She found his answers “wonderful,” but she couldn’t adopt “the usual format,” as she would with “regular people.” She was acutely aware of “interrupting,” Roberta explained. “He wants to get back to what he’s thinking about. It’s like a cloud of concentration, a physical cloud, is surrounding him.”
Buffett acknowledged that he had public and private personas—or, as he put it, that he was an introvert at home and an extrovert on the road.35 This division was mirrored, in a rough sense, by his two female companions. Susie was Buffett’s first lady in more public settings, such as the Graham group seminars, or the Berkshire annual meetings, or with their scores of friends in New York and California.
Susie herself was extremely outgoing. Though she had moved into a tonier apartment in San Francisco, she did not spend much time there. When one of her kids or a friend needed help, or if someone was sick or even dying, Susie would simply pick up and move in for weeks on end. When Bella Eisenberg, a friend in Omaha and an Auschwitz survivor, wanted to revisit the camp site, Susie thought nothing of hopping on a plane with her. She traveled widely, including (owing to her interest in population control) to such removes as India, Turkey, and Africa. As Susie said, she lived “in the sky.”36 She also looked after people in San Francisco, where she took an AIDS patient into her home. But the connective tissue in her later, nomadic life was not home or routine but being on loan to people who needed her—including her husband. “The mystery,” one of Buffett’s associates remarked, “is that he is still madly in love with her.”
Astrid, his partner in Omaha, was quite private—as Buffett was when in Omaha. She spent her mornings at the local zoo, working on the plant life, and usually could be found there in jeans and a sweatshirt, digging in the dirt. She and Buffett didn’t socialize much. When Buffett was at home, he hung out in his “pit,” a small, private space off the living room, formerly the family sunroom, where he kept his papers and books and had a large TV. For meals—breakfast included—he often grabbed a ham sandwich or ate vanilla ice cream out of the container. Their quiet companionship suited Astrid, whose upbringing had been so unsettled. Once, at a holiday gathering, Warren’s sister Doris bluntly asked Astrid how it was going. She blushed and said Warren was “the most wonderful man to live with.”
Buffett’s hunger for solitude, and its offshoot, simplicity, was palpable on the fourteenth floor of Kiewit Plaza—what he wryly termed the “world headquarters” of Berkshire Hathaway. Though it was now a Fortune 500 company, Buffett’s corporate staff in the mid- to late eighties totaled merely eleven people: two secretaries, a receptionist, three accountants, the trader, a treasurer, an insurance manager, Gladys Kaiser (his longtime assistant), and the boss. Berkshire had no lawyers, no strategic planners, no public relations or personnel people—no support staff such as guards, drivers, messengers, or consultants. There were no rows of analysts tethered to cathode ray tubes—none of the sacred totems of the modern corporate village.
This spartan style was part of a deliberate effort to minimize what Buffett termed “institutional dynamics.”37 he had hired a floor of traders, they would have found something to trade; lawyers, no doubt, would have found someone to sue.
A compact organization lets all of us spend our time managing the business rather than managing each other.38
For a Wall Street investment banker, the trek to this citadel of capitalism was not easily forgotten. John Otto, a Bear Stearns man, got his first shock at the Red Lion. Otto had come with a client who was selling a company in the natural gas business. When he told the hotel doorman they were going to Berkshire Hathaway, the fellow gave him a blank stare. When they did manage to find Kiewit Plaza, Otto was surprised to see a “five-and-dime building” opposite a pizzeria. There was no sign, either outside or in the lobby, indicating that it was the domicile of Warren Buffett, Inc.
Buffett greeted his visitors in Kmart-style shoes. After a little small talk, he beckoned Otto’s client to make his pitch. Now Buffett’s features became totally concentrated. He pursed his lips and furrowed his brow, practically driving the thickets of his eyebrows into his spectacles. After listening for ninety minutes or so, Buffett began to ask some questions. The economics of natural gas are complicated; regulation is involved; there are legal issues, social issues. Otto had sent Buffett a package of information, and Buffett knew it cold. As the client divulged new material, he recalculated the economics on the run. Otto noticed that he had not brought notes with him; he had no minions running in and out to prop him up with data. It was all solo. After three or four hours, Buffett made an offer, subject to some fact-finding. Otto was stunned again—executives do not make offers on the basis of a single session. (Ultimately, the deal fell through.)
This ability of Buffett’s to cut through the clutter suggests a certain genius. Buffett focused so exquisitely on his object, and his simplicity was a counterpart to that genius. He recognized that layers of added executives—though each might be bright, earnest, well-intentioned, etc.—would blur his focus. Much of the “work” they might “accomplish” would be unnecessary work. (A Buffett aphorism: “That which is not worth doing is not worth doing well.”)39 He did not like protracted decision-making or drawn-out and contentious bargaining. His negotiating style was to seek or propose offers on a take-it-or-leave-it basis. And once he made a decision he did not reverse it.
Buffett and Bill Scott alone handled the investing—a job that at other firms was divided among scores of traders and analysts. Scott was not even full-time; he left the office at three to practice in a polka band. In any case, Buffett did the research, and Buffett made the decisions, in sweet solitude (consulting by telephone, of course, with Munger). By contrast with this one-and-a-half-man band, the Harvard University endowment, which had roughly the same size portfolio, had a staff of more than one hundred.
Buffett’s Kiewit coworkers were little more than a backdrop—unobtrusive, robotlike, and unerringly dependable. According to daughter Susie, “All of the people in that office are the same. They don’t talk. They just do their work.”
The most essential one to Buffett was Gladys Kaiser, his secretary and assistant. She kept intruders at bay and brushed off inquiries in a flat monotone.
The treasurer, Verne McKenzie, a native of Fremont, Nebraska, with a wispy frame and steely blue eyes, typified the staff’s loyalty. McKenzie had never—not once since the 1960s—asked Buffett for a raise. “If I ever felt I wasn’t making enough and he didn’t agree, then I must have been wrong,” McKenzie said dryly. (In the sixties and seventies, Buffett paid him skimpily. But by 1986, McKenzie was making $198,000.)
In all the time since the early seventies, when McKenzie had returned from New Bedford to Omaha, Buffett had never raised his voice in McKenzie’s presence. Nor had he given McKenzie an inkling of his inner thoughts. “I wouldn’t talk if I thought it would hurt him,” McKenzie noted, “but Warren is such a private person I don’t think it’d be possible.”
There was no intellectual peer among this trusty crew—no one who might break Buffett’s sweet seclusion. He was cheerful with the staff, but not talkative, as he was with his pals. Save for when he had a visitor, he lunched alone, often sending a secretary to McDonald’s (“Quarter Pounder with cheese and french fries”). Buffett had talked to his sons about joining him, but he simply had no place for an understudy. Munger said it was lucky that the heads of Berkshire’s operating units, such as See’s Candy, did not work in the same office. Close up, comparing oneself to Buffett would be “hard on the human ego.”40 His intensity was better at a distance.
The one time that Buffett took an apprentice, he hired Daniel Grossman, a young tennis star who had grown up in Omaha and gotten an M.B.A. at Stanford. Grossman would not discuss the experience, but according to colleagues, he seemed to have been overwhelmed. Most likely, Buffett was a remote mentor. He seemed to converse only when he had a purpose. “The motor was always running,” a lawyer in Omaha said of Buffett. “The
re had to be an analytical content.”
What Buffett expected from the relationship with Grossman isn’t clear. Peter said, “It was the first attempt at my dad’s passing stuff to the next generation. It was just botched. He didn’t know how to do it.” Buffett did not assign projects to staffers or work with them. “If Dan was hoping to watch how he worked and to learn from it—that’s not what happens there,” Buffett’s daughter noted. “You can’t watch it. It’s in his head.” Most of what “happened there” was Buffett thinking and reading.* Grossman ultimately quit and became a successful investor in California.
In 1986, Buffett departed from form and bought a used Falcon aircraft. As corporate jets go, this one was modest (it cost $850,000), but it was the type of corporate frill that he had long criticized. He kiddingly disclosed its purchase in tiny letters in the annual report and damned it as “very expensive” and a “luxury.”41 However uncomfortable he was with the idea of the jet, he loved the jet itself. Nor was it really a departure, since it extended the isolation of Kiewit Plaza to the air. As Buffett explained to a pal, he had been traveling more, and other passengers had begun to recognize him. Often they had tried to feel him out on the market—an intrusion he abhorred.42
Buffett’s eccentricities, though the stuff of a gifted investor, worked against him as a manager. He was better with abstractions than with operational detail, better with numbers than tangible problems, too jealous of his independence to be intimately involved with others on a daily basis.
And by 1986, he was managing a huge conglomerate—certainly a role he had never aspired to. Buffett tried to offset his managerial shortcomings by restricting his role at World Book, See’s Candy, and such to a very few big decisions.43 † He liked to say that one didn’t need a big “circle of competence”—but it was important to know where the “perimeter” was.44 And Buffett was unusually aware of his own limitations. As applied to managing, he picked the chorus line but didn’t attempt to dance (no “advice” on carpets for Mrs. B). Where other managers often created problems by interfering, Buffett’s native genius for simplicity averted them.
Buffett did not require his various unit managers to forecast their earnings. (Computer models of such things were deceptive: they lent the future an air of “false precision.”)45 He did not schedule meetings. (Chuck Huggins, the president of See’s Candy, didn’t set foot in Omaha for twenty years.) Nor did Buffett attempt to impose a Berkshire corporate “culture” from above. At Scott Fetzer, the Harvard-trained Ralph Schey used the full panoply of modern business tools: budgeting, planning, and so on. Mrs. B used … well, other methods. But Schey and the Blumkins appreciated Buffett for an identical reason—he allowed them to run their businesses nearly without strings.
We have no one—family, recently recruited MBAs, etc.—to whom we have promised a chance to run businesses we have bought from owner-managers. And we won’t have.46
In all this, Berkshire was a most odd conglomerate. In fact, it was odd as a modern institution. The modern era is one of specialization; it has, in fact, made a cult of specialization. This is why historians churn out dissertations on shoe sizes in Bonapartean France and why the average pro football team now has a larger staff than did President Coolidge. In the corporate suite, its manifestation is chronic overstaffing. The common thread is that historians, football coaches, and CEOs are equally fearful of shouldering, or even delegating responsibility for, big decisions.
Buffett’s Berkshire bore more structural likeness to King Arthur’s court. Power was concentrated at two levels—that of the operating chiefs, and that of Buffett himself. As CEO, Buffett hired (and, potentially, fired) the operating managers. He controlled their capital in-flow or out-flow. His third, unspoken job was motivating his managers-some of whom, such as Stan Lipsey, were his friends, but many of whom were not.
Ralph Schey knew Buffett only through work. He sent him a monthly financial report (which Buffett demanded from all his businesses, and which he virtually memorized). Occasionally, Schey wrote a narrative to give Buffett a hands-on feeling for the business. And once a month or so, they talked on the phone. But Schey had to initiate such calls. Buffett never called him. And Schey had a latitude that would have been unthinkable elsewhere.
When Schey proposed a plan to reorganize World Book’s sales managers, Buffett was skeptical but let him go ahead. The shake-up was disastrous to morale and spurred a 20 percent drop in sales.47 “It never should have happened,” Schey conceded. Still, Buffett didn’t second-guess him.
The inspirational power in this approach is not to be taken lightly. Except on June 30 and December 31, when Schey was obliged to transfer his profits to Omaha, he felt as if the business were his. In a practical sense, he was free to run it for the long term, as a private owner would. Like Berkshire’s other, low-salaried managers, he had a potentially lucrative incentive clause (the exceptions were Buffett and Munger, whose compensations were fixed at $100,000). But Schey was also motivated by Buffett personally. Like a kid on report-card day (Schey’s own analogy), he hated to bring Buffett bad news.
“The personal responsibility he creates is unique,” Schey explained. “We don’t govern Scott Fetzer the way Berkshire governs us. We have forty people in our corporate office. We have budgets, we have annual plans, long-term plans. We make up rules. We don’t have any of that with Berkshire.”
If managers had a complaint with Buffett, it was that he was too remote. He never interceded, and when asked for advice, he was often elliptical. He would “drop a pearl,” as one of them said—a verse from his Zen of capitalism intended to shed some light, as if his managers, too, were “apostles.”
For some of the managers, pearls were not enough. When the head of Borsheim’s, the jewelry store, died, he was succeeded by his greenish son-in-law, Donald Yale. Yale needed a bit of help. He found that Buffett was good with the numbers but was not willing, or not able, to walk him through the business. When Yale asked an operating question, Buffett would generalize or give a self-effacing dodge.48
As far as is known, Buffett had never fired a manager—rather remarkable, given the breadth of his career. He was clearly displeased with George Aderton, the president of a tiny Buffett holding, Citizen State Bank of Mount Morris, Illinois, in the 1970s. (Buffett wrote Aderton how “irritating” and “annoying” he found his allegedly inaccurate reports—for Buffett, strong words.)49 But rather than get rid of Aderton, Buffett got rid of the bank.
A cautious approach to firings makes good business sense, particularly compared to the Steinbrenner fire-at-the-ready alternative. But Buffett’s extreme fidelity suggests that, as with holding on to stocks, “personal” considerations were a factor. He was much better at motivating with a carrot than with a stick; while he disliked confrontation, he was a master flatterer. In a typically adroit paean, Buffett wrote:
When I call off the names of our managers—the Blumkin, Friedman and Heldman families, Chuck Huggins, Stan Lipsey, and Ralph Schey—I feel the same glow that Miller Huggins must have experienced when he announced the lineup of his 1927 New York Yankees.50
While his individual businesses racked up exceptional returns on capital, they grew at only modest rates, for which Buffett deserves some blame. He was chary of reinvesting in them, possibly because of his failure in textiles. Thus, World Book was slow to put out an electronic edition, and Borsheim’s ignored the opportunity to exploit its reputation by adding stores.
Buffett did not rule out expansion; he simply demanded that a Blumkin, a Lipsey, or a Schey convince him that said manager could do more by retaining a dollar of earnings than Buffett and Munger could do by investing it elsewhere. The manager who did not convince sent a dividend to Omaha. Buffett applied the same equation to himself at the corporate level. That is, if he and Munger could not find superior investments, it would be time for Berkshire to stop growing and to pay dividends to shareholders.
* Buffett’s reading included first of all the Wall Street Journal,
and then the Omaha World-Herald, the New York Times, USA Today, the London-based Financial Times, various magazines and industry journals, and massive quantities of financial statements.
† Two exceptions to his hands-off policy: Buffett often determined price increases for See’s Candy and the Buffalo News.
Chapter 16
CRASH
I have never met a man who could forecast the market.
WARREN BUFFETT,
BERKSHIRE HATHAWAY ANNUAL MEETING, 1987
By the mid-1980s, Berkshire was being driven by the engine of insurance. Its group of property and casualty companies, which was headed by National Indemnity, and which had offices in Omaha, New York, and elsewhere, was providing vast sums of dollars for Buffett to reinvest. Those dollars, as he put it, were being traded for “promises”—cash today, as against indeterminate future claims. The calculations involved in such exchanges were second nature to him. Buffett thought of everything in terms of odds: horse races, plane crashes, even nuclear war. Once, at a meeting of the Graham group, with twenty-five of his confreres, he bet Carol Loomis that at least two people in the room would have the same birthday.1 She was shocked when Buffett proved right. The simple (but surprising) explanation was that the mathematical odds of this occurring were 60 percent. Insurance, similarly, reduced all experience in life to mathematical probabilities. Buffett’s buddy and fellow insurance executive Jack Byrne never forgot when Buffett met him at the University Club in Washington with three mysterious dice, each with an unusual assortment of dots. Buffett made a proposition: Byrne could pick whichever die he wanted and Buffett would take one of the two that remained. Buffett assured him that if they then rolled twenty times, Buffett would win. “I got out my H-P calculator,” Byrne recalled. “I wasn’t going to be shown up in my own business.”
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