* Share prices in this chapter are as of December 31, 1995.
† In 1996, Coca-Cola’s stock split two-for-one.
‡ Prices of Cap Cities/ABC shares are adjusted for a ten-for-one split in 1994.
§ Harry Lime was the mystery figure played by Orson Welles in the 1949 film classic The Third Man.
‖ In 1994, Buffett’s two foundations gave away just a shade more than the $7 million they received from the Berkshire gift program and from interest and dividend income combined. In 1995, Buffett raised Berkshire’s per-share gift from $11 to $12.
AFTERWORD
January 2008
Some months after Buffett was published, in the spring of 1996, I made the pilgrimage to Omaha for the Berkshire Hathaway, Inc., annual meeting. Before the formalities got under way, Buffett was seated at a small table greeting shareholders, many of whom bore books, annual reports, and memorabilia for him to sign. Having spent three-plus years writing his biography, without as yet having gotten any feedback, I thought the moment had arrived. I fetched one of my own copies of Buffett and joined the queue. As I did so, I remembered what Buffett had told me years before when I was doing my research—that he would not attempt to block me, but neither would he give me any help. And so as I handed him the book, as well as a ballpoint, I said emphatically, “Now I will ask for something.” He grimaced as if he were cornered. Then he flung the book open to the title page, etched the words “Warren Buffett” in his trademark scrawl, and shut the volume tight, as though sealing it against any protest I might utter, any plea for an intimacy or for a response that might, at the very least, reveal something of his reaction.
When readers ask if there is anything I would change about the portrait of Buffett in this book, I often think of that bare-bones autograph. Bill Ruane, his since-departed friend, remarked around that time, “I’m not sure if you captured just how tough Warren is.” Perhaps Bill was right. Buffett did not build a company worth $220 billion (sixth largest in the United States) by being an easy mark; in particular, he did not dodge every investment land mine of the past half century without possessing a hard outer shell—a unique ability to say no to all manner of investment promoters, bubble profiteers, and well-meaning but deluded brokers. And even to inquiring biographers. He answered to no one but himself.
The other question that arises, with increasing frequency, is “Will there be a sequel?” That one is easier. Very little in the portrait, and nothing in the investment profile, has changed. That may sound strange, given the relentless expansion of Berkshire’s assets, not to mention the astounding continued rise in its stock. At year-end 1994, Berkshire Hathaway was trading at $20,400 a share; thirteen years later, the stock has hit the eye-popping figure of $141,600. (To update the set of figures in the introduction, an original partnership investor who had given $10,000 to Buffett in 1956, which in the dollars of that day would have paid the salary of a baseball star such as Ted Williams for two weeks, today would be worth $550 million, or enough to sign an Alex Rodriguez for twenty seasons.)
As lofty as it is, the current share price is actually evidence of a marked deceleration. In the first three decades after Buffett dislodged Seabury Stanton and began to transform Berkshire from a sleepy New England textile manufacturer into a media, insurance, and industrial conglomerate, the stock rose at a rate of 27 percent a year (which means that it doubled every third year). Alas, since the initial publication of Buffett, the stock has advanced at merely 16 percent per annum. The “slowdown” is not news; it is exactly what Buffett predicted. The laws of mathematics assured that as Berkshire grew larger, each new investment would have a smaller impact on the whole. The growth rate would have to diminish. What is news, or at least cannot fail to impress, is the extent to which, even at the slower gait of his septuagenarian years, Buffett has left the market in the dust. Which is to say, post 1994 the broad market average is up two times, Berkshire six times.
The more recent performance is a testimony to Buffett’s consistency, which may be his least appreciated trait. His first rule (“Never lose money”) was expressed so glibly that it may have been taken for a lighthearted quip; with the perspective of more time, it emerges as one of the keys to his success. The last dozen years, in particular, have seen more than their share of investment folly. We need only recall the ill-fated rush to lend to the teetering, newly capitalist Russia of the 1990s, or the collapse of the meteoric hedge fund Long-Term Capital Management (LTCM), or the madness of the dot-com bubble. During the last of those episodes, shares of companies with no prospect of realizing earnings soared while Berkshire’s stock, confounding all logic and despite steadily rising earnings, was cut in half. The public became obsessed with twenty-something website promoters, and it was commonly said that Buffett was outmoded, an old-economy relic, and so forth. To Buffett, it was a replay of the Go-Go era of the 1960s; the speculative mania, rather than tempting him into taking more risk, redoubled his innate sense of caution. Seeing the apparent profits of their neighbors, investors who knew better jumped into the game, but not Buffett. “Never lose money” is an unyielding standard; it forecloses the option of taking any speculative risks. This is why Buffett has so outdistanced investors who earn impressive returns in many years but who, on occasion, succumb to speculation and suffer punishing losses. The effect of even an occasional severe loss on cumulative returns is devastating.
In 2007, Berkshire stock vaulted 29 percent (making Buffett once again the U.S.’s and now, most likely, the world’s richest man). The outsize gain seemed a belated recognition of Buffett’s prudent approach. As investors panicked and fled to safety, T-bills fetched a premium and so—almost as if it were a branch of the Treasury Department—did Berkshire Hathaway. The context is worth revisiting, if only because the script is so familiar. America was in the throes of yet another financial crisis, this one triggered by waves of mortgage defaults and foreclosures, which themselves were the fruit of a sharp escalation in housing prices that had given rise to unsound lending practices. Even financial institutions not generally associated with mortgage lending were deeply implicated, because they had invested in mortgage-backed securities.
When the real estate market finally cooled, the losses were horrendous. Virtually every major financial institution—from Citigroup to Merrill Lynch to Bear Stearns to General Electric—was burned. Berkshire had owned a big piece of Freddie Mac, the mortgage giant, but Buffett had sold it years before, out of concern that it was trying to grow too fast. In the debacle of 2007, Berkshire was not only unscathed, it emerged with $45 billion in liquid assets, as well as an unblemished, triple-A credit rating. Devastated bond insurers reached out to Buffett for relief, and there were frequent rumors that Berkshire would come to the rescue of this or that beleaguered lender. Buffett, of course, had recapitalized Salomon Brothers when it was on the skids, and in 1998 he came very close to inking a deal to rescue (on advantageous terms) the hedge fund LTCM. By the time of the mortgage crisis, he, or his company, had become a unique American institution—akin to that of J. P. Morgan, Sr., a century earlier. It was, or was uniquely capable of being, a lifeboat to Wall Street’s fallen, the firm whose credit was invariably soundest when the system was under its greatest stress. As if to seal this legacy, at year-end ’07 Berkshire made a $4.5 billion acquisition of diversified assets—its biggest outside of the insurance industry ever. At the age of seventy-seven, Buffett was reaping the benefits of the watchword of his distant forebear Zebulon: “Save your credit, for that is better than money.”
His corporate empire (which begins, as always, with insurance, and includes dozens of businesses ranging from private aviation to carpeting to water treatment products to household paints) is larger today and more diverse than a decade ago. Berkshire also has invested overseas, in countries as disparate as Israel and China. And the relative concentration of industries has shifted—away from the newspapers he loved as a boy and other media assets, which have been hit hard by the Internet. In recen
t years, with his usual astute sense of timing, Buffett has acquired huge interests in energy. But Buffett has always followed opportunity, and as he still adheres to the price and value discipline that he learned at Ben Graham’s knee, nothing about his approach has changed.
Buffett is also more celebrated today as a public figure. In the early 1990s, people often asked me to repeat the name of my subject, as though trying to commit a strange new word to memory. No such obscurity shrouds Buffett today. His avuncular face—more rounded with age—stares out from magazine covers and television specials; his comments are headlined on CNBC; he is friendly with baseball stars (indeed, with A-Rod) and with Democratic politicians from Hillary Clinton to Barack Obama. But the change has been evolutionary, not sudden, and the urge to command a public audience was always there, even in his twenties, when his friends would gather at his feet and listen to his financial sermons in awestruck silence.
Buffett has made one truly significant change—a reworking of his estate. Ironically, though this is a personal matter, it is likely to influence his public legacy more than any investment he has made. Half a century ago, as a Pepsi-Cola-imbibing young man, Buffett agonized (as he admitted to Jerry Orans) over what to do with his fortune—a fortune he had not yet obtained but that he was sure would one day be his. The problem nagged at him for fifty years, looming larger as his assets grew. Always he had the cushion of believing that his wife, Susie, would outlive him, and that if need be she would dispose of their assets. However, in 2004 Susie died of a stroke. Buffett married his longtime companion, Astrid Menks, but the inheritance issue could no longer be postponed. In 2006, Buffett stunningly reversed his intention to hang on to his assets until death—and announced a plan to slowly give away (with annual bequests) 85 percent of his Berkshire stock. Five-sixths of the money will go to the Bill and Melinda Gates Foundation, which is primarily dedicated to fighting disease in the developing world. The rest will go to four family foundations (one that was his and Susie’s and three others, each of which is run by one of the Buffett children).
The plan to transfer stock to Gates was a lightning bolt that only Buffett could have conceived of. Combining his money with that of his close friend—in recent years the only American richer than he—will create by far the world’s largest foundation. The size of Buffett’s annual gifts will depend, of course, on the future level of Berkshire stock, but at current prices, Buffett has a fortune of $64 billion—probably the greatest on earth. And yet, what is truly notable about the plan is its modesty. It is not just that the bulk of Buffett’s money will be administered by someone else, and that no hospitals will bear the Buffett name, nor will researchers, scientists, and doctors around the globe associate their funding with the Oracle of Omaha. It is his trademark insistence on staying within his “circle of competence”—on doing only what he is good at. By temperament, he was a poor philanthropist. He was too fearful of not getting good value to feel easy about writing checks (or perhaps, to use a Buffettism, he was simply too cheap). In any case, his refusal to give, or to give in proportion to his means, has long been a sore spot to his friends. And so, turning his logical mind to his own estate, he coolly decided to give his money to someone better equipped to dispense of it than he—a trusted friend who in all likelihood should have decades remaining to oversee the bequests and who, most important, has conceived of a purpose worthy of Buffett’s billions: ridding the poorest regions of the globe of disease. As a portfolio manager, Buffett has always tried to concentrate on a few stocks—a very few—that he both understood and felt comfortable with. With his estate, similarly, it is as though Buffett sees in the Gates couple, Melinda as well as Bill, a superstock of philanthropy—a nondiversified vehicle through which his assets will, conceivably, do more to improve human health, and perhaps even human living standards, than anyone’s money ever. The man who taught America how to invest is writing a new chapter on giving it away.
Howard Buffett and Leila Stahl
COURTESY UNIVERSITY OF NEBRASKA
The future capitalist with his sister Doris, probably 1931
COURTESY DORIS BUFFETT BRYANT
The Buffetts posed for a photographer in 1942, after Howard’s upset election to Congress. Warren, then twelve, looked less than thrilled about his forced move to Washington.
OMAHA WORLD-HERALD
Unshakably ethical, Congressman Howard Buffett refused to keep the salary increase that Congress awarded to itself. But Warren broke from his father’s ultra-right wing politics.
COURTESY THE JOHN F. SAVAGE PHOTOGRAPHY COLLECTION. OWNED BY WESTERN HERITAGE MUSEUM, OMAHA
Roberta, Doris, and Warren in Washington. The house in the background is a neighbor’s.
COURTESY DORIS BUFFETT BRYANT
“Likes math … a future stock broker.”
WOODROW WILSON HIGH SCHOOL YEARBOOK, 1947
Though Buffett was a loner on campus, his witty friend Jerry Orans had him looking all very rah-rah for the cover of a campus magazine.
COURTESY THE UNIVERSITY OF PENNSYLVANIA ARCHIVES
Ben Graham with his third wife, Estelle, in about 1950, the year Buffett enrolled in Graham’s investing class. Professor Graham gave Buffett an A+; Estelle gave Buffett her money.
COURTESY MARJORIE GRAHAM JANIS
Charlie Munger, the philosopher-king. Buffett and his partner thought so much alike it was “spooky.”
COURTESY CHARLIE MUNGER
Susie, sporting a Jacqueline Kennedy hairstyle, had strong objections to Warren’s being “the absolute last” person in America with a crew cut. In 1962, they posed in the Buffetts’ solarium at an anniversary party for Susie’s parents.
COURTESY TOM ROGERS
Seabury Stanton’s heart was in textiles. Buffett’s wasn’t.
COURTESY SPINNER PUBLICATIONS, INC.
The Berkshire Hathaway mill, distinguished by a clock tower, is nestled between three-story tenements in New Bedford’s South End, a once-thriving commercial district. The water is to the right.
JOSEPH D. THOMAS
Buffett arriving at the New Bedford airport for the fateful board meeting at which he took control of Berkshire
The pigeons in Sevilla, Spain, were drawn to Ben Graham no less than his students back home were. The picture was taken in 1964.
COURTESY BENJAMIN GRAHAM, JR., M.D., AND JANET LOWE
Warren and Susie in Laguna, California, 1966
COURTESY BENJAMIN GRAHAM, JR., M.D., AND JANET LOWE
His ear to the phone, Buffett looked like nothing so much as an overeager chipmunk. By age thirty-five, he was worth $7 million.
OMAHA WORLD-HERALD
One of the early “annual meetings.” Buffett hosts a dinner for some of his partners at his home on Farnam Street, 1969.
COURTESY TOM ROGERS
The charter members of Buffett’s “Graham Group” were hoping to get advice on the soaring stock market of 1968, but when Professor Graham showed up at the Hotel Del Coronado, he gave them a true-false test instead. Left to right: Buffett, Robert Brustein, Ben Graham, David “Sandy” Gottesman, Tom Knapp, Charlie Munger, Jack Alexander, Henry Brandt, Walter Schloss, Marshall Weinberg, Ed Anderson, a half-obscured Buddy Fox, and Bill Ruane. Roy Tolles took the picture.
COURTESY JACK ALEXANDER
Ben Graham, father of security analysis, about 1970
COURTESY MARJORIE CRAHAM JANIS
The Buffetts strike a characteristic pose: Susie in Warren’s lap. The picture was taken in the early 1970s.
COURTESY TOM ROGERS
Buffett in the mid-1970s with his two passions: Susie and a glass of Pepsi
COURTESY TOM ROGERS
Howie, Susie, and Peter with their folks, shortly after Buffett folded up the partnership. The coffee cup must have been a prop.
COURTESY PETER BUFFETT
Onstage, the sequined Susie was “all passion and nuance.”
OMAHA WORLD-HERALD
After Buffett invested $10 million in the Washing
ton Post, he charmed his way onto the board, befriended the company’s number-shy chairwoman, Kay Graham, and took her to school. Buffett’s investment in the company soared to more than $400 million.
BILL DONOVAN
A dashing Buffett is feted at the Metropolitan Club in New York in 1980. By his fiftieth birthday, Buffett was worth close to $200 million.
BILL DONOVAN
“Commodore” Munger shows off a spotted grouper in Cape York, Australia. He earned the sobriquet in Minnesota, when he capsized a fishing boat with Buffett aboard, nearly drowning him.
IRA MARSHALL
Mrs. B, who quit Buffett’s store in a rage and set up shop directly opposite, was the only business partner of Buffett’s who ever ran out on him. She was ninety-five at the time.
OMAHA WORLD-HERALD
Buffett was always smiling when he was with Tom Murphy—the CEO he admired most, and one who made more than $2.5 billion for him. They are shown at a Capital Cities/ABC retreat in Phoenix.
COURTESY CAPITAL CITIES/ABC
Warren bought a farm for his son Howie and charged him a market rent.
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