The Snowball

by Alice Schroeder

  But while he considered himself an amateur scientist and architect and did not hesitate to expound on Einstein, Darwin, rational habits of thinking, and the ideal distance between houses in a Santa Barbara subdivision, Munger was nonetheless wary of venturing very far from what he had spent some time to learn. He dreaded falling prey to what a Harvard Law School classmate of his had called “the Shoe Button Complex.”

  “His father commuted daily with the same group of men,” Munger said. “One of them had managed to corner the market in shoe buttons—a really small market, but he had it all. He pontificated on every subject, all subjects imaginable. Cornering the market on shoe buttons made him an expert on everything. Warren and I have always sensed it would be a big mistake to behave that way.”3

  Buffett was in no danger of suffering from the Shoe Button Complex. He feared appearing obnoxious or, worse, sanctimonious. He believed in what he called the Circle of Competence, drew a line around himself, and stayed within the three subjects on which he would be recognized as absolutely expert: money, business, and his own life.

  Yet, like Munger, he had his own form of self-intoxication. While Munger chose his speeches selectively but had trouble winding them up, Buffett could usually conclude a lecture, but found it hard not to start one.

  He gave speeches; he wrote articles; he wrote editorials; he gathered people at parties and gave little lessons; he testified in lawsuits; he appeared in television documentaries and did television interviews and took journalists along with him on trips; he went around to colleges and taught classes; he got college students to come and visit him; he gave lessons at the openings of furniture stores, the inauguration of insurance telemarketing centers, and dinners for would-be customers of NetJets; he gave locker-room talks to football players; he spoke at lunches with Congressmen; he educated newspaper folk in editorial board meetings; he gave lessons to his own board of directors; and, above all, he put on the teacher’s robes in his letters to and meetings with his shareholders. Berkshire Hathaway was his “Sistine Chapel”—not just a work of art, but an illustrated text of his beliefs, which was why Munger referred to it as Buffett’s “didactic enterprise.”

  The two men had been each other’s best audience ever since they first met through mutual friends over lunch in 1959. After they talked their hosts into exhaustion, they wound up alone at the table, jabbering to each other. Since then, they had carried on an uninterrupted conversation for decades. Eventually, they could read each other’s minds, stopped talking, and carried on by telepathy. But by then their other audiences had expanded to include their friends, business partners, shareholders—indeed, the whole world. People reeled out of Buffett’s office or away from Munger’s speeches, figuratively smacking their foreheads and saying, “My God!” at some insight one of them had about a seemingly intractable problem, which now, in hindsight, seemed obvious. No matter how much either talked, demand for their words only increased. Like most things in their lives, they found this role easy and comfortable, engraved in their beings by long habit.

  But, accused of being a creature of habit, Buffett responded with a wounded look. “I’m not a creature of habit,” he said. “Now, Charlie—Charlie is a creature of habit.”

  Munger rose in the morning and set his quarter-inch-thick, old-fashioned cataract glasses on the bridge of his nose. He climbed into his car at precisely the same time every day, carefully placed his father’s briefcase—which he now used—on the seat next to him, and drove from Pasadena to downtown Los Angeles.4 He changed lanes on his left side by counting the cars in his rearview mirror, then watching them pass in the front to sense when there would be a gap.5 (For years he drove with a can of gasoline in his trunk in case he forgot to stop for gas, but was finally persuaded to give up this particular habit.) Once downtown, he often met someone for breakfast at the sandy-brick art deco California Club, one of the city’s venerable institutions, where he strode automatically to the first table in the dining room after grabbing a clutch of newspapers from the console table by the third-floor elevator. He tore through the papers like gift wrap on Christmas morning, until they lay around him in a heap.

  “Good morning, Mr. Munger.” The members of the L.A. business establishment genuflected as they passed by on their way to lesser tables, pleased if he recognized them and chatted for a moment or two.

  Munger regarded them through his right eye. His left had been destroyed in a failed cataract operation.6 Now, while he spoke, his left eyelid hung at half-mast as his head swiveled back and forth across the room, taking in the scene. The rotating half gaze gave him an aspect of eternal vigilance and permanent disdain.

  After finishing his blueberries, Munger repaired to the modest, cluttered office he rented from Munger, Tolles & Olson, the law firm he had founded in 1962 and retired from just three years later. Tucked away on an upper floor of the Wells Fargo Center, his domain was watched over by his longtime secretary, the Teutonic Dorothe Obert. There, surrounded by science and history books, biographies of Benjamin Franklin, an enormous portrait of aphorist and lexicographer Samuel Johnson, plans and models of his latest real estate deal, and a hydrocephalic bust of Franklin next to the windows, he felt at home. Munger admired Franklin for espousing Protestant bourgeois values while living as he damn well pleased. He frequently cited Franklin, and spent his days studying his works and those of other “eminent dead,” as he put it, like Cicero and Maimonides. He also administered Wesco Financial, a subsidiary of Berkshire; the Daily Journal Corporation, a legal publishing company that Wesco owned; and worked on a real estate transaction here and there. Would-be chatterers—except for family, close friends, or business associates—met with obscure ironic witticisms and discouragement from Dorothe.

  Munger spent much of his time working on four causes. When he chose, he could pitch in with an almost stunning generosity. However, lacking a soft spot for the people of what he called “Dregsville,” his charity took the form of a Darwinian quest to boost the brightest. Good Samaritan Hospital, the Harvard-Westlake School, the Huntington Library, and the Stanford Law School were the beneficiaries. These organizations knew that Munger’s money and effort would be accompanied by much lecturing and insistence that everyone do things Charlie’s way. He would gladly pay for dormitories at Stanford Law School, as long as Stanford made each room exactly so many feet wide, with a window exactly here and the bedroom so many feet from the kitchen, and provided that the university locate the parking garage where he insisted. He embodied old-fashioned noblesse oblige, with all sorts of irritating strings attached to the money for the recipients’ own good, because he knew best.

  Even with all this overseeing of others’ activities, Munger often left for the day in time to play a little golf with his cronies at the Los Angeles Country Club. Then he joined his wife, Nancy, for dinner, sometimes at the Pasadena house he’d designed himself or, more likely, with a longtime group of close-knit friends, once again either at the California Club or the L.A. Country Club. He concluded his day by burying his nose in a book. He vacationed regularly with his eight children and stepchildren and assorted grandchildren, usually at his cabin on Minnesota’s Star Island, where, like his father, he was an avid fisherman. He hosted dozens of people on his enormous catamaran, the Channel Cat (described as a “floating restaurant” by one friend, and used mainly to entertain). In short, despite his idiosyncrasies, Munger was a straightforward family man who liked his friends, his clubs, and his charities.

  Buffett liked his friends and his clubs, but had little to do with charities. His life was even simpler than Munger’s, despite a personality that was far more complex. He spent the vast majority of his time in Omaha, but his schedule revolved around a series of board meetings and trips to visit friends, orchestrated with an unhurried regularity, like the phases of the moon. On the days he was in town, he drove 1.5 miles from the house he’d inhabited for four decades to the office at Kiewit Plaza that he’d occupied for almost as long, where he sat down be
hind his father’s desk by eight-thirty a.m. There, he turned on the television to CNBC with the sound muted before picking up his pile of newspapers, keeping half an eye on the screen while plowing through a pile of publications on his desk: American Banker, Editor & Publisher, Broadcasting, Beverage Digest, Furniture Today, A.M. Best’s Property-Casualty Review, the New Yorker, Columbia Journalism Review, the New York Observer, and newsletters from writers he admired on the stock and bond market.

  After that he digested the monthly, weekly, and daily reports faxed, mailed, and e-mailed by the businesses that Berkshire owned, a list that grew longer year by year, telling him how many auto policies GEICO had sold last week and how many claims it had paid; how many pounds of See’s Candies had sold yesterday; how many prison-guard uniforms had been ordered from Fechheimers; how many jet time-shares NetJets was selling in Europe and the United States; and all the rest—awnings, battery chargers, kilowatt hours, air compressors, engagement rings, leased trucks, encyclopedias, pilot training, home furnishings, cardiopulmonary equipment, pig stalls, boat loans, real estate listings, ice cream sundaes, winches and windlasses, cubic feet of gas, sump pumps, vacuum cleaners, newspaper advertising, egg counters, knives, furniture rentals, nurses’ shoes, electromechanical components. All the numbers on their costs and sales poured into his office, and he knew many of them from memory.7

  In his spare time, he pored over reports from the hundreds of companies he hadn’t bought yet. Partly out of interest, and partly just in case.

  If some dignitary made the pilgrimage to Omaha to meet him, he got in his steel-blue Lincoln Town Car and drove the 1.5 miles through downtown and out to the airport to pick him or her up personally. People were startled and charmed by the unaffected gesture, although he soon scraped their nerves raw by barely noticing stop signs, traffic lights, or other cars, weaving around the road while talking animatedly. He rationalized his distractedness by saying that he drove so slowly that, if he had an accident, the damage would be light.8

  He always gave a tour of his office, showing off his totems, the memorabilia that told the story of his business life. Then he sat, leaning forward in a chair, hands clasped and eyebrows raised sympathetically as he listened to the visitor’s questions and requests. To each of them Buffett offered off-the-cuff wit, quick decisions on business proposals, and warm advice. As they left, he might surprise a famous politician or the CEO of some huge company by dropping in for lunch at McDonald’s before ferrying him back to the airport.

  In between the reading, the research, and the occasional meetings, the phone rang all day long. First-time callers punching in Buffett’s number were shocked to hear a hearty “Hello!” and often stumbled in confusion when they realized that he answered his own phone. His secretary, the amiable Debbie Bosanek, trotted in and out of his office with messages from the overflow calls. On his credenza, another phone rang from time to time. He took these calls instantly, for they were from his trader. “Yello…mmm hmm…yep…how much…mmm hmm…go ahead,” he would say, and hang up. Then he turned back to the other calls, or to his reading or CNBC, before leaving promptly at five-thirty p.m. for home.

  The woman waiting for him there was not his wife. He was perfectly open about Astrid Menks, with whom he had lived in an unusual triangular arrangement since 1978. Susie Buffett approved of, and in fact had arranged the relationship; yet he and Susie both made a great point of saying how very married they were, their routine as a couple as scheduled and orchestrated as everything else in Buffett’s life. All the while, he offered no more explanation in public than “If you knew everybody well, you’d understand it quite well.”9 While this was true in its way, it did not help the curious, since almost nobody knew both Susie and Astrid well, or, for that matter, Buffett himself. He kept these relationships separate, as he kept many of his relationships separate. By all appearances, however, Astrid and Susie were friends.

  Most nights, Buffett ate dinner—something like a hamburger or pork chop—at home with Astrid. After a couple of hours he turned his attention to his nightly bridge game on the Internet, to which he devoted about twelve hours a week. While he tapped away, glued to the screen with the background noise of the TV, Astrid mostly left him to his game, except when occasionally he said, “Astrid, get me a Coke!” Afterward, he usually talked to Sharon Osberg, his bridge partner and a close confidante, for a while on the phone as Astrid puttered around the house until ten, when Buffett had his nightly conference call with Ajit Jain, who ran his reinsurance business. Meanwhile, Astrid went to the market and picked up the early edition of the next day’s newspaper. While he read it, she went to bed. And that, it seemed, was the simple, ordinary life of a megabillionaire.

  4

  Warren, What’s Wrong?

  Omaha and Atlanta • August–December 1999

  Nearly all of Buffett’s $30 billion plus—ninety-nine percent—was invested in the stock of Berkshire Hathaway. He had spoken at Sun Valley about how the market’s weighing machine was more important than its voting machine. But it was the voting machine’s opinion of his stock price that set the altitude from which he preached. People paid attention to him because he was rich. So when he predicted that the market could disappoint investors for seventeen years,1 he was standing on the edge of a cliff, and he knew it. If he was wrong, not only would he be the laughingstock of Sun Valley; in the record books of the world’s wealthiest men, his personal rank might drop. And Buffett paid close attention to that rank.

  Through the late 1990s, BRK (Berkshire Hathaway’s stock symbol) had boosted his profile by outpacing the market, until it peaked at $80,900 per share in June 1998. That a single share of Berkshire stock cost enough to buy a small condo was unique among American businesses. To Buffett, the stock price represented an uncomplicated measure of his success. It had grown in an ascending line since the day he first bought BRK for $7.50 a share. Even though the market had rocked through the late 1990s, until 1999 an investor who bought BRK and held on to it would have been better off.

  Annual Stock Price Appreciation

  1993

  1994

  1995

  1996

  1997

  1998

  BRK

  39%

  25%

  57%

  6%

  35%

  52%

  S&P2

  10%

  1%

  38%

  23%

  33%

  29%

  But now, Buffett found himself standing on the sinking platform of an unloved stock, watching the “T&T”(tech and telecommunications) stocks ascend. By August 1999, BRK had slumped to $65,000. How much should someone pay for a large, established business that returned $400 million to them in profits every year? How much for a small, new business that was losing money?

  • Toys “R” Us was earning $400 million a year and had sales of $11 billion.

  • eToys was losing $123 million a year and had sales of $100 million.

  The market’s voting machine said that eToys was worth $4.9 billion, and Toys “R” Us was worth about a billion less than that. The presumption was that eToys was going to crush Toys “R” Us through the Internet.3

  The one cloud of doubt that hung over the market concerned the calendar. Experts were predicting that disaster might strike at midnight, December 31, 1999, because the world’s computers were not programmed to handle dates beginning with a “2.” Fearing panic, the Federal Reserve began to increase the supply of money rapidly to prevent cash shortages in case all the country’s ATMs froze at once. Thus turbocharged, shortly after Sun Valley the market had spiraled upward like a Fourth of July firecracker. If you had invested a dollar in January in the NASDAQ, an index full of technology stocks, your bet was now worth a buck twenty-five. The same bet in BRK was worth only eighty cents. By December, the Dow Jones Industrial Average closed the year up twenty-five percent. The NASDAQ blasted through the 4,000-point level, up an incredible eighty-six perc
ent. BRK fell to $56,100. In just a few months BRK’s lead for the past five years had been tsunamied.

  For more than a year, financial pundits had made sport of Buffett, a has-been, an emblem of the past. Now, on the eve of the millennium, Barron’s, a weekly must-read on Wall Street, put Buffett on its cover with the headline “Warren, What’s Wrong?” The accompanying article said Berkshire had “stumbled” badly. He was running a Pamplona of negative press like nothing he had ever experienced. “I know it’s going to change,” he repeated over and over, “I just don’t know when.”4 His shrilling nerves were urging him to fight back. Instead, he did nothing. He did not respond.

  Near the end of 1999, even many longtime “value investors” who followed Buffett’s style had either shuttered their businesses or given in and bought technology stocks. Buffett did not. What he called his Inner Scorecard—a toughness about financial decisions that had infused him for as long as anyone could remember—kept him from wavering.

  “I feel like I’m on my back, and there’s the Sistine Chapel, and I’m painting away. I like it when people say, ‘Gee, that’s a pretty good-looking painting.’ But it’s my painting, and when somebody says, ‘Why don’t you use more red instead of blue?’ Good-bye. It’s my painting. And I don’t care what they sell it for. The painting itself will never be finished. That’s one of the great things about it.5

  “The big question about how people behave is whether they’ve got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard. I always pose it this way. I say: ‘Lookit. Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover?’ Now, that’s an interesting question.