Early in 1966, he took the fateful step of closing the partnership to new accounts.*
The only way to make this effective is to apply it across-the-board and I have notified Susie that if we have any more children, it is up to her to find some other partnership for them.1
As Buffett was shutting off the spigot, Wall Street was being deluged. The war in Vietnam was pumping up the stock market to record heights. Young people, it is true, were marching in the streets, but their parents, seeing the war’s expansionary effects, were queuing at brokers. Mutual funds opened by the dozen, and the Dow Jones Industrial Average broke 1,000 for the first time ever. It repeated this death-defying act on three more occasions; alas, it closed beneath the magic number each time. Then, in the spring of 1966, the market went into a steep swoon. (New money is jittery money.) Increasingly, investors were focusing on the shorter term.
Some of Buffett’s partners called to “warn” him that the market might go lower still. Such calls, Buffett shot back, raised two questions:
(1) if they knew in February that the Dow was going to 865 in May, why didn’t they let me in on it then; and, (2) if they didn’t know what was going to happen during the ensuing three months back in February, how do they know in May?
Inevitably, the advice of such partners was to sell until the future was “clear.” For some reason, market commentators suffer a peculiar blind spot. They routinely assume that once the “uncertainty” of the immediate moment is lifted they will have a plain view of the future unto Judgment Day. The fact that they did not foresee the present uncertainty does not deter them from thinking that no new clouds will trouble the future.
Let me again suggest [that] the future has never been clear to me (give us a call when the next few months are obvious to you—or, for that matter, the next few hours).2
Buffett avoided trying to forecast the stock market, and most assuredly avoided buying or selling stocks based on people’s opinions of it. Rather, he tried to analyze the long-term business prospects of individual companies. This owed to his bias for logical reasoning. One could “predict” the market trend, as one could predict which way a bird would fly when it left the tree. But that was guesswork—not analysis. If he ever sold stocks “just because some astrologer thinks the quotations may go lower,” he warned, they would all be in trouble.3
The Dow did go lower, into the 700s, but the broader market was frothy. In two cases, just as Buffett had begun to buy what he considered to be hot prospects, competitors snatched the stocks away. (Like most pros, Buffett built a position in a stock gradually, to avoid driving up the price while he was buying.) One of them rose to a price way out of his range; the other was taken over.4 Nothing made him madder.
In such a climate, Buffett’s obsession with secrecy rose to the level of paranoia. His brokers were given to understand that under no circumstance were they to speak of Buffett’s stock picks, even to people in their offices. According to Kay Koetter, an Omaha bridge crony, Buffett even got the idea that his Kiewit Plaza office was being bugged via “telescopic amplification” from the nearby Blackstone Hotel. Buffett hired a security firm to check it out, Koetter added, but found nothing.
The real problem was not that people were stealing his stocks, but that he couldn’t find enough that met his standards. In part, Graham’s disciples had become too numerous. Aided by the computer, they were plucking the bargains off the trees.
At the start of 1967, Buffett felt compelled to advise his partners that some of the newer mutual funds had better recent returns than his own. Moreover, he warned that his stream of new ideas was down to a “trickle.” Though he was working night and day to keep them coming, his tone was ominous. If his idea flow “should dry up completely, you will be informed honestly and promptly so that we may all take alternative action.”5
It is noteworthy that Buffett was sending off these dire alarums in direct proportion to the giddiness on Wall Street. To money men, these were the Go-Go years. There was a frenzy for electronics stocks, each new issue of which was held to be the next Xerox. Had Wall Street suddenly developed an expertise in electronics? To ask the question was to misunderstand the age. Wall Street believed in electronics. Even a toad such as American Music Guild could become a prince by calling itself Space-Tone Electronics Inc.
The buzz for high-tech was followed by a merger wave, propelled by huge conglomerates such as International Telephone & Telegraph, Litton Industries, and Ling-Temco-Vought. The public of that confident time did not mistrust bureaucracy; it conferred on big organizations (as on technology) a mystique of competence.
Then, there was a burst of “letter stock”—unregistered shares, often of highly dubious companies, that were marked to absurd valuations. Though each of these fashions had its ebb and flow, as one bubble burst a new fad took its place, so that as the sixties ran their course Wall Street gathered an ever more intoxicating speculative momentum.
The archetype of the Go-Go era was the “performance fund,” an acid-rock version of the conventional mutual fund. This new species attempted to outperform the market not over the long term, but over each successive quarter, month, week, and virtually every hour. Performance funds were run by sideburned gunslingers who were bent on making money fast. They switched from stock to stock, moving to the one that was hot, like an actor running from house to house to sustain the applause. The aim, in short, was to catch the momentary swing. Gerald Tsai, manager of the Manhattan Fund, was the first prodigy of the breed; it was said that a whisper of Tsai’s involvement in a stock was sufficient to set off a small stampede. For the gunslinger wanted nothing of Howard Buffett’s sweet independence. He was a contemporary man, young in age and devoid of memory.
What manner of young man was he? He came from a prospering middle-income background and often from a good business school; he was under thirty, often well under; he wore boldly striped shirts and broad, flowing ties; he radiated a confidence, a knowingness, that verged on insolence, and he liberally tossed around the newest clichés, “performance,” “concept,” “innovative,” and “synergy”; he talked fast and dealt hard.6
Go-Go reached an epitome with Fred Carr, who drew a blaze of publicity as head of the Enterprise Fund. In 1967, he registered a gain of 116 percent, far outstripping any single year of Buffett’s.7 Carr invested in tiny, so-called emerging growth companies and heaps of unregistered letter stock. He was lionized in the press as “cool and decisive.” The very model of the new breed, Carr installed a phone in his bathroom in Beverly Hills and sped to work in a Jaguar. His office was decorated with op art. His strategy was simple: “We fall in love with nothing. Every morning everything is for sale—every stock in the portfolio, and my suit and my tie.”8
On paper, Go-Go’s practitioners were getting rich. If the popular stocks were going up, why not simply buy them? The question nagged at Buffett continuously, and he kept a diary of his reactions, as much for his own benefit as for his partners’. “Fashion” investing, he wrote,
does not completely satisfy my intellect (or perhaps my prejudices), and most definitely does not fit my temperament. I will not invest my own money based upon such an approach—hence, I will most certainly not do so with your money.9
According to his son Peter, Buffett identified with The Glenn Miller Story, the Hollywood epic in which the band leader searches to find his “sound.” For Buffett, the right sound was a matter not just of making money, but of superior reasoning. Being right on a stock had something of the purity of a perfect move in chess; it had an intellectual resonance. Glenn Miller or Bobby Fischer, Buffett simply refused to go outside his ken.
We will not go into businesses where technology which is away [sic] over my head is crucial to the investment decision. I know about as much about semiconductors or integrated circuits as I do of the mating habits of the chrzaszez.10
It seemed that the dizzier Go-Go’s success, the greater was Buffett’s urge to apply the brakes. Indeed, he kept a newspaper cl
ipping of the 1929 crash in plain view on his wall, just as a reminder. He had no op art, nor anything else that might have been in vogue in Beverly Hills-just the big maroon Moody’s books lined up on the radiator, and a few pictures. His office might have been that of a moderately successful dentist. The reception area had a hanging Franklinesque aphorism, “A fool and his money are soon invited everywhere,” and an 1880 photograph of Wall Street. There was no sign of activity in the Fred Carr sense. Buffett did not even have a stock ticker. (Tickers give minute-by-minute readings of stock prices. Virtually every professional investor has one, or a computerized equivalent, and checks it throughout the day.)
Buffett’s portfolio seemed almost as dated as his newspaper clippings. In 1966 and 1967, the partnership bought a pair of retailers, Hochschild, Kohn & Co., a Baltimore department store, and Associated Cotton Shops, a dress shop chain, for a total of about $15 million. In each case, Buffett bought not liquid shares of stock but the entire business. Among fund managers, this was unheard-of. Buffett had often bought stocks with the intent of holding them for the long term, but he was locked into Hochschild and Associated. He could not pick up the phone and sell them like Fred Carr’s necktie. Moreover, to say that inner-city retailing was out of vogue would be a serious understatement. But both companies were cheap, and Buffett thought he could make a profit as an operator.
When he inquired about Associated, he amazed Benjamin Rosner, the sixty-three-year-old owner, with his grasp of retailing. But he understood the business only through the keyhole of finance. When Rosner offered to show him a store, Buffett declined, explaining that he wouldn’t know what he was looking at. He merely wanted Rosner to read him the previous five years’ balance sheets over the telephone. The next day, Buffett called back with an offer.11 When Rosner accepted, Buffett took Charlie Munger to New York to ink the deal.
Associated was potentially a lemon. Its stores were in deteriorating, inner-city neighborhoods, and Rosner, its architect, was planning to retire. Sensing that he would need a Sancho Panza once again, Buffett demurely asked Rosner if he could stay on for six months to help him get going. Privately, Buffett shrewdly told Munger, “That’s one problem we don’t have. This guy won’t be able to quit.”
The son of Austro-Hungarian immigrants, Rosner had started with a single dress shop, in Chicago, in 1931. He was an archetypal bootstrapper, having taken a $3,200 grubstake to a business with $44 million in annual sales. Like other self-improvers, he was a slave to his work and a dictator to the staff. His penny-pinching work ethic may have reminded Buffett of his grandfather, the erstwhile monarch of Buffett & Son grocery. Rosner (Buffett loved to relate) had once counted the sheets on a roll of toilet paper to avoid being cheated—definitely Buffett’s kind of guy. He flattered Rosner profusely, and though he asked him for monthly financial reports, he stayed out of Rosner’s hair (and out of his stores), which suited both of them. As Buffett had predicted, Rosner soon found that he was in not, in fact, in any great hurry to retire, and began to squeeze the proverbial lemonade from lemons.†
Hochschild, the Baltimore retailer, was not so easily salvaged. Not only was the main store out-of-date (one wing had access only via a staircase), it required frequent additions of capital just to maintain its market share. And downtown Baltimore was badly decaying. Cheap price or no, it did not take Buffett long to realize that he had goofed.
Another long-term “bargain,” textile maker Berkshire Hathaway, also was having problems. The suit business was depressed, just as the clothier Sol Parsow had warned. In midsummer 1967, Buffett soberly informed his partners that he did not see anything to suggest that it would improve.12
Wall Street, meanwhile, was feeling oh so happy. It was not only profitable but—for the first time since the twenties—fun. Trading volume was soaring. Consider, when Buffett started out, in the 1950s, volume on the New York Stock Exchange had been two million shares a day; by 1967, it was ten million. The buoyant spirit was mockingly captured by Abbie Hoffman, who visited the exchange that summer and threw dollar bills from the gallery while floor clerks scurried for the loot. On the West Coast, customers at Kleiner Bell stood in front of the ticker tape cheering “Go, go, go.” The Dow roared back to the low 900s.
As if on cue, Congress held—what else?—hearings. In August, Paul Samuelson, the Massachusetts Institute of Technology economist, appeared before the very Senate Banking Committee that Ben Graham had faced a decade earlier. This time the subject was the rampant growth of mutual funds. Samuelson testified that fifty thousand mutual fund salesmen—one for every seventy investors—were combing the country. Most were plainly incompetent, but were sustained by the industry’s abusively high fees. It was common for funds to charge their investors an up-front sales load of 8.5 percent. This did not cover annual management fees; it was merely to pay for marketing and to keep the salesman in shoe leather. (Buffett, in contrast, took a share of the profits, but nothing up-front and no management fee.) According to Samuelson:
Only 91½ cents of my every dollar will ever work for me now to produce income and capital gains, and 9.3 percent of this amount has gone forever in the form of selling charges.13
A by-product of the mutual fund boom was the rise of a class of mandarin investors. For the first time, the pros—mutual funds, pensions, and the like—had more influence in markets than the individual duffer. In Buffett’s view, the professional was more speculative, not less; the old saw that the pro kept his cool while the amateur fell victim to emotionalism was inside out. In the words of one canny observer:
It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it “for keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence.14
That, in fact, had been written by John Maynard Keynes, in 1936. Though Keynes, of course, is best remembered as a macroeconomist, Buffett read him for his considerable insights into markets. Indeed, Keynes’s career in some ways prefigured Buffett’s. Early on, he lost large sums speculating in currencies, corn, cotton, and rubber. Then, renouncing his sins, he became an apostle of long-term, selective investing.15 He pursued the market with calm, devoting to it an hour in bed in the morning, yet compiling a stellar record for his own account and for that of King College. His speeches at the annual meetings of the National Mutual Life Assurance Society, of which he was chairman, were celebrated in the London of the 1930s for their impact on market prices.
For Buffett, Keynes’s relevance during the Go-Go era was his keen understanding of how crowds could influence market prices. The stock market is a crowd, consisting of whoever is following prices at any given moment. This amorphous assemblage revalues prices every day, even every hour. Yet the outlook for a given business—say, a Walt Disney—changes far more slowly. The public’s ardor for Mary Poppins is unlikely to change from a Tuesday to a Wednesday, or even over a month or two. Most of the fluctuations in Disney’s shares, therefore, derive from changes not in the business but in the way that the business is perceived. And the pros were preoccupied merely with outwitting the crowd, that is, with staying a step ahead of its fleeting shifts in opinion. Again, Keynes:
We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be.16
One sees in Buffett a strongly similar suspicion of public opinion. Buffett viewed a crowd as a potential source o
f a sort of intellectual contagion. It was the author of acts and feelings which, rather than being a summing-up of the parts, no one individual among the crowd would have subscribed to alone.17
Buffett illustrated this with an allegory about an oil prospector, who arrived at heaven’s gate only to hear the distressing news that the “compound” reserved for oilmen was full. Given permission by Saint Peter to say a few words, the prospector shouted, “Oil discovered in hell!”—whereupon every oilman in heaven departed for the nether reaches. Impressed, Saint Peter told him there was now plenty of room. Quoting Buffett:
The prospector paused. “No,” he said, “I think I’ll go along with the rest of the boys. There might be some truth to that rumor after all.”18
Buffett had heard the story from Ben Graham, though he did not set it to paper until much later. In the Go-Go era, the story was not at all far-fetched. The performance funds hopped on “story” stocks—that is, stocks with a simple concept (“Oil discovered in hell!”) that might catch on in a hurry. A notorious example was National Student Marketing, which was sold to the public at 6 and vaulted to 82 within a year.
National Student Marketing was the brainchild of Cortes Wesley Randall, a thirty-something Gatsby who lumped under one umbrella a group of businesses purportedly serving college kids: books, records, youth airfare cards, and so on. He thus combined the public mania for conglomerates with a novel “story”—youth. In addition, Randell was a hell of a salesman. He flattered security analysts, took them on tours of his Virginia castle, and called them from his Learjet. Each year, Randell predicted trebled earnings. And each year, he met his target—though not, it would develop, without some help from the company’s accountants. But Wall Street believed, and pushed the stock to 140. One was reminded of Galbraith’s comment, with regard to the twenties, that “perhaps it was worth being poor for a long time to be rich for just a little while.”19 No less than Bankers Trust, Morgan Guaranty, and the Harvard endowment fund bought Randell’s stock.20
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