The Snowball

by Alice Schroeder

  Graham said that a company is no different than a person, who might think that her net worth was $7,000, comprising her house, worth $50,000, less her mortgage of $45,000, plus her other savings of $2,000. Just like people, companies have assets that they own, such as the products they make and sell, and debts—or liabilities—that they owe. If you sold all the assets to pay off the debts, what would be left was the company’s equity, or net worth. If someone could buy the stock at a price that valued the company cheaper than its net worth, Graham said, eventually—a tricky word, “eventually”—the stock’s price would rise to reflect this intrinsic value.15

  It sounded simple, but the art of security analysis lay in the details—playing detective, probing for what assets were really worth, excavating hidden assets and liabilities, considering what the company could earn—or not earn—and stripping apart the fine print to lay bare the rights of shareholders. Graham’s students learned that stocks were not abstract pieces of paper, and their value could be analyzed by figuring what the whole pie of a business was worth, then dividing it into slices.

  Complicating matters, however, was that issue of “eventually.” Stocks often traded at odds with their intrinsic value for long periods of time. An analyst could figure everything right and still appear wrong in the eyes of the market for the investing equivalent of a lifetime. That was why, as well as being a detective, you had to build in what Graham and Dodd called a MARGIN OF SAFETY—that is, plenty of room for error.

  Graham’s method struck people who studied it in one of two ways. Some grasped it immediately as a fascinating, all-consuming treasure hunt and others recoiled from it as a dreary homework assignment. Warren’s reaction was that of a man emerging from the cave in which he had been living all his life, blinking in the sunlight as he perceived reality for the first time.16 His former concept of a “stock” was derived from the patterns formed by the prices at which pieces of paper traded. Now he saw that those pieces of paper were simply symbols of an underlying truth. He instantly grasped that the patterns formed by trading these pieces of paper did not signify a “stock” any more than those childhood piles of bottle caps had signified the effervescent, sweet-sour-spicy taste of soda pop that made people crave it. His old notions dissolved in an instant, conquered by Graham’s ideas and illuminated by the way he taught.

  Graham used all kinds of nifty, effective tricks in his class. He would ask paired questions, one at a time. His students thought they knew the answer to the first, but when the second came along, it made them realize that maybe they didn’t. He would put up descriptions of two companies, one in terrible shape, practically bankrupt, another in fine form. After asking the class to analyze them, he would reveal that they were the same company at different times. Everyone was surprised. These were memorable lessons on thinking independently, typical of how his mind worked.

  Along with his Company A and Company B teaching method, Graham used to talk about Class 1 and Class 2 truths. Class 1 truths were absolutes. Class 2 truths became truths by conviction. If enough people thought a company’s stock was worth X, it became worth X until enough people thought otherwise. Yet that did not affect the stock’s intrinsic value—which was a Class 1 truth. Thus, Graham’s investing method was not simply about buying stocks cheap. As much as anything it was rooted in an understanding of psychology, enabling its followers to keep their emotions from influencing their decision-making.

  From Graham’s class, Warren took away three main principles that required nothing more than the stern discipline of mental independence:

  • A stock is the right to own a little piece of a business. A stock is worth a certain fraction of what you would be willing to pay for the whole business.

  • Use a margin of safety. Investing is built on estimates and uncertainty. A wide margin of safety ensures that the effects of good decisions are not wiped out by errors. The way to advance, above all, is by not retreating.

  • Mr. Market is your servant, not your master. Graham postulated a moody character called Mr. Market, who offers to buy and sell stocks every day, often at prices that don’t make sense. Mr. Market’s moods should not influence your view of price. However, from time to time he does offer the chance to buy low and sell high.

  Of these points, the margin of safety was most important. A stock might be the right to own a piece of a business, and the intrinsic value of the stock was something you could estimate, but with a margin of safety, you could sleep at night. Graham built in his margin of safety in various ways. As well as buying things for considerably less than he thought they were worth, he never forgot the danger of using debt. And although the 1950s had become one of the most prosperous eras in American history, his early experiences had scarred him and given him the habit of assuming the worst. He looked at business through the lens of his 1932 Forbes articles—as worth more dead than alive—thinking of a stock’s value mostly in terms of what the company would be worth if dead—that is, shut down and liquidated. Implicitly, Graham was always looking over his shoulder at the 1930s, when so many businesses went into bankruptcy. He kept his firm small in part because he was so risk-averse. And he rarely bought more than a tiny position in any company’s stock, no matter how sound the business.17 This meant the firm owned a large array of stocks that required much tending. While plenty of stocks did sell at prices below the businesses’ liquidation value, which made Warren an enthusiastic follower of Graham, he disagreed with his teacher about the need to buy so many stocks. He had cast his lot with one stock: “Ben would always tell me GEICO was too high. By his standards, it wasn’t the right kind of stock to buy. Still, by the end of 1951, I had three-quarters of my net worth or close to it invested in GEICO.” And yet Warren “worshipped” his teacher, even though he had strayed so far from one of Graham’s ideas.

  As the spring semester wore on, Warren’s classmates gradually accepted the routine of the classroom duet. Warren “was a very focused person. He could focus like a spotlight, twenty-four hours a day almost, seven days a week almost. I don’t know when he slept,” says Jack Alexander.18 He could quote Graham’s examples and come up with examples of his own. He haunted the Columbia library, reading old newspapers for hours on end.

  “I would get these papers from 1929. I couldn’t get enough of it. I read everything—not just the business and stock-market stories. History is interesting, and there is something about history in a newspaper, just seeing a place, the stories, even the ads, everything. It takes you into a different world, told by somebody who was an eyewitness, and you are really living in that time.”

  Warren collected information, weeding out biases imposed by other people’s way of thinking. He spent hours reading the Moody’s and Standard & Poor’s manuals, looking for stocks. But it was the weekly Graham seminar that he looked forward to more than anything else he did. He even convinced his disciple Fred Stanback to come in and audit a class or two.

  While the chemistry between Warren and his teacher was obvious to everyone else in the class, one student in particular had taken note of him. Bill Ruane, a stockbroker at Kidder, Peabody, had found his way to Graham through his alma mater, Harvard Business School, after reading two important and memorable books—Where Are the Customers’ Yachts? and Security Analysis. Ruane loved telling tales about his stockbroking job, though he swore that his first choice of career was working as an elevator boy at the Plaza Hotel, a future derailed by a lengthy wait for a uniform.19 He and Warren had connected immediately. But neither Ruane, nor any other of Graham’s students, nor Warren himself, ever had the temerity to try to see Graham outside the seminar room. Warren did manage to find reasons, however, to drop in on his new acquaintance, Walter Schloss, down at the Graham-Newman Corporation.20 He got to know Schloss better and learned he was caring for a wife who had been suffering from depression throughout most of their marriage.21 Schloss, like David Dodd, appeared to be remarkably loyal and steadfast, qualities that Buffett sought out in people. He also envied
Schloss his job; he would have cleaned the washrooms for free in exchange for one of those gray laboratory-style jackets, made of thin cotton, that everyone at Graham-Newman wore to keep from dirtying their shirtsleeves while they filled out the forms that Graham used to test stocks against his investing criteria.22 Above all, Warren wanted to work for Graham.

  As the semester neared an end, the rest of the class was busy finding their futures. Bob Dunn would be heading off to U.S. Steel, possibly the most prestigious corporate job in the United States. Almost every young businessman saw the route to success as working his way up the ladder in a great industrial corporation. In Eisenhower’s postwar, post-Depression America, job security was all-important, and Americans believed that institutions—from the government to large corporations—were essentially benevolent. Finding one’s cell inside the institutional beehive and learning how to fit in was the normal and expected thing to do.

  “I don’t think there was one guy in the class that thought about whether U.S. Steel was a good business. I mean, it was a big business, but they weren’t thinking about what kind of train they were getting on.”

  Warren had one goal in mind. He knew he would excel if Graham would hire him. While lacking self-confidence in many things, he had always felt sure-footed in the specialized area of stocks. He proposed himself to Graham for a job at Graham-Newman Corporation. It took audacity to even dream of working for the great man himself, but Warren was audacious. He was, after all, Ben Graham’s star student, the only one to earn an A+ in his class. If Walter Schloss could work there, why couldn’t he? To clinch the deal, he offered to work for free. He went in and asked for the job with far more confidence than he had felt riding up to Chicago for his interview with the Harvard Business School.

  Graham turned him down.

  “He was terrific. He just said, ‘Lookit, Warren. In Wall Street still, the “white-shoe” firms, the big investment banks, they don’t hire Jews. We only have the ability to hire a very few people here. And, therefore, we only hire Jews.’ That was true of the two gals in the office and everybody. It was sort of like his version of affirmative action. And the truth is, there was a lot of prejudice against Jews in the fifties. I understood.”

  Buffett found it impossible to say anything that could be interpreted as critical of Graham, even decades later. Of course, it must have been incredibly disappointing. Couldn’t Graham have made an exception for his star student? Someone it wouldn’t cost him anything to employ?

  Warren, who idolized his teacher, had to accept that Graham viewed him impersonally, so much so that he would not overrule a principle even for the best student who had ever taken his class. There was no appeal—at least for now. Chagrined, he stayed through graduation, then once again he pulled himself together and stepped aboard a train.

  He had two consolations. He would be back in Omaha, where he felt he belonged. And it would be much easier to pursue his love life there, for he had met an Omaha girl and was now smitten. As usual, the girl he wanted was not smitten with him. But this time, he was determined to change her mind.

  18

  Miss Nebraska

  New York City and Omaha • 1950–1952

  Warren had always been a washout with girls. He longed to have a girlfriend, but the very things that made him different hindered his quest. “Nobody was more shy than I was with girls,” he says. “But my reaction to that was probably to turn into a talking machine.” When he ran out of words about stocks or politics, he resorted to grunts. He was afraid to ask girls out. He summoned the nerve when a girl occasionally did something that made him think he wouldn’t get turned down, but in general his attitude was, “Why would they want to go out with me?” Thus he didn’t go on many dates during high school or college. And when he did, something always seemed to go wrong.

  On a date to a baseball game with a girl named Jackie Gillian, the high point was hitting a cow with his car on the way home. He took another girl to hit golf balls at a driving range.1 That didn’t fly. Driving a hearse to pick up Barbara Weigand, he says, was “sort of desperate,” not a stunt. It may have worked as an icebreaker, but after that, what was there to say? On a date with a shy girl like Ann Beck, he was struck mute; he was so insecure that he had no idea what to do. Girls didn’t want to hear about Ben Graham and the margin of safety. If he couldn’t get to first base with Bobbie Worley, who had dated him all one summer, what hope did he have? Very little, he thought, and maybe the girls could sense it.

  Finally, the summer of 1950 before he went to Columbia, his sister Bertie set him up on a date with her roommate from Northwestern. A round-cheeked kewpie of a brunette named Susan Thompson,2 she had quickly impressed Bertie, who was a year and a half younger, as a special girl with a knack for understanding people.3 As soon as Warren met Susie, he was fascinated, but suspected she was too good to be true: “I bet she was a fake at first. I was intrigued by her and I was pursuing her, but I was determined to find the hole in the dike. I just couldn’t believe anybody was really like her.” Susie, however, was not interested in him. She was in love with somebody else.

  After Warren went off to Columbia, he read in Earl Wilson’s gossip column4 in the New York Post that Miss Nebraska 1949, Vanita Mae Brown, was living at the Webster women’s residence5 and performing with the singer and teen idol Eddie Fisher on a television show.

  Vanita had attended the University of Nebraska at the same time as Warren, although she had escaped his notice and aspirations until now. Something about the situation overcame his shyness. Since the glamorous Miss Nebraska was living in New York, he telephoned her at the Webster.

  Vanita took the bait. Before long, she and Mr. Omaha had a date. He learned that her upbringing had been nothing like his. She grew up in South Omaha near the stockyards, cleaning chickens at Omaha Cold Storage after school. Her pinup body and girl-next-door face had been her ticket out. She got a job in Omaha as an usherette at the Paramount Theater, then parlayed her love of putting herself on display into victory in a local beauty pageant. “I think her talent was bedazzling the judges,” Buffett says. After winning the Miss Nebraska title, she represented the state as Princess Nebraska in the Washington, D.C., Cherry Blossom Festival. From there she moved to New York City, where she was now desperately trying to make it in show business.

  Although Warren was not the kind of guy to take a girl to dinner at the Stork Club or a show at the Copacabana, she must have welcomed a hometown face. Soon the two of them were exploring the streets of New York together. Looking to upgrade themselves, they went to Marble Collegiate Church to hear Dr. Norman Vincent Peale, a famous self-improvement writer and speaker. Warren serenaded her with “Sweet Georgia Brown” by ukulele on the bank of the Hudson, toting along cheese sandwiches as riverside picnic fare.

  Even though Vanita hated cheese sandwiches,6 she seemed willing to keep seeing him. He found her so entertaining and quick-witted that talking to her was like playing verbal Ping-Pong.7 The aura of Technicolor that surrounded her made her magnetizing. Vanita’s interest did not delude him, however, about his woefully lacking social skills. With each passing year, he had become more desperate to improve them. He’d seen an ad for a public-speaking course in the Dale Carnegie method. Warren trusted Dale Carnegie, who had already helped him to get along better with people. He went to a Carnegie course in New York with a $100 check in his pocket.

  “I went to Dale Carnegie because I was painfully aware of being socially maladjusted. And I went and gave them a check, but then I stopped payment on it because I lost my nerve.”

  Nor did Warren’s social deficiencies augur well for his prospects with Susan Thompson, to whom he had been writing all fall. She was not encouraging, but neither did she tell him outright to stop bothering her. Warren quickly hit on the strategy of befriending Susie’s parents as a gateway to their daughter. Over Thanksgiving, he went to Evanston with them for a Northwestern football game. Afterward, the three of them had dinner with Susie, but she ditched th
em early to go out on a date.8

  Warren returned to New York after the holiday, discouraged but no less intrigued. He continued to see Vanita. “She had one of the most imaginative minds I’ve ever run into,” he says.

  In fact, dating her began to take on an edge of unpredictability and risk. At various times she threatened to go down to Washington when Howard was speaking on the floor of Congress and throw herself at his feet, shrieking, “Your son is the father of my unborn child!” Warren thought she might actually do it. Another time, she created such a scene as they left a movie theater that, unable to listen to it any longer, he hoisted her up and stuffed her, jackknifed, into a wire-mesh trash basket on the street corner. She hung there, suspended and screaming, as he stalked away.9

  Vanita was beautiful, she was smart, and she was entertaining. She was also dangerous, and Warren knew it was risky to get more involved with her. But there must have been some sort of thrill to it. Dating Vanita was like walking a leopard on a leash to see if it would make a good pet. Yet, “Vanita could handle herself fine. She had no problem carrying it off. The only question was whether she was going to want to carry it off. You didn’t have to worry about her embarrassing you unless she wanted to.”

  Once Warren invited her to a dinner at the New York Athletic Club for Frank Matthews, a distinguished lawyer and Secretary of the Navy. Having the beautiful Miss Nebraska on his arm would be a plus. Matthews was Nebraskan, the crowd was full of people worth knowing, and Warren wanted to be known. During the cocktail hour, Vanita made sure he would indeed be talked about. After he introduced her as his date, she corrected him and insisted she was his wife. “I don’t know why he does this,” she said. “Is he ashamed of me? Would you be ashamed of me? Every time we go out, he pretends that I’m just his date, and we’ve been married.”