Buffett

by Roger Lowenstein

  “Right,” Buffett said. “You know what you’re getting.”

  “By that logic, we’d go there every day,” Weinberg said.

  “Precisely. Why not eat there every day?”

  Another time, Buffett did lunch at the elegant Harmonie Club, with Sam Stayman, the champion bridge player and a Buffett investor, and Stayman’s wife. Josephine Stayman was smitten by Buffett’s Midwestern informality. She recalled:

  Afterward I was going uptown, where we lived. Warren was going uptown, too, I think to another meeting. He said he felt very confined in New York—did I mind if we ran from 61st Street to 79th Street? This was before anybody was jogging in New York. We ran up Madison and at a very fast pace. He was in his business clothes. He wanted his freedom.

  One thinks of the Washington schoolboy with the charmingly unstylish tennis shoes. People were not accustomed to seeing Omaha cowboys run up Madison Avenue. Nor were Americans, in general, used to multimillionaires who flew coach class and looked as if they had slept in their suits. What they expected of Wall Street was J. P. Morgan; what they saw in Buffett was Will Rogers.

  Bob Malott, a Data Documents codirector, ran into Buffett one evening on Fifth Avenue, where Buffett was pacing up and down like a lost dog. Buffett explained that he was measuring the land underneath Best & Co., a department store. The Kansas-bred Malott concluded that Buffett was “unpretentious in a way I wouldn’t think possible had he been raised in Greenwich, Connecticut.”

  Toward the end of 1968, the bull market showed signs of age. The conglomerate bubble burst. Gerald Tsai’s Manhattan Fund plunged to a ranking of 299th out of 305 funds, prompting Tsai to quit. In December, the Securities and Exchange Commission suspended trading in Omega Equities. For Fred Mates, a.k.a. the flower child, this was really a bummer. The Mates Fund, which owned 300,000 shares of Omega, and which had been the top-ranked fund in the country, faced a sudden run on its assets. In a desperate mood, Mates persuaded the SEC to halt redemptions (equivalent to a bank’s shutting the teller’s window). Mates, as it happened, was due to speak on the investment outlook before a blue-chip audience at the New York Hilton. The irony of his delivering his expert opinion while his fund was going up in smoke seems to have been lost on Mates himself. “There are no more reasons for being afraid of what might happen in 1969 than there were in 1968,” Mates said confidently. Subsequently, the “window” reopened and his fund traded down by 93 percent.45

  And Mates was but a symptom. When his fund toppled, it was clear that his would not be the last. Walter Stern, of Burnham & Co., voiced a prescient fear that in a bear market the gunslingers might turn to selling as indiscriminately as they had bought.46 Still, the market was buoyed by the Paris peace talks. In December 1968, the Dow climbed to 990, and Wall Street cast a hopeful eye toward a pair of elusive goals: an end to the war in Vietnam and a 1,000 Dow.

  Buffett Partnership clocked a gain in 1968 of $40 million, or 59 percent. Its assets swelled to $104 million. Bereft of ideas, managing more money than ever, and with the market at a peak, Buffett had had his best year. He beat the Dow not by the 5 percentage points called for in his lower target, but by 50 points. He said the result “should be treated as a freak—like picking up thirteen spades in a bridge game.”47 It was his last hand.

  The bull market was in a spasmodic death rattle. Wall Street was recommending the popular stocks regardless of price. Merrill Lynch liked International Business Machines at thirty-nine times earnings. Bache & Co. was pushing Xerox at fifty times. Blair & Co. was touting Avon Products at fifty-six times.48 At that level of earnings, it would take a buyer of all of Avon half a century to get his money out. Could it possibly be “worth” that much? A fund manager, echoing the prevailing thinking, allowed that a stock was worth whatever people think it’s worth at the particular time. Every college endowment, he noted, felt it had “to own IBM and Polaroid and Xerox and everything else. So … I think they will do well.”49 Buffett reminded partners of a seemingly lost distinction: “Price is what you pay, value is what you get.”50

  It no longer mattered. Finally, and irreversibly, he had despaired of finding stocks. In May 1969, Business Week proclaimed that Fred Carr “may just be the best portfolio manager in the U.S.”51 That same month, the man from Omaha made up his mind. Weary of jeremiads and wary of jeopardizing past profits, Buffett did a remarkable thing. He quit. He stunned his partners with the news that he was liquidating Buffett Partnership. And now, at the height of a bull market, he was getting out.

  I am not attuned to this market environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero.52

  The courage that lay behind his decision may be measured by its uniqueness. On Wall Street, people did not fold up and return the money—not at the top, not after their best year. It simply wasn’t done. Buffett had plenty of options. He could simply have sold his stocks, put his assets in cash, and waited for opportunities. But every partner was looking to him to perform, and he felt an inescapable pressure to lead the league each year.53 Since the watershed letter of 1967 he had tried to work less compulsively, but as long as he was “on stage,” it wasn’t possible.

  If I am going to participate publicly, I can’t help being competitive. I know I don’t want to be totally occupied with out-pacing an investment rabbit all my life. The only way to slow down is to stop.54

  His friend Dick Holland had the impression that Buffett was contemplating his “whole life,” and specifically what he could do with his money—of which he now had the astounding sum of $25 million.55 To his partners, Buffett hinted at a change of pace:

  Some of you are going to ask, “What do you plan to do?” I don’t have an answer to that question. I do know that when I am 60, I should be attempting to achieve different personal goals than those which had priority at age 20.56

  Buffett, who had raised funds for the quixotic presidential campaign of Eugene McCarthy the year before, told the Omaha World-Herald that he hoped to spend the bulk of his time working “in any intelligent and effective way possible” on human problems.57 In another interview, he said he wanted to pursue interests aside from merely making money.58

  Buffett began one such effort immediately. Waspish Omaha did not permit Jews in the Omaha Club, a downtown eating haunt for businessmen. Buffett had quite a few Jewish friends, including one Nick Newman, who ran an Omaha grocery chain, and who was incensed at being excluded. Buffett brought it up with the board of the club, and was told, “They [the Jews] have their own club.” (Omaha also had several country clubs, each of them segregated.) In Buffett’s view, it was blatantly wrong:

  Now there are Jewish families that have been in Omaha a hundred years, they have contributed to the community all the time, they have helped build Omaha as much as anybody, and yet they can’t join a club that John Jones, the new middle-rank Union Pacific man, joins as soon as he’s transferred here. That is hardly fair.59

  Of course, Buffett was not about to lead a protest march outside the Omaha Club. Characteristically, he opted for a passive and indirect tactic, yet one that cleverly shifted the burden. Namely, he applied for membership to the all-Jewish Highland Country Club.

  The Highland had been founded in 1923, by Jewish golfers who had been subjected to taunts of “kike” and “sheenie” on Omaha’s public courses. Even in the sixties, anti-Semitic incidents were not unknown, and Omaha’s Jews were neither entirely ready to assimilate nor entirely welcome in gentile society. Highland’s purists vehemently opposed letting Buffett join. Their feeling was, “This is our club and they’ll take it over.”60 Buffett’s friends and the club liberals, which included Omaha’s rabbis, favored integration. The battle was heated, but on October 1, 1969, Buffett was admitted. Then he returned to the Omaha Club and informed them that “the Jewish club” wasn’t totally Jewish anymore. Now the Omaha Club had no excuse, and quickly admitted some Jews.

  Buffett would later make light of his mo
tives—with him, a telltale sign of strong feeling—by joking that he had joined Highland because “the food was better.”61 In fact, he rarely went there. Aside from his civil rights concern, one suspects that he had a feeling for Jews in particular—perhaps a subtle homage to Ben Graham, or an identification with underdogs. Rabbi Myer Kripke, whose family were frequent guests at the Buffetts’, thought Buffett a “philo-Semite.” (Buffett used to joke with Kripke that he had “a nice Jewish boy” picked out for his daughter.)

  In the minds of Omahans, the Highland episode loomed large. It severed Buffett from his John Bircher father. Rabbi Kripke, who had taken issue with Howard Buffett over the latter’s support for prayer in public schools, said Warren’s gesture “was such a sharp reaction to this [his father]. I think he did it as a political statement.”

  Buffett also got involved in a path-breaking abortion case. Along with Susie, who was active in Planned Parenthood, Warren strongly favored legalizing abortions (then illegal in most states). In 1969, the California Supreme Court had agreed to hear an appeal from Leon Belous, a doctor convicted for referring a woman to an abortionist. Charlie Munger had read about Belous in the newspaper and called Buffett, and the two immediately decided to underwrite the appeal.

  Munger turned Belous into a personal crusade. He organized two friend-of-the-court briefs: one signed by 178 medical school deans and professors, the other by seventeen prominent lawyers and written by Munger himself. In September 1969, Belous won a landmark victory—the first time an abortion law had been declared unconstitutional.62 ‡

  From Buffett’s angle, the Highland episode and Belous had similar virtues. He characteristically sided with what he saw as community interests over sectarian ones. In his rational, stockpicker’s view, society’s stake in having open institutions and in minimizing the number of unwanted babies outweighed the narrower claims of segregationists and antiabortionists.

  Aside from politics, Buffett spent most of 1969 liquidating the portfolio. His Uncle Fred, coincidentally, announced the closing of Buffett & Son, the family grocery begun precisely one hundred years earlier. Appropriately enough, in the fall, Warren and Susie threw a party with echoes of fin de siècle. They invited 180 guests and flew in sandwiches and racks of sausages from the Stage Deli. The Buffetts’ door was illuminated by a string of flashing lights, flanked by a pair of three-foot Pepsi bottles. Politicians and businessmen came, blacks and whites, “the moneyed and the still struggling.”63 Women wore cocktail dresses, bell-bottoms, culottes, and miniskirts. Partygoers painted the bodies of two scantily clad girls in the solarium, and W. C. Fields and Mae West were featured on the racquetball court, with popcorn served from a machine. A guest said he hadn’t known that Omaha had “all these people.”

  Meanwhile, Buffett’s decision to quit had begun to look shrewd. The Dow had hovered close to 1,000 until May. In June, it dipped below 900. One by one, the high-fliers crashed. Litton Industries—hallmark of the conglomerate era—fell 70 percent from its peak; Ling Temco-Vought, another, plunged from 169 to 25. Wall Street brokerages closed their doors. The stock exchange slogan “Own your share in American business” was dropped without explanation.64 Performance funds were routed.

  Fred Carr, anointed by Business Week in May, quit in December, leaving the Enterprise Fund stuffed with illiquid letter stock. It would fall 26 percent in 1969 and by more than 50 percent before the carnage stopped.65 Cortes Randell’s National Student Marketing was modestly revalued, from 140 to 3½, taking the Harvard endowment along for the ride.§ The Dow Industrials closed out 1969 at an even 800. And the slaughter went on. By May 1970, a portfolio of every share on the stock exchange was down by half from the start of 1969.66 Four Seasons Nursing Center—darling of the ’68 garbage market—fell from 91 to 32. Electronic Data Systems plunged 50 points on a spring day—reducing the fortune of its Napoleonic founder, H. Ross Perot, by a cool $445 million. The Ford Foundation portfolio was shattered, forcing McGeorge Bundy to swallow a severe helping of humble pie.‖

  Buffett eked out a 7 percent gain in 1969, the partnership’s final at-bat. It was an off year, but it topped the Dow by 18 percentage points. The long-prophesied down year had never come. He had made a profit and beaten the benchmark in every season.

  Had an investor put $10,000 in the Dow in 1957, his total profit over thirteen years would have amounted to $15,260. The same grubstake, if invested in the partnership, would have produced a profit—after deducting Buffett’s share—of $150,270.67 Alternatively, Buffett’s portfolio grew at a compound annual rate of 29.5 percent, compared to 7.4 percent for the Dow. One might look for metaphors to other realms—in music, Mozart; in baseball, the 1927 Yankees. In the world of investing, there had never been anything like it.

  Investment companies tried to buy his partners list, but Buffett turned them down.68 However, there remained the matter of where his former investors would put their dough. Buffett gave them just one name: Bill Ruane, the straight-arrow from Graham’s class, who was setting up the Sequoia Fund, a new mutual. Many of Buffett’s partners invested in it.

  Buffett said he would put much of his own money in municipal bonds, and he wrote a long last letter offering to help his partners do the same (but making it clear that he would not be offering continuing investment counsel). The letter was, at turns, informal, discursive, and highly detailed. At one point—recall that it was five years before any glimmer of New York City’s financial trouble—Buffett interrupted his train of thought with a cautionary aside:

  You will notice I am not buying issues of large cities. I don’t have the faintest idea how to analyze a New York City, Chicago, Philadelphia, etc. (a friend mentioned the other day when Newark was trying to sell bonds at a very fancy rate that the Mafia was getting very upset because Newark was giving them a bad name). Your analysis of New York City—and I admit it is hard to imagine them not paying their bills for any extended period of time—would be as good as mine. My approach to bonds is pretty much like my approach to stocks. If I can’t understand something, I tend to forget it.69

  The partnership liquidated all but two of its investments: Berkshire Hathaway and Diversified Retailing, the latter a holding company for the Ben Rosner dress chain.a Thus, each partner could take his proportional interests in Berkshire and Diversified in stock or opt to cash out. Buffett would take the stock:

  I think both securities should be very decent long-term holdings and I am happy to have a substantial portion of my net worth invested in them.70

  He urged his partners to think of Berkshire, which was by far the bigger of the two, as he did—as a business, rather than as a “stock.” But his plans were a trifle obscure. On the one hand, he didn’t think much of textiles; on the other, he liked the guy in charge. He allowed that it ought to grow at 10 percent or so a year, but avoided making a firm prediction. Moreover, though he expected to play a role in setting policy at Berkshire, his partners should understand that he was under no obligation “should my interests develop elsewhere.”71

  Sam Stayman, the bridge champ, figured that Buffett had played out his hand. He sold his Berkshire back to Buffett at $43 a share. But many partners hung on. They could not know what Berkshire Hathaway would become, nor how deeply Buffett was engaged in remaking it. But Buffett had made it plain that he was keeping his Berkshire. As the loyal Doc Angle saw it, “That’s all anybody had to hear if they had any brains.”

  * Buffett was also constrained by federal securities law, which restricts such partnerships to ninety-nine partners. According to Dan Monen, his lawyer, he had far more than ninety-nine people investing with him, but no more than ninety-nine “limited partners”—an end run accomplished by lumping groups of investors into single entities. “It was within the letter of the law,” Monen said. “I don’t know about the spirit.”

  † Rosner stayed for twenty years. Toward the end of his tenure, he told Buffett: “I’ll tell you why it worked. You forgot you bought this business. And I forgot I sold it.”
<
br />   ‡ Two years later, Belous was cited in the appellants’ brief in Roe v. Wade as having established “the fundamental right of the woman to choose whether to bear children.”

  § Randell would plead guilty to stock fraud. He was sentenced to eighteen months.

  ‖ Quoting from Bundy’s letter in the 1971 Ford Foundation Report: “These sober six years have taught us a number of lessons.… in the mid-1960s we too easily allowed ourselves to make larger commitments than hindsight would recommend. It was easy in 1965 and 1966 to believe in the high long-term rates of total return on stocks, the low rates of total return on bonds, and the modest rates of inflation that had been the general pattern for fifteen years. The last six years, to put it very gently, have been different.”

  a Buffett luckily managed to sell the Baltimore-based Hochschild to Supermarkets General and get out without a loss.

  Chapter 7

  BERKSHIRE HATHAWAY

  It was the fate of New Bedford, Massachusetts, to be cursed by fleeting prosperity not once but twice. Founded by Pilgrims, it withstood a sacking by the British in the Revolutionary War and then became the center of the world’s whaling trade. Its damp, salt-drenched cobblestones led ever to the wharf, which gave New Bedford a livelihood yet left the town at risk should whaling fall upon the shoals. A local seaman—Herman Melville—said, “The town itself is perhaps the dearest place to live in, in all New England.” Yet whence had its riches sprung? “Go and gaze upon the iron emblematical harpoons round yonder lofty mansion, and your question will be answered.… One and all, they were harpooned and dragged up hither from the bottom of the sea.”1

  The whalers suffered losses in the Civil War, and they were doomed by the drilling of the first oil wells, in Pennsylvania. Yet if New Bedford shuddered it did not collapse—thanks to a prescient diversion of its capital. As early as 1847, a cotton mill, which promoters said would reduce the city’s dependence on the sea, was financed by New Bedford whalers. A subsequent mill was named for the whaler Acushnet, symbolizing the redirection of capital. Ultimately, some $100 million was invested in textiles,2 so that even as the harpoons were being laid to rest, ships were piling the docks with bales of Southern cotton. By the early twentieth century, New Bedford’s seventy mills were spinning more fine cotton than any other city in the country.3