Since Buffett had no wish to run a store himself, or even to closely supervise one, he wanted managers who would “feel like I do,” ready to tap-dance at the start of the workday.16 Mrs. B was a sort of exaggerated version—almost a caricature—of that self-made, self-motivating ideal. Buffett, who had upped his own salary to $100,000 a year, paid $300,000 to Mrs. B.17 He routinely referred to her as one of his “heroes.”
He must have seen in her an unpolished—but in the essentials, quite faithful—rendering of himself. It was not just her obsessive habits (in her nineties, she continued to work every day of the year, ten to twelve hours a day), or her native suspicion of credit (the forty-three-acre store site was unmortgaged), or, as Buffett put it, that she “started with five hundred bucks and put everyone else out of business.”18 It was her utter singularity of purpose. When the Omaha World-Herald inquired as to her favorite movie, Mrs. B replied, “Too busy.” Her favorite cocktail? “None. Drinkers go broke.” Her hobby, then? Driving around and spying on competitors.19
A reporter who found Mrs. B at home noted that her living room looked like an extension of the showroom. The twin love seats, the reflecting glass coffee table, the assortment of crystal and brass figurines were arranged as they were in the store. Price tags dangled from the lampshades.20 Mrs. B didn’t spend much time there and never entertained. “I don’t like rich society people,” she noted. “Rich people are rude to you when you’re poor; I don’t forget that.”
As an unlettered immigrant, she underscored all that Buffett had been writing about the folly of needless complexity. She knew nothing about B-school retailing concepts such as “elasticity,” but she could tell Buffett her cash balance down to the penny.21 Buffett told an audience at Columbia Business School that Mrs. B knew depreciation and accruals “better than anybody in this room,” though she did not understand them in accounting terms. In his view, she had a native genius, which consisted of staying focused on the one area of her expertise.22 This was very similar to how Buffett saw himself. (At Buffett’s prompting, New York University granted Mrs. B an honorary doctorate of commercial science, an honor she shared with Fed chairman Paul Volcker and Citicorp CEO Walter Wriston.)
A visitor found her at work on a Sunday afternoon, attired in a sweater and blue pinstriped suit, with a carpet sample in her basket. She had a lively sense of humor and a poignant memory, and vividly described the day that she had seen two of the czar’s daughters in Minsk, shortly before they were shot.
When she spied a young woman fingering a rug, she burrowed over to her like a motorized rat. An expression of alertness, bordering on suspicion, was etched onto her face.
“Thirty-nine dollars. It’s a beauty.”
“I have blues and pinks,” the woman said uncertainly.
“It will go with anything.”
Mrs. B motored toward the counter. A saleswoman was on the phone with a customer who hadn’t paid for a carpet.
“Hang up,” Mrs. B volunteered. “Let him go to hell. Got to be ashamed of himself.”
The saleswoman was trying to work it out.
“Hang up! No sense talking to him.”
The saleswoman was straining to hear the details—something about the wrong color.
“I make my life being honest. Say ‘Goodbye’ and hang up! The guy’s going to get a cancer ’cause he’s such a crook.”
Aside from her prominent veins, she looked far less than her nine decades plus. She subsisted on a diet of fruits and vegetables, rose at 5:00 A.M., did not exercise, and, other than having had her knees replaced, was in perfect health. That was probably the trait Buffett admired most.
He couldn’t bear the thought that ill health (or death) would force him to give up working, and often joked that he planned to rely on séances as a management tool. (Buffett invariably vented his most anxious feelings with humor.) For someone so conscious of his mortality, the sight of Mrs. B must have provided a sort of cover. Writing to his shareholders, Buffett openly made the link between Mrs. B’s advancing age and his own:
It’s clear to me that she’s gathering speed and may well reach her full potential in another five or ten years. Therefore, I’ve persuaded the Board to scrap our mandatory-retirement-at-ioo policy. (And it’s about time: With every passing year, this policy has seemed sillier to me.)23
Mrs. B’s blemish was her disposition, which was increasingly brutal. She was badly at odds with two of her grandsons, who were the store’s heir-apparent managers. One of them, Ronald Blumkin, was so fed up with his grandmother’s scoldings that the two of them had stopped speaking. This fly in the Blumkin ointment was easy—perhaps too easy—for Buffett to ignore, because the Mart consistently earned a high return.
Buffett regarded the Blumkin clan so highly that Berkshire bought a second family business: the Omaha jewelry store Borsheim’s. Borsheim’s was truly a case of lightning striking twice. In 1948, the then tiny store had been purchased by Mrs. B’s sister and brother-in-law, Rebecca and Louis Friedman, who had escaped Russia on a westward odyssey via Latvia. Borsheim’s became the second-biggest-selling jewelry store (trailing only Tiffany’s in New York) in the United States.24 Like the Furniture Mart, it perfected the high-volume/low-price formula—which, once in place, tends to be self-perpetuating. Of course, the profits on diamonds were considerably higher than those on carpets.
From Buffett’s vantage, the stores had similar strengths. Each enjoyed a protective “moat” that kept competitors at bay.25 (Buffett’s hatred of competition, evident in the Buffalo newspaper drama, was a mainstay in his career.) And nobody could take on the Furniture Mart without a very substantial investment and lengthy battle—which is the sort of chin-deep moat that dissuades would-be competitors from even trying.
Indeed, it gave Buffett a thrill just to stand by the counter at the Furniture Mart and watch it ring up a sale.26 He made a ritual of taking out-of-town guests to Mrs. B’s; he even provided buses for the annual meeting of Berkshire, so his shareholders could visit the store. In a spiritual sense, the Mart replaced the red-brick New Bedford textile mill as the company’s flagship. In fact, Buffett made about as much money in fifteen months in furniture as he had in nineteen years in textiles.
The comparison is illustrative, because the Hathaway mill was everything the Mart was not. The mill was indistinguishable from its competitors; the end consumer didn’t know it existed. As Buffett would bitterly joke, no one went into a men’s store and asked for “a pinstriped suit with a Hathaway lining.”27
Whereas the fast turnover at Mrs. B’s resulted in precious little capital being tied down in inventory, the textile mill consumed capital. Every time one manufacturer upgraded its plant, Berkshire’s mill and all the rest were forced to match it. Thus, no one would gain any advantage—any moat—but every manufacturer would have sunk in more capital.
Though Buffett knew better, he occasionally had been seduced into thinking that a little more capital could turn it around. In the mid-seventies, he even bought another textile plant, in Manchester, New Hampshire. On paper, the purchase was a steal. But it turned out to be a disaster. Retrospectively, Buffett realized that textiles were a trap:
Viewed individually, each company’s capital investment decision appeared cost-effective and rational; viewed collectively, the decisions neutralized each other and were irrational (just as happens when each person watching a parade decides he can see a little better if he stands on tiptoes).28
Shareholders increasingly questioned why he stayed in textiles. Buffett replied that the mills were big local employers, the unions had been cooperative, and he had hopes for modest profits. Also, he felt a loyalty to Ken Chace, who had run the operation from the start. As he reminded shareholders, it had been Chace’s efforts in textiles that had provided the fuel for Berkshire’s growth.29 But in private, Buffett would occasionally warn Chace: “It looks like the mill is going to start using cash. I don’t want that.”
Chace continued to labor mightily—al
most (not quite) as doggedly as Mrs. B. He switched product lines and fabrics. He upgraded machinery. He improved relations with union leaders (who knew that his boss in Omaha was a skinflint). But he couldn’t outrun the competition, of which the supply seemed unending. Buffett drew from this a broad maxim: a good manager was unlikely to overcome a bad business.30 This led to a truism about problem businesses in general: “ ‘turnarounds’ seldom turn …”31
In 1980, Buffett halted production in Manchester and cut the number of looms in New Bedford by a third. Still, in 1981, textiles lost $2.7 million, rivaling some of the worst years of the Seabury Stanton era. Buffett told Chace, “If you can’t cut the overhead I’m going to shut you down.” But Chace—to Buffett’s rueful surprise—pulled it off.
The purchase of the Furniture Mart, in 1983, put Buffett’s mill mistakes in stark relief. He finally (though obliquely) admitted in public that his devotion to Ben Graham had caused him, for too long, to stick with brick-and-mortar assets such as textiles at the cost of overlooking Mrs. B-style franchises.
My escape was long delayed, in part because most of what I had been taught by the same teacher had been (and continues to be) so extraordinarily valuable.32
But now, his thinking had “changed drastically.” The next year, Chace retired. His replacement, Garry Morrison, an M.B.A. with a degree in textiles, argued for an infusion of fresh capital. Buffett refused. And without new money, the mill, clearly, would continue to bleed. In 1985, Buffett shut it down.
Its four hundred workers, mostly skilled, ethnic Portuguese, got a few months’ notice and job retraining, though many, if not most, ended up in lower-paying work. They asked for severance above what the contract guaranteed and, as David Lima, secretary-treasurer of the New Bedford Textile Workers Union of America, recalled, got a month or so. “For guys who were losing their jobs, it wasn’t worth a hill of beans,” Lima said.
The union also asked to see Buffett personally. He coldly responded that he saw no reason to meet.33 In Garry Morrison’s view, “Warren wanted to be fair. He was fair, but not overly generous.”
Buffett was sensitive to just such a characterization. In an epilogue to the affair, he noted that during the previous five years, 250 other mills had also closed.34 During that time, Berkshire’s mill had lost more than $5 million. Buffett fancied that by running the mill so long, he had found a “middle ground,” less ruthless toward the workers’ interests than (the original) Adam Smith but more so than Karl Marx—that is, willing to endure “subnormal profitability” but not “unending losses.”
Of course, as between the two, Buffett had his “Marxist” tendencies rather well hidden. He was willing to moderate Adam Smith, and to sacrifice “a fraction of a point” on his rate of return—but not to abandon Smith. Indeed, the point of his essay was that to forsake Smith—to forsake capital—could be ruinous. The ill-disguised hero of Buffett’s essay was himself, for having followed Smith and diversified out of textiles. Its devil was another yarn mill: Burlington Industries. Burlington, he noted, had not diversified; it had stuck to its knitting. During Buffett’s bountiful score and one years at Berkshire, Burlington had reinvested $3 billion back into textiles. It was now the biggest U.S. textile company, but that was a dubious prize. For over those twenty-one years, Burlington’s stock had pitifully crept from 60 to merely 68. Adjusted for inflation, its investors had lost two-thirds of their purchasing power. Marx might have approved, but Smith—and Buffett—did not.
This devastating outcome for the shareholders indicates what can happen when much brain power and energy are applied to a faulty premise. The situation is suggestive of Samuel Johnson’s horse. “A horse that can count to ten is a remarkable horse—not a remarkable mathematician.”35
And a brilliantly run textile firm was not a brilliant business.
Ken Chace, in retirement on the Maine coast, judged that Buffett had run the plant ten years too long. He stressed that he treasured his experience with Buffett—“It’s hard to describe how much I enjoyed working for him”—but was wistful for an expressiveness that Buffett had never shown. “One thing that’s always bothered me,” Chace admitted. “I never knew why he picked me. When I resigned, he said, ‘I remember you were absolutely straight with me from the first day I walked through the plant.’ That was all he ever said.”
The mill’s subsequent fate confirmed Chace’s verdict that Buffett had been slow to close it. The equipment was auctioned to carrion hunters for the laughable sum of $163,122. Looms purchased in 1981 for $5,000 apiece were sold in 1985 as scrap for $26 each.36 But Buffett insisted on keeping the real estate on Cove Street. The mill space was leased to tiny firms making silk screens, stage assemblies, data-processing forms—and others with no memory of the heyday of textiles. The old headquarters, where once Seabury Stanton had proudly reigned from the Ivory Tower, would serve as the office of BHR Inc.—Berkshire Hathaway Realty—its name a flickering reminder of the once-great mills that sit like rotting ships in the city’s south end.
Chapter 14
THE EIGHTIES
In 1984, Buffett dropped in on J. Richard Munro, the chief executive of Time Inc., at the company’s stately headquarters in New York’s Rockefeller Center. Berkshire owned 4 percent of Time, and Buffett and Munro often talked media together. Now, as both of them knew, Time was rumored to be a takeover target.
Buffett thought he could help the magazine giant keep its independence. “How would you like a white knight?” he asked. In the parlance of the eighties, Buffett was proposing a deal. In Munro’s words:
Warren would have been a major shareholder and agreed to never sell. He would have been our guy. We took it to our board, and they said, “Who is Warren Buffett?”
It was still possible for a company, especially an institution such as Time, to think of itself as immune. “That was before anything hit the fan, before we were lying awake nights,” Munro noted. Later, Time would discover that it was anything but immune. Menaced by a hostile bid, it would merge with Warner Communications and, in the process, thoroughly wreck its balance sheet. Indeed, Time would be the most prominent example of the self-destructive tactics of the merger era. In hindsight, Munro said of Buffett’s offer, “It’s too bad we didn’t do it.”
As Munro—and so many others—would discover, dramatic changes were afoot. At First Boston, a sleepy firm where four people had worked on mergers and acquisitions a decade earlier, a staff of 110 were cranking out deals by the hour. And the pace was accelerating. In 1975, Wall Street had racked up $12 billion in deals; in 1984, $122 billion. Investment bankers, long seen as staid, suddenly were objects of envy and resentment. Young, rich, smugly powerful in red suspenders, they indulged in battlefield metaphors and terrified Main Street executives.
For a century, the Street had provided financing at the behest of corporate clients. Now the tables had turned. Wall Street’s matchmakers were seizing the initiative; Main Street was merely fodder for their deals. Hostile raids were being backed by a novel form of finance, the junk bond, which had been pioneered by the renegade Drexel Burnham Lambert, and which investors were accepting as payment for whatever inflated sum the raiders offered. In this respect, the eighties bore a resemblance to previous speculative eras. Indeed, Fred Carr, the fallen archetype of the Go-Go market, had resurfaced as the head of First Executive, the most ardent promoter of Drexel’s junk.
Of course, speculation was not new to Wall Street, nor was merger mania. But the architecture of Wall Street had changed. Fortune 500 companies were now, overwhelmingly, controlled by professional shareholders such as pension and mutual funds. And such investors uniformly took the high bid and ran. Once upon a time, at least at well-performing companies, the major shareholders’ commitments to management had been a force inhibiting takeovers. By the mid-eighties, such commitments had the half-life of a cup of coffee. Andrew Sigler, the CEO of Champion International, complained that his stockholders changed so fast he didn’t know who they were.1
Buffett’s perspective had also changed. At one time, his view of the Street had been exclusively that of a shareholder. Now, in middle age, he also identified with CEOs—with the Dick Munros and Andy Siglers. He was suspicious of the raiders and of the havoc they caused in corporate boardrooms, and wary of stock prices inflated by takeover fever. Once again, he felt that Wall Street was going too far, as it had during the Go-Go era. But this time Buffett had no thought of quitting. In fact, he was hoping to do some very big deals.
Buffett’s entry in the grand game can be dated—February 26, 1985. In Washington for a couple of days, Buffett got a call from Tom Murphy, his friend and the chairman of Capital Cities.
“Pal, you’re not going to believe this,” Murphy began. “I’ve just bought ABC. You’ve got to come and tell me how I’m going to pay for it.”2
Thomas S. Murphy, like Buffett, was the son of a politician. His father was a Brooklyn judge and had exposed Tom to visitors such as Thomas Dewey and Al Smith. After a charmed youth—summers in the country, golf at the family club—Murphy went to the Harvard Business School. A classmate, James Burke (later chairman of Johnson & Johnson), thought Murphy was a natural for politics, too. Tall and balding, Murphy was almost irresistibly affable. He had an easy, unpretentious manner and addressed people as “pal.” After a stint at Lever Brothers, he took an $18,000-a-year job with Hudson Valley Broadcasting, managing a bankrupt UHF station in Albany.
The humble Hudson Valley, which broadcast out of a home for retired nuns, managed to acquire another station and went public in 1957, at seventy-two cents a share. A few years later, Murphy moved to New York, settling into a cozy brownstone office, and tapped Daniel Burke (James’s younger brother) as his second-in-command. They operated as a team, with Murphy focusing on strategy and deal-making and the harder-edged Burke on operational details. The company, now known as Capital Cities, gradually acquired an empire in broadcasting, cable, and publishing. Its style, though, was anything but imperial. Murphy and Burke delegated ample authority to their far-flung properties and ran a corporate office that was bone-trim. Cap Cities had no legal department and no public relations staff. Murphy was so frugal that he had once painted only the two sides of his Albany headquarters that faced the road—not the sides facing the Hudson River. His and Burke’s blend of vision and cost-attentiveness produced consistently superior profits.
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