Buffett

by Roger Lowenstein

  In 1970, Berkshire’s profits from textiles were a laughable $45,000. Meanwhile, it earned $2.1 million from insurance and $2.6 million from banking, both of which, at the start of the year, were working with roughly the same amount of capital as textiles.

  In his annual report, Buffett saluted Ken Chace’s attitude and effort, but noted that textiles were “swimming against a strong tide.” Pointedly, he noted that Berkshire’s return was 10 percent, merely average for corporate America, and that “it is considerably in excess of what would have been achieved had resources continued to be devoted exclusively to the textile business.”38

  Of course, the question of whether Buffett, an outsider, would close the mill had hung over him from the start. Malcolm Chace claimed that he knew from day one that Buffett “didn’t have any intention of putting more money into the brick and mortar of textiles.” Jack Stanton, watching bitterly from the sidelines, concluded that Buffett was merely a liquidator.

  But from time to time Buffett did reinvest modest amounts. He did not want to be known for closing New Bedford’s last mill. In a final letter to his partners he had written:

  I like the textile operating people—they have worked hard to improve the business under difficult conditions—and, despite the poor return, we expect to continue the textile operation as long as it produces near current levels.39

  He felt a debt to Ken Chace, who had provided him the cash to diversify, and in whom Buffett saw the qualities he most admired: frankness and self-reliance. Once, when Chace put himself down, Buffett threw him a look. He said, “Ken, you worked your way up from nothing.”

  He was stingy about paying Chace, who made less than competitors at other textile mills.40 In 1970, after Chace had been at the helm for five years, his salary was $42,000 a year. Also, Buffett tightened up considerably—as did other textile companies—on the pension plan. “Warren had a strong negative feeling about management benefiting at the expense of shareholders,” Chace noted.

  Yet Chace deeply appreciated his autonomy under Buffett and was extremely devoted to him. This says a lot about Buffett’s effect on people. Though he wouldn’t loosen his wallet, he was uncanny as a motivator.

  Chace wondered whether Buffett would shut him down, but he sensed that his overseer did not want the tumultuous upheaval of a mill closing. Buffett, he knew, did not like change. “Warren tends to hang on,” Chace noted. “He keeps his old friends.”

  According to Buffett’s capitalist credo, he probably should have closed the mill. But viscerally, he felt an affection for this relic of a factory, whose past seemed oddly more alive than its future.41 He was willing to tolerate a mediocre return, as long as the mill didn’t become a drain on cash and require him to put in more capital. Spiritually, though no longer financially, the Hathaway mill embodied the New England work ethic that Buffett revered. So Buffett made a Faustian pact between his conscience, his comfort, and his wallet. Textiles would be bled to the bone, but the looms on Cove Street would continue to hum.

  * Green, a shipping heiress, was said to have wrapped herself in papers to keep warm in the winter. She died in 1916, reputedly the world’s richest woman, with a $100 million fortune.

  † The company had no relation to Hathaway shirts.

  ‡ Buffett later said, “I must have been in the bathroom” when the dividend was declared. He never paid another.

  § Ringwalt’s memoir, Tales of National Indemnity Company and Its Founder, is a hilarious romp past the characters, not always savory, in the back alleys of the insurance business.

  ‖ Within a year or two of the National Indemnity deal, Buffett was imitated by financial operators such as Saul Steinberg, Carl Lindner, Harold Green, Maurice Greenberg, and Larry Tisch, all of whom pursued insurance-company takeovers.

  Chapter 8

  RETURN OF THE NATIVE

  Now is the time to get rich.

  WARREN BUFFETT, 1974

  Coming off the golf green with his chum Bob Billig in the summer of 1970, Buffett noticed a commotion by the club patio and asked what was going on. “That’s your fortieth birthday celebration, watching us,” Billig said dryly. As Buffett stood uncertainly, the crowd approached, bursting into the familiar refrain. Though he kept his composure, Buffett was deeply touched. Now at midlife, he was mildly celebrated. In Omaha, he was a somebody: chairman of the weekly Sun, a director of the Omaha National Bank. As a visitor observed on a walk through downtown Omaha, Buffett could “rattle off the financial characteristics of every building and business he passes.”1

  Yet with his partnership liquidated, Buffett no longer had a full-time job. Keeping a vigil over Ken Chace and the Hathaway mill took only so much time. His three children were teenagers. A profile in the Lincoln Journal & Star portrayed him as a man in limbo, monitoring his investments from a four-room suite and living a “pretty easy life.” To a younger money manager who had sought his counsel, Buffett curtly replied, “I am no longer in the investment management business and, therefore, have had to decline all requests, including yours”—sounding as if Wall Street were not to hear from him again.2

  After his fortieth birthday, Buffett reconvened the Graham group, in Williamsburg, Virginia, this time without Graham. Oddly, Buffett was the only one not active in stocks. The market was unattractively high, and he was asking quite natural questions—such as, with $25 million, what was the point of accumulating more? Writing in Fortune, his friend Carol Loomis said Buffett had “a strong feeling that his time and wealth should now be directed toward other goals than simply the making of more money.”3 Bill Ruane urged him to run for President.

  In fact, Buffett was thinking seriously of public service. He did not want to run; he was far too private—and, he admitted, thin-skinned—for that carnival test.4 But he was dabbling backstage. He supported Democratic presidential hopefuls, such as Harold Hughes and Allard Lowenstein. He was getting chummy with politicians, such as Senators Frank Church and Richard Clark and Governor Jay Rockefeller. Geoffrey Cowan, a Village Voice writer, had dinner at the Buffetts’ along with John Culver, a candidate for U.S. senator. Strangely, the talk at this multimillionaire’s dinner table was all about liberal politics.

  Howard Buffett had championed America as a finished product, as a sort of perfect, closed society unneedful of change. Warren, who had the American sympathy for the underdog, identified with the up-and-coming Ben Rosners and Ken Chaces. Like his father, he hated free riders (e.g., his disdain for stock options), but he saw more of them within the country clubs and boardrooms than without. Once, at a formal dinner, when a guest complained about the cost of welfare programs for the poor, Buffett replied tartly, “I’m a lot more concerned about welfare for the rich.”5

  This was reflected in Buffett’s lifestyle. He lived more or less on the $50,000 salary that he received from Berkshire. His children went to public schools, and Warren encouraged them to do something that they enjoyed, irrespective of what they would earn. In fact, Peter realized the extent of his father’s fortune only when he read of it in the newspaper. Young Susie said:

  We didn’t live any differently from anyone else. I could charge clothes and never get in trouble—that was the only difference. I didn’t have a car. I had to get a job at sixteen—at the Carriage Shop, as a salesperson.

  Buffett generally tried to make light of his money. When his wealth attracted publicity, alarming his family, Buffett joked, “We’ll just put a sign on the door that says it’s Bill Scott’s [his assistant’s] night to keep the money.” Or, he would crack, “And to Peter, who wants to be mentioned in my will: ‘Hi, Pete!’ ” Of course, this was not really a joke. Warren had strong feelings about his money and warned his kids that they should not expect a penny of it. He seemed to fear that even a droplet of his money would spoil them.

  This may have been obsessive, but as a consequence, the Buffett household had an unmoneyed, informal spirit and an egalitarian air. At a Halloween apple-bobbing party, the Buffetts invited in every passing
trick-or-treater—a gesture one would not have expected from a J. P. Morgan or a Henry Kravis.6 People dropped in unannounced to use Buffett’s racquetball court, and in such numbers that he took to calling it the “YMCA.”

  Under the influence of the hip elder Susie, the house became a refuge from Woodstock-era generational conflict. Layne Yahnke, a friend of little Susie’s, said it was a “safe house.” People could just walk in and raid the fridge. “If the snow fell and the city stopped—that’s where you went,” Yahnke recalled. “Sitting in the family room was so damned nice.”

  Susie had done the house in her trademark sunshiny oranges and yellows. There were paintings by artists that she had taken under her wing, and Aquarius-age posters such as the ubiquitous War Is Unhealthy for Children and Other Living Things. The man of the family might come down to make some popcorn, but—“retired” from money management or not—he was generally upstairs, working. Again, Layne Yahnke:

  Saturday nights the family room would be full of kids. Mrs. Buffett would be there; we’d be playing our music for her; she’d be playing music for us. Long about twelve-thirty in the morning you’d hear “Susan-O—you coming up?” There were never any rules. When he went to bed, we turned down the music.

  In 1971, “big Susie” talked Warren into buying a $150,000 vacation home in Laguna Beach, south of Los Angeles. It was near the ocean but not fronting it, as the more expensive homes were, and was casually furnished with rattan chairs. The first summer, thirteen teenagers stayed there. Buffett would get a daily package of papers from his office and go off by himself, but he was pretty tolerant of his kids’ friends. One evening he took a big crew of them to dinner. After the meal, the waiter came back with his credit card and said, “You’re at your limit.” Buffett arched his eyebrows at his wife and handed the waiter a second card, without so much as a word to suggest that he was, indeed, good for the bill.7

  While Warren was pondering a political role for himself, Susie was spending a lot of time in north Omaha, the black quarter (and the birthplace of Malcolm X). Besides being president of a local volunteer agency, she would make the rounds of schools and always seemed to have an errand or a mission on the north side. (Tom Rogers, a nephew, satirized her thusly: “Oh, are you black? Are you poor?—How much do you need?”)

  Encouraged by Susie, Warren put his toe in the water. Their private trust, the Buffett Foundation, began to provide more than fifty scholarships a year to black college students.8 In the early seventies, Rodney Wead, a friend of Susie’s who was promoting black-run business ventures, asked Warren to get involved. In particular, Wead, who had visions of “black capitalism,” thought Buffett would be just the guy to help him get his Community Bank of Nebraska off the ground.

  Buffett agreed. He and Nick Newman (his country-club co-conspirator) joined the bank’s advisory board and devoted a fair amount of time to it. Buffett also made a nominal investment—1.4 percent of the bank’s capital.9 However, unlike Susie, Warren was far from an innocent. He repeatedly warned the bank’s directors that a disproportionate number of minority banks had failed because of bad loans. As the bank was getting under way, Buffett sent the board a nervous note, enclosing a copy of a newspaper story about a similar bank in Denver that had failed.

  You will notice that the President of the bank said, “When we started business, it was our plan to aid minority investors and the so-called little guy. This we did, but some of them didn’t treat us very well in paying their debts, and that was our downfall.” The President is making a mistake in blaming the borrower. Every bank gets offered lots of bad loans, and it is the banker’s fault if he accepts them.10

  When the Community Bank began to flounder, Buffett distanced himself. Wead suggested that Buffett take some black students under his wing and teach them finance, but Buffett did not respond. “Warren is an enigma,” Wead concluded. “He’s gracious. He’s honest. He’s hardworking. But he’s never understood his role as a wealthy man in our beleaguered community.” When bad loans mounted—just as Buffett had feared—he pointedly refused to invest more capital.11

  Wead complained that Buffett “didn’t understand the cycle of poverty.” The truth was to the contrary. Buffett understood the cycle well enough to keep his wallet zipped. Without the hope of a return, he was no more willing to invest in the Community Bank than he was in textiles.

  Despite his ideals, Buffett was suspicious of the liberal impulse to simply spend money. George McGovern, then running for the Democratic presidential nomination, stayed at Buffett’s house and seemed to win Buffett’s favor—until, soon after, he announced that a President McGovern would favor giving each person in the United States a $1,000-a-year stipend. Buffett dropped him like a hot potato and voted for Richard Nixon.12

  Partly, Buffett was just tight, but he genuinely did not think people or organizations (or his kids) benefited from easy cash. He measured social projects through the same lens as business ventures: he wanted a return. Good works required that one proceed on the basis of trial and error, even on faith. Buffett was incapable of such a leap. Indeed, the very discipline that made him a good investor crippled what could have been a powerful inclination to work for societal changes. He needed a yardstick. “In investment you can measure results,” he admitted to a reporter. “With some of this other stuff, you don’t know in the end whether you’ve won or lost.”13

  Like many another mogul, Buffett thought he would be able to play both the citizen and the capitalist in publishing. Jay Rockefeller had introduced him in the late sixties to Charles Peters, a former Peace Corps administrator who was starting a magazine, the Washington Monthly. The Monthly espoused just the hardheaded liberalism Buffett admired. He invested $32,000 and brought in Joe Rosenfield, a liberal friend from Des Moines, as a partner. Full of high-minded ideals, Buffett told Rosenfield, “It’ll be interesting and if it breaks even it’ll be worth it.”

  Peters immediately blew his capital. Buffett and Rockefeller took it upon themselves to go to New York and hire a consultant to see if the magazine was worth saving. Concluding that it was, Buffett agreed to put in $50,000 more. Then he began to doubt whether it would, as he had said, be “worth it.” He called Peters and told him he wanted out—which would have been a death blow. The fast-talking Peters assured him that the Monthly would be a big breadwinner, which neither of them believed. They went back and forth on the telephone, Buffett referring to his accursed numbers, Peters desperately trying to reel him in. Finally, Buffett agreed.

  The amount of money was trivial, but as Ken Chace had learned, that didn’t matter. “Warren wanted annual reports—all that shit,” Peters noted. The Monthly was precisely the editorial voice that Buffett had hoped for—influential and at times ground-breaking. But as a business the Monthly was a joke. Though it was understaffed and run on a shoestring (Peters earned $24,000), Buffett was most annoyed because Peters didn’t produce an annual report. Even in a venture that couldn’t possibly make a buck, he needed that yardstick.

  Buffett complained to Rosenfield, “They talk about open government but they don’t send statements.” Peters said that Buffett was “torn—between his pro bono side, and his side that didn’t want it on his tombstone that he had invested capital in the Washington Monthly.”

  Buffett did care about the journalism. In 1971, he called the Monthly with what he said was a pretty hot tip. Two young editors rejected it, reckoning that if it came from a millionaire it wouldn’t be much good. 14

  Then Buffett took the story to the Sun, the group of Omaha-area weekly papers that he had purchased for Berkshire. Stanford Lipsey, the publisher, and Buffett were pretty chummy. Lipsey would go over to Buffett’s and, liquefied with Pepsi-Colas, the two would talk for hours about how to improve the paper and how to use it as a social force in Omaha. They had tried their hand at kingmaker, vigorously pushing a candidate for mayor (who lost). One time, Buffett called Lipsey to tell him that an editorial on President Nixon’s wage-and-price controls was terrific. �
��Warren, you gave it to me,” Lipsey reminded him.

  Buffett’s tip concerned Boys Town, a revered Omaha institution. It had been founded in 1917 by Edward J. Flanagan, an Irish priest, as a home for wayward youths, and celebrated in an Oscar-winning 1938 movie starring Spencer Tracy. Buffett had a source who told him that Boys Town was sitting on a ton of money and was straying pretty far from Father Flanagan’s dream.15

  The story was tailor-made for the Sun, a feisty paper but a weak second fiddle to the Omaha World-Herald. And Buffett gave Lipsey a crucial lead: Boys Town had been required, for the first time, to file an independent tax return.16 The return showed that Boys Town had accumulated an astonishing $162 million investment portfolio—twice the endowment of the University of Notre Dame. Meanwhile, it was serving fewer boys and operating a heart-tugging direct-mail campaign under the guise of poverty.

  This was the sort of story that fired Buffett’s conscience. He invested a godlike faith in capital, because any amount of it, even Queen Isabella’s pittance, bore the seeds of future trillions. To squander or misdirect it was a sin.

  The Boys Town project was reported in secret, and Buffett, Lipsey, and the editor proofread the eight-page exposé in the editor’s living room. Buffett topped the story with a line from scripture (Luke 16) that could have been his refrain for anyone in public life, or in business, who had misused capital: “Give an account of thy stewardship.”

  The story, published in March 1972, won a Pulitzer Prize.

  Buffett liked newspapers. He was nostalgic about his boyhood exploits as a Washington Post carrier; he liked the inky feel of newspapers. But he was dissatisfied with the Omaha Sun. Like other quasi-social ventures, such as the Community Bank and the Washington Monthly, the Sun didn’t quite cut it for him. Though he was proud of the Pulitzer, he wanted a profit.