Buffett

by Roger Lowenstein

  With Susie expecting a third child and Warren seemingly on his way, the Buffetts bought a sprawling five-bedroom house on Farnam Street. Warren helped his daughter bid a tender farewell to the old house. Previously, four-year-old “little Susie” had developed a terrifying fantasy of a bespectacled interloper, whom she referred to as “the glasses man.” Each night, before she went to sleep, Susie had insisted that her father check the balcony off her room just in case the glasses man was there. Now, as they made ready to drive away, Warren asked his daughter to step inside for a final look. Bending down, he said, “The glasses man is staying here. Tell him goodbye.”

  The Buffetts’ new home was a 1920s gray stucco with brown trim—the picture of upper-middle-class suburbia. It fronted on a busy street but was obscured by plantings. Writing to Jerry Orans, Buffett thought it barely worth mentioning. “Not much new out here. As I may have mentioned I picked up a house.…” The aspect that drew his attention was the expense. “Buffett’s Folly,” he reported, “has lots of room, both in the house and yard,” but he hadn’t gone “overboard on price”—a reassurance that Orans hardly needed.6 The house had cost $31,500.7

  Buffett worked off the master bedroom in a sitting area, which his wife decorated with greenback wallpaper. Peter, their third child, was born that year, but mentally Warren was wrapped up in stocks and bonds. He was working virtually all the time, and loving every minute. He said he was thinking of making money before his feet hit the ground.8

  Soon after the Buffetts moved, Tom Knapp, Buffett’s Graham-Newman colleague, flew to Omaha and he and Buffett drove to Beloit, Wisconsin, to hear Graham give a speech. On the way, Knapp happened to mention that the U.S. Post Office was taking its four-cent Blue Eagle stamp out of circulation. Buffett came alive—here was a chance to earn some greenbacks! He and Knapp stopped at every post office on the drive home, “investing” in soon-to-be-scarce Blue Eagles. Eventually, they bought $12,000 worth of stamps—all of them, alas, destined for Knapp’s mailroom.

  Buffett did better with his stocks. His partnerships soared 41 percent in 1958—inching out the Dow, which rose 39 percent. By the end of Buffett’s third year, the original partnership money had doubled.

  He also was gathering new investors. He signed up friends such as Fred Stanback from Columbia, Don Danly, and Jerry Orans. He went to neighbors and to former students. He signed up Leland Olson, the obstetrician who had taken Buffett’s class, and when Olson wanted to sign up his mother, Buffett drove his baby-blue Volkswagen Beetle through a blinding snowstorm, arriving in fine shape, as if he’d stepped out of a VW commercial. But Buffett refused to grovel or to bend his rules to get new investors.

  As he was picking up steam, Jack Ringwalt, the owner of an Omaha insurance company and a friend of Buffett’s Aunt Alice, called Buffett, whom he had never met, and offered $10,000 for the kid to “fool around” with.

  Buffett replied that he had been counting on a big fish such as Ringwalt for $50,000. Ringwalt thought it a most ungrateful reply, but repeated his offer of $10,000.

  Buffett turned him down.9

  Around town, Buffett’s fast start, coupled with his unusual gumption, was raising eyebrows. There was a luncheon at the Blackstone, a big hotel in Omaha, at which, as one of Buffett’s investors recalled, “everybody was talking about Warren Buffett. Bob Storz was there. He was one of the biggest wheels in Omaha. He said that young man will be broke—it’s just a new idea and you’ll lose your money in less than a year.”

  But the impression of people who met Buffett was otherwise. It was not so much his results as his serene self-confidence. One time he went to a meeting of neighbors, who were hotly debating what to do about a city proposal that would reroute traffic onto Farnam Street. Buffett stood up and calmly suggested that everybody ought to forget about it. And that was it; people realized he was right and went home.† Buffett evoked a similar reaction from his investors. They felt that he could see simple truths that they themselves had missed.

  Buffett insisted on not disclosing his stocks because he was afraid that someone would copy him—thus making it more expensive if he wanted to buy more. He wouldn’t talk to anyone—he maintained that he was afraid to talk in bed because his wife might hear.10

  But behind the cordon of secrecy, he was living a Graham-and-Dodder’s fantasy, picking up small cheap stock after small cheap stock. His talent lay not in his range—which was narrowly focused on investing—but in his intensity. His entire soul was focused on that one splendid outlet, as it had been when he was a boy delivering papers. Company after company he analyzed and committed to memory. And when one became cheap, he pounced.

  National American Fire Insurance was as obscure a company as one could find. An Omaha-based insurer, National American was controlled by Howard F. Ahmanson, the banking magnate, and his brother Hayden. The stock had been distributed to Nebraska farmers and such in the late 1920s, and then largely forgotten. The Ahmansons now were offering to buy it back for $50 a share. Their offer was cheap, but as no public market existed for the stock, shareholders were gradually selling out.

  After doing some digging in state insurance files, Buffett realized that it was extremely cheap, but he couldn’t find any stock to buy. He and his lawyer chum, Dan Monen, went to the annual meeting, but Hayden Ahmanson curtly refused to let them see the stockholders list. Then, as if asking a friend to spend an afternoon hunting for golf balls, Buffett suggested that Monen drive around the state looking for stock. Sucked in by the Buffett contagion, Monen took off in a red-and-white Chevrolet for the far corners of Nebraska, waving $100 a share at anyone he saw in rural courthouses, banks, and the like. “It sounds corny,” Monen said later, reflecting on his willingness to go. “Warren Buffett is as near to Mr. Perfect as anyone I know.” Mr. Perfect and his partner captured 10 percent of the stock and made more than $100,000—Buffett’s first big strike.11

  Sanborn Map, another, illustrated Buffett’s debt to Ben Graham. Sanborn’s once-lucrative map business had declined; however, the company had an investment portfolio, built up over its flush years, worth some $65 a share. And its stock, reflecting its sagging map business, was trading at only 45. This was a carbon copy of Northern Pipe Line—prized by Graham for its railroad bonds. Echoing his mentor, Buffett bought Sanborn stock throughout 1958 and 1959. He was trusting in Graham’s testimony: sooner or later a stock would rise to value.

  But it didn’t. The company’s directors owned merely four hundred shares (105,000 were outstanding) and were content to let the share price languish. In fact, while sitting on that huge portfolio they had cut dividends five times in eight years, though, as Buffett noted, it had not as yet occurred to the board to reduce the fees to themselves.12

  Following Graham page for page, Buffett became a director and lobbied the management to unearth the sub rosa value in its investment portfolio. The management resisted.

  In the meantime, Buffett did not mention Sanborn to his investors, though he did disclose that he had put 35 percent of their assets into a single stock. But he and other dissident shareholders continued to put the heat on. In 1960, Sanborn capitulated, and agreed to use its portfolio to buy out stockholders. Buffett made roughly a 50 percent profit. With the cat out of the bag, he wrote to partners that Sanborn “does point up the necessity for secrecy regarding our portfolio operations as well as the futility of measuring our results over a short span of time.…”13

  Not everyone was convinced. In the midst of the Sanborn episode, John Train, a New York financial writer, met Buffett with an idea of signing up. When Train learned that Buffett would not reveal his holdings, he decided not to invest.14

  Buffett also approached Donald Keough, a neighbor whose kids often played with Buffett’s. “Don, you’ve got a wonderful group of children,” Buffett said. “Have you given any thought to how you’re going to get the kids through college?”

  Keough, an up-and-coming assistant manager for a coffee wholesaler, liked Buffett, but he thought
it strange that his neighbor stayed in the house all day, working in his sneakers and a T-shirt. Keough, too, turned him down.15

  People who signed up intuitively grasped that Buffett’s Garbo-like loneness was part of the appeal. When Buffett insisted on secrecy, it was not merely to prevent leaks, but also to prevent intrusions, and to maintain that sweet independence. He wanted no amateur tipsters or second-guessers. For a stock to merit investment, Buffett had to persuade himself of it, and if he did, what was the use of other opinions? Temperamentally, he mistrusted advice-givers and financial soothsayers. If the basis for a stock was popular opinion and opinion changed, then what? He was confident that his own analysis would be less fickle.

  Buffett wanted only one thing from outside: capital.

  In 1960, now just shy of thirty, Buffett approached one of the more devoted of his partners, a folksy cardiologist named William Angle. “Doc Angle” had built a model train set for Buffett in his attic, and was willing to do just about anything for him. “Warren asked if I’d be interested in getting ten doctors together to put up $10,000 each,” Angle recalled. “So I rounded up a group from Clarkson Hospital at a restaurant on 49th and Dodge.”

  Buffett had yet to appear in public as a money manager. But at the restaurant—the Hilltop House—he trotted out the speaking skills he had learned at Dale Carnegie and refined in night school. Silhouetted against a darkening summer sky, he poured out liquid couplets from Benjamin Graham and Shakespeare, interspersed with gentle self-mockery. He was done in less than an hour.

  At the Clarkson coffee shop the next day, the talk was of nothing else. An obstetrician said, “We’re not giving money to that young man—he could leave the country.” Arthur Green, who had taken Buffett’s class, declared that he wasn’t investing because Buffett had ridiculed AT&T, which Green owned, as “an old ladies’ stock.” “I was stupid,” Green said later. But eleven doctors decided to take a chance on him. In Omaha, at least, Buffett had made a big step forward.

  The next year, Buffett bet $1 million—his biggest plunge ever—on a company that, had they known of it, would have made the doctors gasp. Dempster Mill Manufacturing was an eighty-year-old windmill and farm-implement maker in Beatrice, Nebraska, ninety miles south of Omaha. The windmill business being not exactly another Xerox, Dempster had suffered from static sales and dismal profitability. Buffett had nibbled at the stock—a cheap, typical-Graham play—a few years earlier. In 1961, he snapped up the controlling interest, giving him 70 percent—and staking a fifth of his partnerships’ assets on it. Buffett appointed himself the chairman, a prophetic move (and unusual for a money manager) that signaled an ambition to be something more than just an investor.

  Characteristically, Buffett roped Dan Monen onto the board, too. Every month, Buffett and the loyal Monen would drive to Beatrice, a dusty town in the plains, like a Quixote with his Sancho Panza. But Buffett couldn’t get a handle on Dempster. It needed an overhaul, but working with the gritty details was not his forte. It was like cleaning the fruit bins at the Buffett store; he preferred the numerical abstractions to the business itself.16 Each month, Buffett would entreat the managers to cut their overhead and trim the inventory, and they would give it lip service and wait for him to go back to Omaha.17 Promptly, Buffett put the company up for sale.18

  But he did not question the Graham-like premise that had led to its purchase. In fact, Graham’s influence permeated the partnerships. Aside from Dempster, the money was sprinkled among forty stocks-cigar butts, arbitrages, workouts (such as liquidations)—all from the Graham-Newman playbook.19 Buffett unashamedly aped his mentor in his letters to partners;20 he even mimicked Graham’s shortcomings. Like his teacher, Buffett ruled out any and all high-technology companies as speculative. Graham had rejected Xerox; Buffett snubbed Control Data at $1 a share, even though he was related (via the marriage of an uncle) to William Norris, the computer giant’s founder, and was well aware of the opportunity.‡

  The Buffetts would visit the Grahams (staying at a very inexpensive strip motel) a couple of times over the summer, when the Buffett family took a vacation in California. Buffett would closet himself with Graham for hours. He also struck up a friendship with Graham’s wife Estelle.

  Graham by then was spending much of his time in the quiet company of his olive-skinned French lover, Marie Louise Amingues, a.k.a. Malou.§ Estelle Graham was crushed by it. A poor girl from Brooklyn, Estelle was self-educated and enamored of the high life in Los Angeles, where she and Graham shared a box at the Hollywood Bowl and threw lavish parties. According to Rhoda Sarnat, a cousin of Graham’s who lived across the street, “It wasn’t all tea and crumpets living with Ben. Just because you’re a genius doesn’t make you the most caring person in the world.”

  Buffett treated Estelle kindly, and he enjoyed being there even when Graham wasn’t around. Ironically, Graham’s wife became Buffett’s most ardent disciple. Though Graham steered others to his prize pupil, Estelle actually invested with him. She exclaimed to Sarnat: “This guy is really coming up; he’s totally trustworthy, and you ought to put your oar in.”

  Buffett himself was far more taciturn. In any single year, he knew, Mr. Market could take a nasty turn. He warned his partners: “There are bound to be years when we are surpassed by the Dow.”21 To shoulder the expectation of having to beat it every year was too much. But his brief record, even including the still-unresolved Dempster, had been phenomenal. It should be understood that in most years, most money managers do not even match the Dow Jones Industrial Average. Over the first five years, the Buffett partnerships had left it in the dust.

  PARTNERSHIPS DOW

  1957: +10.4% –8.4%

  1958: +40.9 +38.5

  1959: +25.9 +19.9

  1960: +22.8 –6.3

  1961: +45.9 +22.2

  And the cumulative gain, after five years:

  PARTNERSHIPS DOW

  +251.0% +74.3%22

  The last pair of figures merit a second glance. The Dow was up three-quarters, Buffett’s portfolios two and a half times.

  Word of Buffett’s success spread quickly in his hometown. Acquaintances would amble over to him at Ross’s Steak House and ask, with studied casualness, if he had any tips. Buffett, with perfect geniality, would advise them to take a pencil, shut their eyes, and point it at the stock tables. He would pull into the Omaha Country Club, in khaki pants and Hush Puppies, and older men in golf shoes and sportswear would descend on him like bees.23 But they wouldn’t get any honey.

  Virtually every other stock man in the country chatted up ideas with nary a second thought. Over lunch, at golf courses, on the telephone-tens of thousands of times every day—investment people inhaled and exhaled the name of a favored stock. And most of their tips were forgotten days, if not moments, later, to be supplanted by a new hot stock. But Buffett was different. He was possessive about stocks, like an artist with an unfinished canvas. He liked to tell stories of his coups in the market—but only when they were wrapped up. And only of stocks that were on his agenda to talk about.

  People liked to listen to him, because he made business sound transparent and did it with a sense of humor. In 1960, he invested in Data Documents, a tiny Omaha tab card manufacturer founded by Wayne Eves, a friend, and John Cleary, a former aide to Buffett’s father. Buffett was so quick with answers that Eves and Cleary made him chairman. Then Buffett put Bill Ruane and Fred Stanback, pals from Ben Graham’s class, and Robert Malott, a friend from Chicago, on the board, too. They would fly into Omaha the night before board meetings—basically, as one said, they wanted an excuse “to eat steak at Ross’s and talk to Buffett for three or four hours.”24 He was fun company.

  Buffett had an astonishing circle of cronies, who overlapped with his investors. And he did not change gears from one to the other; he was fetching, understated, informal, and a bit of the teacher in either camp. He did not draw the usual line between “work” and other activities. When he got on the links, he was focused as a cat. Rob
ert Billig, a golf partner, said Buffett “could take putting instructions better than anyone.” When Billig told him how to aim, Buffett shut out everything else and turned his ethereal concentration on the golf ball. “It was amazing how often he’d make those,” Billig marveled.

  Buffett’s passion outside of work was bridge. He had a regular game, the members of which were a sampling of Main Street, U.S.A.—ad executive, Buick dealer, judge, life insurance agent, mortgage man, railroad attorney, and American Automobile Association chapter president. Buffett would show up with a six-pack of Pepsi-Cola and entertain the guys with a stream of jokes and stories. He didn’t talk about the money he was making. The point was, he didn’t have to. He played so intensely he could have been working, only with trumps instead of with stocks and bonds.

  Buffett hated to lose. He resisted playing for high stakes, meaning a penny a point, unless he thought his team had an edge. But he competed just as hard at quarter-penny stakes.25

  What distinguished Buffett was the way he zoned in. He would stare at the cards and calculate the odds like a machine. “He was not emotional,” noted James Koley, a lawyer and occasional partner. “It was just mathematics to him.”

  Before the first card was played, Buffett would plan the entire hand, stripping away the hateful aspect of chance. Kay Koetter, the life insurance man, recalled, “Warren used to sit there and think and think and think until he had figured out where every card in the deck was. I brought my father once—it drove him crazy.”

  Buffett was so consistently analytical—unusually so. On form, his emotional pendulum did not swing as far as other people’s. There was no pushing him to an expression of, say, anger, despondency, recklessness, or other feeling outside of his customary Pepsi-drenched high spirits. He was always logical and even-tempered, always in the same, circumscribed arc.

  Buffett was enormously dependent on Susie. She paid the bills, took care of the kids, ran their lives. Whatever was outside his range, Susie handled. In particular, Susie shielded Warren from his mother. Even as an adult, he would shake or go mute at the sight of that aging and shriveling tormentor. He did his best to avoid her, and at family gatherings, he would withdraw after dinner on the pretext that he needed to nap.