The Snowball

by Alice Schroeder

  But Howard, of course, dreaded inflation and believed that government bonds could turn into worthless paper. Overcoming his scruples, he went to work to break the terms of Frank’s will and got a judge to approve some technical changes so the money could eventually be invested in stocks.41

  These events took place during what Leila called the “worst winter in years.” Blizzards buried the Midwest and hay had to be airlifted to Nebraska from surrounding states for weeks during the freeze to keep the snowbound livestock from dying on their feet.42 The winter of the haylift became emblematic of the Truman victory. Howard, who had never gotten rich, now had two kids in college and another about to start. He went back to work at his old firm, now known as Buffett-Falk, but his partner Carl Falk, who had been handling his clients during his absence in Washington, was not interested in sharing them now. Striding around downtown Omaha with the bitter snow pelting his face, Howard tried to drum up new clients. But his long absence meant that his writings were the way most people knew him now, and articles like “Human Freedom Rests on Gold Redeemable Money” had given him the reputation of an extremist.43 In the spring of 1949, he went out into the countryside and knocked on farmhouse doors in search of a new clientele.44

  As for Warren, his father’s defeat left him heartsick, but also offered him an excuse for leaving the East Coast. He was bored at school and hated Philadelphia so much that he had nicknamed it “Filthy-delphia.”45

  At the end of the spring semester he headed back home for good, so relieved that he signed his letters “Ex-Wharton Buffett.” He rationalized this by saying that enrolling at the University of Nebraska in Lincoln, where he would spend the last years of his college career, would be cheaper than Penn.46 He gave the little Ford coupe back to David Brown, its tires threadbare. It was Brown’s problem to figure out how to replace them, since tires were still rationed.47 Warren wanted only one memento of Penn. On the way out the door, he and Clyde flipped a coin to see who got to keep their treasured copy of S.J. Simon’s Why You Lose at Bridge. Warren won.

  15

  The Interview

  Lincoln and Chicago • 1949–Summer 1950

  The first thing Warren did on returning to Nebraska in that summer of 1949 was get a job in newspapers, managing country circulation for the Lincoln Journal. He and his friend Truman Wood, who was Doris’s boyfriend, went halves on a car. Warren felt comfortable in Lincoln, going to university classes in the morning, then driving around managing his route in the afternoon. In his spare moments he called on the local newspaper editors and talked business, politics, and journalism. Supervising rural paperboys was a serious job, for he was now the boss. Fifty young boys in six rural counties reported to “Mr. Buffett.” The challenges of management suddenly became clear when he hired a minister’s daughter in the town of Beatrice, thinking she would be a responsible paper carrier. The three paperboys in Beatrice promptly quit: He’d turned it into a sissy job.

  Warren spent part of his time that summer in Omaha, selling men’s furnishings at JC Penney’s. His spirits had begun to revive. He bought a ukulele to compete with the uke-playing boyfriend of a girl he was pursuing, but wound up holding only the ukulele instead of the girl.

  Penney’s, however, was a good place to work. The employees put on an unofficial pep rally in the basement every morning where Warren, clad in a cheap suit, played his new ukulele—off the clock—while everyone sang, before heading off to his seventy-five-cents-an-hour job in men’s furnishings. Penney’s called him back over the Christmas holidays, improbably putting him to work selling menswear and Towncraft shirts. Looking at racks filled with products about as comprehensible to him as a French restaurant menu, he asked his manager what to tell the customers about the clothes. “Just tell them it’s a sort of worsted,” Mr. Lanford said. “Nobody knows what a worsted is.” Warren never did learn what a worsted was, but at JC Penney’s he sold nothing but.*11

  In the fall, he had moved into a furnished house on Pepper Avenue in Lincoln, which he shared with Truman Wood, and started full time at the University of Nebraska. He liked the teachers better than at Penn and he enrolled with a heavy course load, studying accounting with Ray Dein, the best professor he had had thus far.

  That year Warren revived his golf ball business, this time with a college friend from Penn, Jerry Orans, as a partner. He would drive down to the Omaha train station and pick up the golf balls from his old supplier, Half-Witek.1 Orans acted as his East Coast distributor, but in fact Warren had always wanted partners for the sake of partnership alone; in every business venture, he looked to friends to partner with him. (Needless to say, in Warren’s partnerships, he was always the senior partner.) He was also investing and got the idea of shorting stock in the automaker Kaiser-Frazer. This company produced its first cars in 1947, but saw its share of the auto market fall from nearly one out of every twenty cars to fewer than one out of every hundred in less than a year. “Dear Pop,” he wrote his father on Nebraska Cornhusker stationery. “If there isn’t a trend line apparent in those percentages, I’m no statistician.” Kaiser-Frazer had lost $8 million during the first six months, “so even with phony bookkeeping the loss will probably run more.”2 He and Howard shorted the stock together.

  Back at school, he went down to the broker Cruttenden-Podesta’s office and asked a stockbroker, Bob Soener, where the stock was trading. Soener looked at the chalkboard and said, “Five bucks.” Warren explained that he had shorted the stock, borrowing shares to sell. If the price dropped, as he expected, he could buy the stock back, return the shares, and keep the difference. Since Warren thought Kaiser-Frazer was going bust, if he had sold the shares at five bucks, he could buy them back for pennies and make nearly five dollars on each share.

  I’ll show this young whippersnapper, thought Soener. “You’re not old enough to short a stock legally,” he said. “Oh yes,” Warren said, “I did it in my older sister Doris’s name.” He explained why the stock was going to zero and laid out the evidence.3 “And he cut my feet right out from under me,” says Soener. “I had no retort whatsoever.”

  Warren waited for the Kaiser-Frazer idea to work. And waited. He started hanging around Cruttenden-Podesta while he waited. He was convinced the idea would work. It was so obvious that Kaiser-Frazer would eventually go broke. Meanwhile, he and Soener became friends.

  In the spring of 1950, Warren was close to finishing college. After three years of study, he only needed to take a few classes at summer school to graduate. And then he made a decision that completely reversed his path to date. After high school he had felt fully qualified to achieve his goal of becoming a millionaire by age thirty-five with no further education. But now that he was close to graduating, at the point when most people are done studying and ready to go to work, Warren prepared to put work aside. He had fixed his ambitions on attending the Harvard Business School. Throughout his entire educational history he had shown little interest in formal schooling—as opposed to learning—and considered himself largely self-taught. Harvard, however, offered him two important things: prestige and a network of future connections. He had just seen his father thrown out of Congress and his career as a stockbroker crushed, in part because he had tended to isolate himself by sacrificing relationships for the sake of rigid ideals. So perhaps it was not surprising that Warren chose Harvard.

  He was so certain that Harvard would choose him that he was already urging his friend “Big Jerry” Orans to “Join me at Harvard.”4 Furthermore, he wasn’t even going to have to pay for all of his tuition.

  “One day I read in the Daily Nebraskan a little item that said, ‘The John E. Miller Scholarship will be awarded today.5 Applicants should go to Room 300 at the Business Administration building.’ And it provided five hundred dollars*12 to go to the accredited school of your choice.

  “I went to Room 300, and I was the only guy who showed up. The three professors there kept wanting to wait. I said, ‘No, no. It was three o’clock.’ So I won the scholarship
without doing anything.”

  Enriched with this nugget mined from the college newspaper, Warren rose in the middle of the night to catch the train to Chicago, where his Harvard interview would take place. He was nineteen, two years younger than the average college graduate, and younger still than the average business-school student. His grades were good but not stellar. Despite being the son of a U.S. Congressman, he was using no connections to try to get into Harvard. Since Howard Buffett scratched no backs, his own back went unscratched, and his son’s as well.

  Warren was relying on his knowledge of stocks to make a good impression in the interview. So far his experience had been that whenever he started talking about stocks, people could not help but listen. His relatives, his teachers, his parents’ friends, his fellow students—all wanted to hear him discourse on this subject.

  But he had misunderstood Harvard’s mission, which was to turn out leaders. When he arrived in Chicago and introduced himself to the interviewer, the man saw past his confidence as a prodigy in a single subject straight through to his self-consciousness, his shaky inner core. “I looked about sixteen and emotionally was about nine. I spent ten minutes with the Harvard alumnus who was doing the interview, and he assessed my capabilities and turned me down.”

  Warren never got the chance to show off his knowledge of stocks. The man from Harvard told him gently that he would have a better chance in a few years. Warren was naive; it did not quite sink in what this meant. When the letter arrived from Harvard refusing him admission, he was shocked. His first thought, he says, was, “What am I going to tell my dad?”

  Awkward and stiff-necked he might be, but Howard was undemanding of his children. The Harvard dream was Warren’s, not his father’s. Howard was accustomed to failure and resolute in defeat. The real question must have been: What am I going to tell my mom?

  These conversations took place, but their memory has drained away. And yet Warren would later come to consider his rejection by Harvard the pivotal episode of his life.

  Almost immediately, he started investigating other graduate schools. While leafing through the Columbia catalog one day, he came across two names that were familiar to him: Benjamin Graham and David Dodd.

  “These were big names to me. I’d just read Graham’s book, but I had no idea he was teaching at Columbia.”

  “Graham’s book” was The Intelligent Investor, published in 1949.6 This book of “practical counsel” for all types of investors—the cautious (or “defensive”) and speculative (or “enterprising”)—blew apart the conventions of Wall Street, overturning what had heretofore been largely uninformed speculation in stocks. It explained for the first time in a way that ordinary people could understand that the stock market does not operate through black magic. Through examples of real stocks such as the Northern Pacific Railway and the American-Hawaiian Steamship Company, Graham illustrated a rational, mathematical approach to valuing stocks. Investing, he said, should be systematic.

  The book had mesmerized Warren. For years, he had been going downtown to the library and checking out every book available on stocks and investing. Many of the books dealt with stock-picking systems based on models and patterns; Warren wanted a system, something that would work reliably. He had been fascinated by numerical patterns—technical analysis.

  “I read all of them over and over. The book that probably had the most influence on me was Garfield Drew, who wrote an important book about odd-lot stock trading.7 I read that about three times. I read Edwards and McGee, which is the bible of technical analysis.8 I would go down to the library and just clean them out.” But when he found The Intelligent Investor, he read and reread it. “It was almost like he found a god,” said Truman Wood, his housemate.9 After careful study and thought, he had gone ahead and made a “value” investment on his own. Through a connection of his father’s, he had heard of a company called Parkersburg Rig & Reel, which he researched according to Graham’s rules. He bought two hundred shares.10

  According to the catalog Warren had now picked up, the man who had become his favorite author, Ben Graham, was lecturing in finance at Columbia University. And David Dodd was there too. Dodd was associate dean of the Graduate School of Business, and head of the department of finance. In 1934 Graham and Dodd had coauthored the seminal text on investing, Security Analysis. The Intelligent Investor was the layman’s version of Security Analysis. Enrolling at Columbia would mean he could study with Graham and Dodd. And as Columbia’s catalog pointed out: “No other city in the world offers as many opportunities to become acquainted at firsthand with the actual conduct of business. Here a student may come into personal contact with the outstanding leaders of American business, many of whom give generously of their time to take part in seminars, institutes, and conferences…. Business establishments of the city cheerfully welcome groups of students as visitors.”11 Even Harvard could not offer this.

  Warren now determined that he would go to Columbia. But it was almost too late.

  “I wrote in August, about a month before school started, way past when you were supposed to do it. Who knows what I wrote? I probably wrote that I just found this catalog at the University of Omaha, and it said that you and Ben Graham taught, whereas I thought you guys were on Mount Olympus someplace just smiling down on the rest of us. And if I can get in, I’d love to come. I’m sure it was not a very conventional application. It was probably fairly personal.”

  But in a written application, however unconventional, Warren could shape the impression he made more successfully than in a personal interview. The application wound up on the desk of David Dodd, who as associate dean was in charge of admissions. By 1950, after teaching at Columbia for twenty-seven years, Dodd had effectively become the junior partner of the famous Benjamin Graham.

  A thin, frail, balding man who cared for a disabled wife at home, Dodd was the son of a Presbyterian minister and eight years older than Warren’s father. While Dodd may have been touched in some way by the personal nature of the application, it was also true that at Columbia, he and Graham were more interested in their students’ aptitude for business and investing than their emotional maturity. Graham and Dodd were not trying to create leaders. They taught a specialized craft.

  Whatever the reason, after the deadline, and without an interview, Warren was accepted by Columbia.

  16

  Strike One

  New York City • Fall 1950

  Warren arrived in New York City alone. The only person he knew there was his aunt Dorothy Stahl, widow of the revered Marion Stahl. Otherwise, the motherly women to whom he usually attached himself were unavailable. His teachers and classmates at the business school would consist almost entirely of men. Unlike Penn, where his family had been only a couple of hours away, he was on his own. And his father was once again immersed in politics, running to regain his seat in Congress—this time managing the campaign himself. But even if he won, New York was a long way from Washington.

  Warren had applied to Columbia too late to get into a university dorm, so he found the cheapest lodgings available: joining the YMCA for a dime a day and paying a dollar a day for a room at the Y’s Sloane House on West 34th Street, down near Penn Station.1 He was far from broke, enriched by $500 from the Miller scholarship and $2,000 from Howard, a graduation gift and part of a deal not to start smoking.2 He also had $9,803.70 saved, some of it placed in stocks.3 His net worth included $44 in cash, his half interest in the car, and $334 invested in his Half-Witek golf ball business. But since Warren looked at every dollar as ten dollars someday, he wasn’t going to hand over a dollar more than he needed to spend. Every penny was another snowflake for his snowball.

  On his first day in David Dodd’s class, “Finance 111–112: Investment management and security analysis,” he recalls that Dodd broke his customary reserve and greeted him personally and warmly. Warren had already more or less memorized the course textbook, Security Analysis, Graham and Dodd’s seminal book on investing.4 As the principal
drafter and organizer of Security Analysis, Dodd was of course intimately familiar with its contents. Yet when it came to the text itself, Buffett says, “The truth was that I knew the book even better than Dodd. I could quote from any part of it. At that time, literally, almost in those whole seven or eight hundred pages, I knew every example. I had just sopped it up. And you can imagine the effect that would have on the guy, that somebody was that keen on his book.”

  Published in 1934, Security Analysis was a mammoth textbook for serious students of the market, laying out in much more detail the innovative concepts that were later summarized for a popular audience in The Intelligent Investor. Dodd had taken meticulous notes at Ben Graham’s lectures and seminars for four years, organizing them and enriching the examples with his own knowledge of corporate finance and accounting. He structured the book and proofread the galleys from his summer home on rustic Chebeague Island in Maine’s Casco Bay, in between golf games and mackerel-fishing tournaments.5 He described his role modestly: “The genius was [Graham’s], supplemented by long experience of a distinguished character, and exceptional literary talent. My most important role was to be a devil’s advocate on a variety of issues where I thought he had got himself out on a limb.”6

  Dodd’s class focused on valuing defaulted railroad bonds. Since childhood, Warren had been slightly obsessed with trains, and, of course, thanks to the long, checkered, and colorful history of the Union Pacific, Omaha was practically the center of the universe when it came to bankrupt railroads.7 Warren had read his favorite book on bonds, Townsend’s Bond Salesmanship, for the first time at the age of seven after making a special plea to Santa Claus for this tome.8 Now he took to the subject of bankrupt railroad bonds like a duck to the warm spring rain. Unsurprisingly, Dodd showed an unusual interest in him, introducing him to his family and taking him to dinner. Warren soaked up the fatherly attention and also felt sympathy for Dodd, who cared for his mentally ill wife.