Buffett

by Roger Lowenstein

  Impressed with this display of virility, Gutfreund showed Byrne the door and told Frinquelli, the Salomon analyst, to research GEICO and write up a recommendation. Frinquelli concluded that GEICO could be saved, and ought to be saved. If restored to health, he said, it would be valuable to policyholders and profitable for investors. Gutfreund also was reassured by the news of Buffett’s investment.48

  In August, Gutfreund agreed to underwrite a $76 million offering of GEICO preferred. This was a gutsy move. GEICO was thought to be so risky that no other firm would join in a syndicate, as usually occurs, meaning that if the offering failed, Salomon would be on the hook for the entire $76 million.

  When a lawyer on the deal pestered the bankers over some detail, Gutfreund snapped, “What are you worried about? It’s only your job. It’s our money.”49 In November, days before the offering, it appeared that Salomon would take a major loss.50

  Shortly before the underwriting, Buffett told Gutfreund that he’d be willing to take the entire allotment—and named his price.51 Byrne wanted to sell it at $10.50 a share, but Gutfreund, knowing Buffett’s ceiling, insisted on $9.20. He wouldn’t budge—not by a penny. Buffett was his backup.

  The offering turned out to be a hit. Buffett took 25 percent of it, giving Berkshire a total investment of $23 million. Thanks to a curious Catch-22, the investment, once made, was no longer risky—because the fact of the added capital took GEICO out of peril. In Byrne’s view, the hero of the rescue was Gutfreund, who had stepped up with capital when no one else would.52 Buffett also was impressed with him. Gutfreund evidently was his kind of investment banker.

  Within six months, GEICO rose to 8⅛—a quadrupling. That was only a faint indication of its potential. Over the next few years, Berkshire doubled its stake, making Buffett the controlling investor. GEICO seemed to go through a Buffett mold—Buffett had that effect on companies. GEICO, like the Washington Post, repurchased its own shares; GEICO’s boss, too, made a habit of calling on Buffett. It was Buffett-ized. Byrne was an experienced pro, but his business relationship with Buffett was not so very different from Kay Graham’s. Quoting Byrne:

  I’d ask him all kinds of things. He showed me sensible ways to finance. He was generous with his time. But he never—ever—made suggestions. Warren figured out a long time ago that he could make a lot more money for Berkshire by being a benevolent shareholder. This guy made a lot of money by backing up the truck.

  Once a year, Buffett would do a Q&A with GEICO’s executives. Onstage, he was a natural. He had the Casey Stengel technique of avoiding overliteralness by treating questions as general prompts. He would segue into a little story, which usually had an investment moral, but which he told in an utterly simple style. He was informal, yet picked his words with exquisite precision. You couldn’t not be drawn in.

  Byrne swears that people at GEICO canceled vacations so as not to miss the show. One time, Buffett said an investor should approach the stock market as if he had a lifetime punch card. Every time he bought a stock he punched a hole. When the card had twenty holes he was done—no more investing for life. Obviously, the investor would filter out every idea but the best. Lou Simpson, who was managing GEICO’s portfolio, said this parable had a profound impact on him.

  Buffett, in fact, had this punch-for-life conviction in GEICO, and went out of his way to let Byrne know it, both privately and in Berkshire’s published reports. In an era when managers were increasingly under the gun to raise their stock or face a takeover, Buffett wanted Byrne to manage for the long term, and emphasized that he wouldn’t sell him out.

  This was put to a test when a Fortune 500 company made a serious bid to acquire GEICO. Byrne called Buffett and asked what he thought. Buffett said, “It’s up to you.” Byrne said, “Oh, come on—you gotta give me more than that.” Buffett said nothing, but agreed to accompany Byrne to a late-night bargaining session at the Waldorf-Astoria, in New York.

  The suitor and his bankers naturally addressed themselves to Buffett, the controlling stockholder. Buffett said, “You’re talking to the wrong guy. He [Byrne] is the one you have to convince.” Byrne took Buffett aside and pleaded, “At least whisper a price in my ear.” Buffett stayed mum.

  “It was amazing,” Byrne said. “We were talking a billion dollars or so. He left it in my hands.”

  Finally, Byrne named a price that was out of the buyer’s range, and the talks ended. That was surely the outcome that Buffett, who figured that GEICO’s best days were still ahead, had wanted. So why had he played around? “It’s hard to know what’s going on in Warren’s mind,” Byrne admitted.

  No doubt, Buffett wanted Byrne to know that he trusted him. And he must have guessed that if he showed his faith, Byrne would not want to let him down. One could say that Buffett was lucky, except that he got lucky too often.

  Reminiscing on the GEICO roller coaster, Walter Schloss, Buffett’s buddy from Graham-Newman, said the entire saga “was pathetic in a way. Some people became millionaires, some didn’t benefit at all, and others went broke.”53 Leo Goodwin, Jr., the son of GEICO’s founder, bailed out at the low, a bankrupt. And Ben Graham kept his GEICO to the bottom. In September 1976, just before the bailout was completed, Graham died at his home in France. He was eighty-two.

  After Graham’s death, commentators often remarked on Buffett’s departure from Graham’s methodology. Quite obviously, Buffett evolved. He was influenced by Charlie Munger and by the writer-investor Philip Fisher, each of whom stressed good, well-managed companies as distinct from statistically cheap ones.54 And he was influenced by his own experience.

  Buffett analyzed companies more subjectively than Graham, and he found “intrinsic value” in companies, such as See’s Candy, that Graham would not have touched. But these deviations tend to obscure a larger fidelity. The very idea that a stock had an “intrinsic” worth, independent of the tape, Buffett got from Ben Graham. Indeed, it is nearly impossible to imagine Buffett’s quitting the partnership at the height of the Go-Go years, or jumping back in during the 1974 market depression, had he not read Graham’s liberating parable of Mr. Market. Buffett’s eulogy for Graham, written for the Financial Analysts Journal, stressed, precisely, the endurance of Graham’s approach:

  In an area where much looks foolish within weeks or months after publication, Ben’s principles have remained sound—their value often enhanced and better understood in the wake of financial storms that demolished flimsier intellectual structures.55

  Some years later, Buffett admitted that the stocks he was buying were entirely different from those that Graham would buy. What he had retained from Graham was “the proper temperamental set”—that is, the principle of buying value, the conservatism embedded in Graham’s margin of safety principle, and the attitude of detachment from the daily market gyrations.56

  Buffett did not stop thinking of himself as one of Graham’s followers, nor did he lose his personal feeling for the teacher who had treated him with an “open-ended, no-scores-kept generosity.”57 Much later, when Buffett was speaking to the author about Buffett’s own career, he remarked with unmistakable affection: “The best thing I did was to choose the right heroes. It all comes from Graham.” When the author mentioned that he had spoken to some of Graham’s children, Buffett’s voice suddenly broke. “I wish you could talk to Graham,” he replied.

  * The Newspaper Preservation Act of 1970 permits competing papers to combine the business side of their operations while retaining separate editorial staffs—if it can be shown to the Department of Justice that one of the papers may otherwise go under.

  † One time in California, the Buffetts and Roy and Martha Tolles were strolling past a tourist shop that had a help-wanted sign next to some rather skimpy bikinis in the window. Buffett deadpanned, “I wonder if they need a fitter.”

  ‡ The figure was based on shipments to stores—which vastly overstated actual purchases. Within a year, Atari, the kingpin of video, was rocked by losses and the industry suffered a sha
keout.

  § For comparison with current prices, as of 1994 GEICO had split five-for-one.

  Chapter 11

  PRESS LORD

  A few days before Christmas, 1976, Buffett met with Kay Graham, her son Donald, and Mark Meagher, president of the Post newspaper division, in the Newsweek offices in New York. A party was going on at Newsweek. The Post directors retreated to a private room and ushered in a visitor—Vincent Manno, a newspaper broker.1 Manno was hoping to interest the Post in making a bid for the Buffalo Evening News. Afternoon papers were a dying breed, but the Evening News had thrived, owing to its strong reputation and to Buffalo’s demographics. In blue-collar Buffalo, people rose early and did not read a paper until after work.

  The Evening News also had several negatives. It did not publish on Sundays—the day readers tended to linger over their paper and, increasingly, the day most sought after by advertisers. Buffalo, a rusting steel town, was itself considered a negative—too old and cold. Worst of all, the paper’s employees were represented by a total of thirteen unions that had won increasingly good contracts; of 131 newspapers represented by the Newspaper Guild, employees at the Evening News had the seventh-highest pay.2

  For all that, the Evening News was precisely the dominant, big-city paper of Buffett’s dreams. It reached a higher percentage of local households than any other big-city daily in the country.3 And Buffalo was a city where habits died hard. Most of its people were from Buffalo, and had grown up reading the Evening News. Despite its reputation as a dying city, Buffett knew that its stable population was a plus. What’s more, he was hungry—not to advise a newspaper owner, but to be one. He wanted Graham to know in advance: if the Post didn’t buy the Buffalo Evening News, then Warren Buffett might.4

  Founded in 1880, the Evening News, which was establishment and Republican, had been run by the Butler family, which also owned a local television station and a fortune in American Airlines stock. In recent decades, the proprietor had been Kate Robinson Butler, a grande dame who traveled with her poodle in a Rolls-Royce. Butler had built a lavish printing plant, rimmed with distinctly nonnative tropical plants, and had gone to similar expense to avoid trouble with unions.5 Employees who had once tied the papers by hand had continued at their posts after the work was automated. As papers came off the runway, the workers would pass their hands over the conveyors, as if offering a sacrament. They were known as “blessers.”6 But the family’s stewardship had ended with Butler’s death, in 1974. Now the paper was up for sale by her estate.

  After the meeting at Newsweek, Graham concluded that the Post, having just crushed a strike, would be unwelcome in such a union town. The Tribune Co. of Chicago similarly decided not to bid.7 Manno, the broker, cut the asking price from $40 million to $35 million. Shortly after, he got a call from Buffett.

  “Do you work on Saturdays?” Buffett inquired.

  Manno asked if it was important.

  “I think you’ll consider it important.”8

  Buffett and Munger arrived at Manno’s home, in the quaint community of Weston, Connecticut, the first Saturday after New Year’s Day, 1977. They had lunch at Manno’s club, which was warmed by a blazing fire. When they got back to the house, Buffett cut to the chase. Bidding on behalf of Blue Chip Stamps,* he offered $30 million for the Evening News. Manno demurred. Buffett raised the bid to $32 million. Still no dice.

  Buffett and Munger left the room. Their offer was extraordinarily high, relative to the paper’s meager profits. The Evening News had earned only $1.7 million, pretax, in 1976. But Buffett knew that it was capable of earning more. He knew that in city after city, strong papers had gotten stronger while weaker ones had floundered or failed. And the Evening News virtually owned the town. It had twice the daily circulation of its morning competitor, the Buffalo Courier-Express, and 75 percent more advertising revenue.9

  When Buffett and Munger returned, a moment later, Munger scribbled out a formal offer of $32.5 million on a single sheet of yellow legal paper. That might do, Manno said.10

  Directly, an omen arrived in the form of the worst snowstorm in Buffalo’s history. When Buffett and Munger arrived to iron out a contract, the city was still digging out. Munger was uneasy—the Evening News, after all, was their biggest purchase by far. Touring the extravagant printing plant, Munger snapped, “Why does a newspaper need a palace to publish in?”11 Buffett jokingly dubbed it Taj Mahal East. But the Evening News was a big step for him. It was not a stock-market investment but a business owned in entire. Buffett would not have Kay Graham to take the punches for him; he would be personally on the line.

  Even before the sale closed, Buffett seemed to have a strategy in mind for the paper. When he introduced himself to Murray Light, the chain-smoking, Brooklyn-born managing editor, Buffett asked, “How do you feel about a Sunday paper?” Light said he had been urging the publisher to start one for years. Buffett hid his cards, but Light sensed that he agreed.

  After the closing, Light threw a welcoming party for Buffett at his home. A gaggle of employees approached the new owner, standing in the backyard in the warm light of spring. Buffett remarked, “News happens twenty-four hours a day, seven days a week”—an unmistakable clue that he was thinking of expanding to Sundays.

  Rumor had it that the Evening News had refrained from publishing on Sundays because of a tacit agreement between the Butlers and the Conners family—owners of the rival Courier-Express. The latter paper was older (the Express had once been owned by Mark Twain),12 more liberal, and of marginal to no profitability. Its Sunday paper was its life-blood, as was evident from the two newspapers’ respective circulations:13

  EVENING NEWS DAILY COURIER-EXPRESS SUNDAY COURIER-EXPRESS

  268,000 123,000 270,000

  The advertising numbers told a similar tale. The Evening News outsold the Courier-Express during the week by a four-to-one margin.14 Only the latter’s Sunday paper kept it in business.

  Buffett and Munger thought this balance was unstable. Without a Sunday edition, they believed, the Evening News eventually would lose its dominant franchise and possibly, in time, go under. That summer, the nearby Toronto Daily Star announced that it would start a Sunday paper. As Buffett knew, in addition to the Evening News, only the Cincinnati Post, the Cleveland Press, and the New York Post—dinosaurs all—remained as big-city dailies without a Sunday edition.15 Dashing off a note to Munger, he humorously warned that they should not be the last.

  Susie used to say, about my crew cut, that she didn’t mind my being the next-to-the-last fellow in the country with a crew cut, but she had strong objections to my being the absolute last. I think our course of action in Buffalo should be obvious.16

  Soon after, Buffett, who held the position of chairman at the Evening News, told Murray Light to design a Sunday paper—pronto. Light set up a special task force, and Buffett would drop in on them every month or so. Quoting Light:

  I’d see my colleagues reach into their jackets to pull out facts and figures which had been forwarded to Warren’s office. When they faltered, Warren would interject and fill in the blanks. He knew more about the reports than the guys who had written them.

  Buffett was on one of his highs, helping to design a newspaper, getting involved with ad rates, promotional schemes, pricing. He dashed off a note to a certain publisher friend: “Kay, I’m having so much fun with this it is sinful.”17

  However, people in Buffalo were afraid that the depressed local economy would not be able to support two papers in a head-on clash. As the November start-up neared, some stores, partly for civic reasons, made plans to advertise in both Sunday papers. Keith Alford, who ran a department store, said, “Nobody wanted to lose a paper—from an advertising standpoint or a news standpoint.” According to Ray Hill, the Newspaper Guild representative and an Evening News columnist, “We knew the time had come—one or the other paper would be out of business.”

  The Courier-Express knew it too. Two weeks before the fateful Sunday, it launched a surpr
ise attack, suing the Evening News for violating the Sherman Anti-Trust Act. Boldly, it demanded a preliminary injunction to handcuff the new Sunday edition before its scheduled November 13 debut.

  The suit charged the Evening News with classic monopolist behavior. It alleged that Buffett was planning to use his strength during the week to subsidize a money-losing paper on Sunday—analogous to a chain store cutting prices in the one locale that is across the street from a mom-and-pop competitor.

  Mr. Buffett’s Evening News [is] engaged in … a concerted effort to use its monopoly power to eliminate the Courier as a competitor in Buffalo.18

  The evidence was said to include the Evening News’s plan to sell seven papers for the price of six during a five-week promotional period, and its intention to sell the Sunday paper for only thirty cents. The Courier-Express, like papers in Syracuse, Rochester, Albany, and Bing-hamton, charged fifty cents.

  Buffett flatly disputed the charge. The Evening News, he asserted, fully intended to earn a profit on Sunday. He argued that a new edition would promote competition, not inhibit it, and made the obvious point that the Evening News had as much right to publish on Sunday as anyone, regardless of its effect.19 Put differently, it was not Buffett’s job to keep a competitor in business. But he had been badly caught off guard.

  Transcripts of the legal papers were printed verbatim in the Courier-Express, which treated its lawsuit as the story of the century. Also, Frederick Furth, the Courier-Express’s flamboyant San Francisco litigator, aroused public opinion against the out-of-town Buffett, casting him as a carpetbagger out to wreck a local institution.

  The law required the Courier-Express to show that its rival intended to destroy it. Certain business practices, such as pricing below cost, were considered unfair, and might weigh in the Courier-Express’s favor, but the line between merely competitive tactics and illegal ones was fuzzy. The key question was whether the Evening News had an intent to monopolize.