One wonders how such silk-stocking paragons could be so gullible. The answer is, they were afraid to be left behind. The choice was to buy the popular stocks, which, after all, were rising, or to risk momentarily lagging the pack. And those who lagged, even for a quarter or two, could not raise new capital. For a money manager in the Go-Go days there were no second acts.
The watershed moment was a 1967 critique from McGeorge Bundy, president of the Ford Foundation, and the very embodiment of pinstriped conservatism. Bundy sternly took his fellow endowment-fund managers to task—not for being too bold, but for being insufficiently so:
We have the preliminary impression that over the long run caution has cost our colleges and universities much more than imprudence or excessive risk-taking.21
This knocked the Street on its ear. If the Ford Foundation was encouraging people to take more risk, what fiduciary need be timid? Moreover, Bundy, the former national security adviser and Vietnam War architect, backed his words with deeds. He far overspent the foundation’s income, reckoning that he could make up the capital shortfall with trenchant plays in the market. He remarked to Fortune, with a self-assurance worthy of Camelot, “I may be wrong, but I’m not in doubt.”22
In October 1967, months after the Bundy encyclical, Buffett, like a rival pope, issued a manifesto of his own. He was not so self-assured as Bundy; in fact, Buffett had nothing but doubts. The partnership had $65 million, but where would he put it? The bargains were gone, and the game had changed.
Wall Street was putting more and more chips on ever briefer spins of the wheel. It was true, Buffett told his partners, that this self-fulfilling merry-go-round had been quite profitable. It was also true that the fashionable stocks might continue to go up. Nonetheless, Buffett was “sure” that he, personally, would not do well with them. Nor did he wish to try. He could offer no proof that prices were silly, only conviction.
When the game is no longer being played your way, it is only human to say the new approach is all wrong, bound to lead to trouble, etc. I have been scornful of such behavior by others in the past. I have also seen the penalties incurred by those who evaluate conditions as they were—not as they are. Essentially I am out of step with present conditions. On one point, however, I am clear. I will not abandon a previous approach whose logic I understand even though it may mean forgoing large, and apparently easy, profits to embrace an approach which I don’t fully understand, have not practiced successfully and which, possibly, could lead to substantial permanent loss of capital.23
Partners who had dismissed such stuff as crying wolf were taken up short. For the shocking kicker was this: Buffett was dropping his goal of beating the Dow by 10 percentage points a year. From now on, he would strive for the far more modest goal of earning 9 percent a year or of beating the Dow by 5 percentage points—whichever was less. Partners with better opportunities might “logically” decide to leave, “and you can be sure I will be wholly in sympathy with such a decision.”
There was also a hint of midlife crisis. Buffett personally was worth more than $10 million; he wanted “a less compulsive approach” than when he was “younger and leaner.” At the ripe age of thirty-seven he was thinking—astonishingly—of pursuing noneconomic activities or, alternatively, businesses in which the monetary payoff would not be the sole consideration.
What is notable in such musings is that, even when looking in the mirror, Buffett retains his rational, almost mechanistic objectivity. Unusually self-aware, he knew that if his stated goal remained constant he would feel compelled to run as hard as ever. Therefore, as if to change the settings on a laboratory rat, he was lowering his target.
Elementary self-analysis tells me that I will not be capable of less than all-out effort to achieve a publicly proclaimed goal to people who have entrusted their capital to me.
But it is doubtful that Buffett seriously tried to moderate his “all-out effort.” No one in his family noticed a “less compulsive approach,” nor did they believe that he was really capable of it. As young Susie recalled, it was virtually impossible to poke through the fog of his concentration. A while after his letter—on the day Susie got her driver’s license—she went out for a spin and managed to hit another car, putting a small dent in her father’s Lincoln. Naturally, the prospect of breaking such news to her father put Susie in a delicate state. “By the time I got upstairs, I was crying,” she recalled. “Dad was reading the newspaper. I said, ‘Dad, I wrecked your car.’ He didn’t look up. I kept crying, and after five seconds or so he said, ‘Was anyone hurt?’ I said, ‘No.’ I waited there. He didn’t say anything. He didn’t look up.”
This was the new, less compulsive Buffett. A few minutes later, he realized that a fatherly word might be in order, and poked his head into Susie’s room and said, “Suz, remember, the other guy is a jerk.” And that was all he said. After dinner that night, Susie wanted the car and he gave it to her without a word.
Buffett’s investing record, certainly, did not skip a beat. Shortly after his letter, he reported that in 1967 the partnership had advanced 36 percent—17 percentage points more than the Dow. Much of it was derived from American Express, which ballooned to 180 a share, and which at its peak represented 40 percent of the portfolio.24 On that one $13 million investment, Buffett made a $20 million profit.25 (He never did disclose the source of the bonanza to his partners.) He also made a 55 percent profit on Walt Disney.26
Perhaps because his results were so uncanny, his partners lost sight of the fact that it was a genuinely difficult time for him. (Some wrote to ask if he had “really” meant it about being out of step—which, Buffett assured them, he absolutely had.)27 Just because he was willing to forgo “large, easy profits” does not mean that doing so was easy. In effect, he had pivoted his career on a single premise—that his instincts were correct and that those of “Mr. Market” were wrong. Watching the continued success of Go-Go must have been a torture for him.
Early in 1968, Buffett turned to the one person who, at very least, he felt would understand. Why not, he proposed, gather a group of former Ben Graham students at the foot of the master? Buffett invited a dozen of his old chums, including Bill Ruane, Marshall Weinberg, and Tom Knapp (and a few, such as Charlie Munger, who had not been Graham students), to meet near San Diego. He loyally asked the group not to bring “anything more current than a 1934 edition of Security Analysis.”28 As is clear from the protective tone of his letter, Buffett was uneasy lest anyone try to steal the spotlight from his hero.
I talked with Ben Graham today, and he likes the idea of the “select” group coming out on Friday, January 26, when we will engage in a little cross fertilization. Knowing of the propensity of some of you for speech making (and I feel a few fingers pointing toward me), I hasten to explain that he is the bee and we are the flowers! As I look at the addressees of this memo, I feel there is some danger of a degeneration of the meeting into a Turkish rug auction unless we discipline ourselves to see what we can learn from Ben, rather than take the opportunity to post him on how many of our great ideas he has missed.29
Perhaps he was worried about the outspoken Charlie Munger, who thought much of Graham’s teaching rather daft, and kept prodding Buffett to rethink it.30 In Munger’s view, it was better to pay a fair price for a good business than a cut rate for a stinker. The cheap business, too often, was so full of problems as to turn out to be no “bargain.”
Buffett, of course, knew this. In a revealing passage, not long before, he had admitted that while he thought of himself primarily as a Graham-style bargain hunter, “the really sensational ideas I have had over the years have been heavily weighted toward the qualitative side.”31 Certainly he had in mind American Express and Disney. For all that, he still considered Graham-type stocks to be his bread and butter: “the more sure money.” His teacher still had a hold on him.32
En route to California, a few of the gang met in Las Vegas. The thought of Buffett loose on the strip is one to stir the pulse, b
ut evidently Graham’s disciples judged that playing the slots would be poor preparation for the upcoming reunion. As recalled by Walter Schloss, Buffett’s former cellmate at Graham-Newman: “We went to Caesars Palace—low rates, cheap food.”
The meeting with Graham was at the elegant Hotel del Coronado (the setting for the Marilyn Monroe classic Some Like It Hot), across the bay from San Diego. Graham arrived in a Socratic mood. “You’re a bunch of smart fellows,” he began. “I’ve got a test for you. Here are ten questions, true or false. I warn you, they are tremendously difficult.” Nobody got more than half, except for Roy Tolles, Munger’s law partner—who suspected a trick and wrote a T for every one. Graham’s point was that an easy-looking game could well be rigged—a subtle warning regarding the Go-Go era.33
“We loved having Ben there,” said Ed Anderson, Tom Knapp’s partner. But the meeting was anticlimactic. Graham was feeling ill and left early. And he had lost interest in playing the “bee.” The assembly was really the nucleus of a Buffett group.
His friends were bright, ambitious, and narrow. Henry Brandt was a born worrier and workaholic who walked around the Beach Point Club with his reading materials in a duffel bag. The imperious David “Sandy” Gottesman, who ran First Manhattan, an investment advisory firm, was singularly obsessed with the financial worth of himself and others. (In characteristic form at a dinner at the Harvard Business School, Gottesman turned to a woman he had just met and inquired, “Are you rich?”)
Marshall Weinberg, an outgoing, plumpish bachelor, was an aesthete—interested in his pyramids and his Rubinstein. There were two eclectics—Ed Anderson, a chemist turned money manager who was into behavioral psychology, and Charlie Munger. But the common thread was a passion for Wall Street. They were intellectually curious about investing but could scarcely go head-to-head with Graham on Spanish literature or the ancient Greeks.
In San Diego, the disciples spent two days sharing their similarly dour view of the market. “We were all commiserating” over the lack of opportunities, Anderson said. Buffett pumped Jack Alexander, his Columbia classmate, for ideas, but was tightlipped about his own.34 It is doubtful that he left San Diego with his view of the stock market improved.
Indeed, Buffett was starting to feel that managing a portfolio was a bit of a rat race. One puffed on a cigar butt and then tossed it out; the ephemeral quality was unsatisfying.35 But he was getting a kick from his investments in long-term, controlled companies such as Berkshire and Associated, and from working with their managers, such as the Horatio Alger-like Ben Rosner. Admittedly, such companies were unlikely to match the heady profits of American Express. Nonetheless:
When I am dealing with people I like, in businesses I find stimulating (what business isn’t?), and achieving worthwhile overall returns on capital employed (say, 10–12%), it seems foolish to rush from situation to situation to earn a few more percentage points.36
It is fair to ask why partners had hooked up with him if it was not to make “a few more percentage points.” Strictly from the standpoint of investment returns, Fred Carr seemed to make more sense. “We fall in love with nothing.” Buffett, though, assuredly was falling for a few of his investments. Something other than math—an urge for continuity-seemed to lie behind it. He had stayed partial to Omaha, to Ben Graham, to his friends. All his life, he had hungered for continuity. His great fear had been the supreme discontinuity of dying. Selling was also a discontinuity. As with other philosophical puzzles that he tossed in the air, he was not sure where to draw the line—when, that is, to hang on to a favored business and when to take a profit. On Wall Street, no one else even dreamed of such a question.
In 1968, a year when the country was seized by political unrest, stock trading reached a frenzy. Volume on the Big Board averaged thirteen million shares a day—30 percent more than the record pace of 1967. On June 13, 1968, volume erupted to twenty-one million shares. The kachung-kachung-kachung of the ticker seemed to grow louder with each clash of antiwar marchers and rifle-bearing guardsmen, as though the rising political temperature were spawning a sympathetic fever on Wall Street. In that convulsive summer of riots and assassination wakes, the stock exchange was so swamped by paper that it was forced to shut down, for the first time in its history and for repeated days. One could hear in the brief silence an SOS. But the market rallied on, like a drunk intent on finishing the last bottle, oblivious to the light of dawn.
The broker Richard Jenrette dubbed it “the great garbage market.”37 There was a frenzy for new issues such as Four Seasons Nursing Center of America, Kentucky Fried Chicken, and Applied Logic. Buffett noted that spectacular sums were being made “in the chain-letter type stock-promotion vogue. The game is being played by the gullible, the self-hypnotized, and the cynical.”38 Most assuredly, he had in mind the case of Frederick Mates, a self-proclaimed Robin Hood who ran the Mates Investment Fund from an office that he dubbed a “kibbutz” and with a young staff that he deemed his “flower children.” Mates put much of the fund into a tiny letter stock known as Omega Equities. Letter stock having no quoted market, its value was uncertain. Mates, in calculating his fund’s assets, assigned a value to Omega of $16 a share. This was an interesting number, since Mates had acquired the stock for $3.25. Thus, with no change in Omega’s outlook or prospects, the Mates Fund was showing a book profit of more than 400 percent. 39
Though only in his late thirties, Buffett felt himself, comparatively, in the “geriatric ward.”40 His competitors, whom he had once scorned for supposed lethargy, were now evincing “acute hypertension.” He noted that the manager of one fund had asserted that it wasn’t enough to study stock prices week by week or day by day: “Securities must be studied in a minute-by-minute program.” Buffett observed, “This sort of stuff makes me feel guilty when I go out for a Pepsi.”41
It was easy to imagine such letters as coming from a rube, perhaps, one who had been dumped unawares on Wall Street and was writing to an uncle back home about the shocking goings-on in the city. The fact is that Buffett was in no way detached from Wall Street. He was on the line to stockbrokers and to traders virtually every day, and on many days numerous times. Art Rowsell, the chief trader at Cantor Fitzgerald, mused that he must have spoken “one hundred million words” to Buffett over the years.
And Buffett’s circle of contacts was unusually wide. In fact, the dope that he had in Omaha probably was as good as, if not better than, most people’s in New York. What he did gain from Omaha was a certain sense of proportion. Driving past a McDonald’s one day, he told his son Howie, “It takes twenty years to build a reputation and five minutes to ruin it. If you think about that you’ll do things differently.”
People were surprised that a stock market wizard could get by in Nebraska, especially during such a fast-paced period. Buffett, speaking about this in 1968 to Dun’s Review, remarked: “Omaha is as good a spot as any. Here you can see the forest. In New York, it’s hard to see beyond the trees.”
But what about the famed access of New Yorkers to “inside information?”
Buffett replied, “With enough inside information and a million dollars you can go broke in a year.”42
This was a very Midwestern and revealing remark. The subtext was that virtue could be as rewarding as sin—a notion directly counter to the received wisdom on Wall Street.
It is illustrative to look at Buffett’s investment in the same year, 1968, in Home Insurance. He was buying the stock over a period of weeks, using Tom Knapp’s Manhattan-based company, Tweedy, Browne & Knapp, as a broker. One day, after Tweedy Browne had bought $50,000 worth of stock for him, Howard Browne, the trading partner, got a call from Omaha. He put down the phone and said, “That’s odd. Warren said, ‘Stop buying.’ ”
Home Insurance announced the next day that it was being taken over by City Investing at a big premium. Presumably, Buffett had gotten a tip. But he did not take the $50,000 worth of stock—meaning that he passed up a tidy profit.43 Understand that taking it wou
ld have been legal—though, had anyone been watching, somewhat suspicious-looking.
Whether Buffett felt his virtue or his self-interest to be at stake—presumably, it was some of each—is almost irrelevant. He recognized that the self-interested course and the virtuous one were apt to coincide often enough so that one might as well play it safe. Needless to say, this perspective was occasionally lacking among some of his Wall Street peers.
Buffett traveled to New York quite a bit, with Susie in the spring and also at other times. He stayed at the Plaza, and saw a wide array of business people and friends, among them investment adviser Sandy Gottesman, Bill Ruane, Fortune writer Carol Loomis, and up-and-coming hotelier Larry Tisch—all in all, a well-heeled and well-connected crowd.
Yet Buffett in Gotham had a faint air of Mr. Deeds, not least because his speech was studded with gee-whiz, Ozzie-and-Harriet talk (“dope,” “jerk,” “okey-dokey”).44 Though Susie preferred the Café des Artistes, Buffett dined with chums at joints such as the Stage Delicatessen, where he would order his out-of-town-signature roast beef w/mayo on white bread. One time, the intrepid Marshall Weinberg suggested that they try something a bit less bland—a Japanese steakhouse.
“Why don’t we go to Reuben’s?” Buffett countered.
Weinberg pointed out that they had lunched at Reuben’s, an East Side deli, the previous day.
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