The Snowball

by Alice Schroeder

  Warren wrote his aunt Dorothy Stahl in October 1951 in his best smart-alecky style: “Things in the girl department are at an all-time peak…the hooks have been sunk pretty deep into me by one of the local gals. As soon as I get the go-ahead from [my uncle] Fred and you, I may proceed further. This girl has only one drawback; she knows nothing about stocks. Otherwise she is unbeatable and I guess I can overlook her Achilles’ heel.”39

  Cautiously “proceeding further” was putting it right. Warren worked up his nerve. Instead of proposing marriage, he “just sort of assumed it, and kept talking.” Susie, for her part, “realized she had been chosen,” although “she wasn’t sure how.”40

  Triumphant, Warren went to his Dale Carnegie class on schedule. “That’s the week I won the pencil. They gave a pencil award for doing something difficult and doing the most with the training. The week I won the pencil was the week that I proposed.”

  Afterward, Susie wrote a long, sad letter to Milton Brown, telling him the news. He was shocked. He knew she had been out on some dates with Warren but had no idea it was anything serious.41

  Warren went to talk to Susie’s father to get his blessing. This, he already knew, would be easily had. But Doc Thompson took a while—quite a while—to get to the point. He started by explaining that Harry Truman and the Democrats were sending the country straight to hell. Pouring money into Europe after the war through the Marshall Plan and the Berlin airlift42 was just proof that the policies of that devil Roosevelt were still in place, and that Truman was sending the country straight into bankruptcy. Look at how the Soviets got hold of the atomic bomb right after Truman had dismantled part of the military. Senator Joe McCarthy’s House Un-American Activities Committee was proving what Doc Thompson had known all along, that the government was riddled with Communists. HUAC was finding Commies everywhere. The government was downright ineffectual—or worse—when it came to dealing with Communism. Truman had lost China for democracy. He would never be forgiven for firing the heroic General Douglas MacArthur for insubordination after he made repeated efforts to go around Truman and get approval to attack the Chinese Commies in Manchuria. But it was probably too late for even MacArthur to save the country now. The Communists were taking over the world, and stocks were going to be nothing but valueless bits of paper. So Warren’s plan to work in the stock market was going to fail. But Doc Thompson would never blame Warren when his daughter starved. He was a smart young man. If not for the Democrats ruining the country, he would probably do all right. The miserable future that awaited Susie wouldn’t be Warren’s fault.

  Long used to this kind of talk, from both his own father and Susie’s, Warren waited patiently for the crucial word “yes.” Three hours later, Doc Thompson wound his way to a conclusion and gave his consent.43

  By Thanksgiving, Susie and Warren were planning their April wedding.

  19

  Stage Fright

  Omaha • Summer 1951–Spring 1952

  Warren understood Doc Thompson’s concern about how he would support a family, even though he had no such doubts himself. Since he couldn’t work for Graham-Newman, he had decided to become a stockbroker, and to do it in Omaha, far from the canyons of Wall Street. If you wanted to make money in the stock market, went the common wisdom, the place to do it was New York, so his decision was an unusual one. But he felt free from the conventions of Wall Street; he wanted to work with his father; Susie was in Omaha; and he was never happy far from home.

  At almost twenty-one, Warren was supremely confident in his own investing abilities. By the end of 1951, he had already boosted his capital from $9,804 to $19,738. He had earned seventy-five percent in a single year.1 As a matter of course, however, he consulted his father and Ben Graham. To his surprise, both said, “Maybe you should wait a few years.” Graham—as always—thought the market was too high. Howard, pessimistic, favored mining stocks and gold stocks and other investments designed to protect against inflation. He didn’t think any other kind of business would be a good investment, and he worried about his son’s future.

  That didn’t make sense to Warren. Since 1929, the value of businesses had grown substantially.

  “It was absolutely the reverse effect of what you saw in other times, when the market was staggeringly overvalued. I had looked at companies. I just couldn’t see why you wouldn’t want to own them. It was on a micro level, not an assessment of the growth of the economy or anything like that, and I was working with micro money. But it just seemed to me that it was crazy not to own them. On the other hand, here’s Ben, with his two hundred IQ and all experienced, telling me to wait. And my dad, who, if he told me to walk out a window, I would have done it.” Still, to make this decision to defy the advice of his two great authorities—his father and Ben Graham—was an enormous step for him. It required him to consider the possibility that his judgment might be superior to theirs, and that the two men whom he most deeply respected were not thinking rationally. Yet he was certain he was right. He might have walked out a window if his father told him to—but not if it meant leaving a Moody’s Manual full of cheap stocks behind.

  In fact, the opportunities he saw were so plentiful that they justified borrowing money for the first time. He was willing to take on debt equal to a quarter of his net worth. “I was already running short of money to invest. If I was enthused about a stock I would have to sell something else to buy it. I had an aversion to borrowing money, but I got a loan for five thousand dollars or so from the Omaha National Bank. I was under twenty-one and my dad had to cosign the loan. Mr. Davis, the banker, conducted it as a rite of passage. He said something like, ‘You’re going into manhood now,’ and referred to this five thousand dollars, saying, ‘It’s a solemn obligation, and we know you’ve got the kind of character to pay it back.’ This went on for half an hour while I was sitting there next to this big desk.”

  Howard probably felt both proud and a little silly cosigning a loan for his son, who had been a full-fledged businessman for at least a dozen years. Since Warren had made up his mind, Howard was also willing to take him on at his own firm, Buffett-Falk—though only after suggesting that he interview at a prominent local firm, Kirkpatrick Pettis Co., to see what the best of Omaha stockbroking had to offer.

  “I went to see Stewart Kirkpatrick and said during the interview that I wanted intelligent customers. I was going to try to look for people who could understand things. And Kirkpatrick said, in effect, don’t worry about whether they’re intelligent, worry about whether they’re rich. Which is okay, you can’t knock him for that. But I wouldn’t have wanted to work anyplace but at my dad’s firm.”

  At Buffett-Falk, Warren was installed in one of its four private unair-conditioned offices, next to the “cage,” a glassed-in area where a clerk handled the money and securities. He started out selling his favorite stock to the safest people he knew, his aunt and his college friends, including his first roommate at Wharton, Chuck Peterson, who was now in the real estate business in Omaha and with whom he’d reconnected.

  “My aunt Alice was the first call I made, and I sold her a hundred shares of GEICO. She made me feel good about myself. She was interested in me. And after that Fred Stanback, Chuck Peterson, and anybody I could get to buy it. But mostly I got myself to buy it, because when other people didn’t buy it, I’d just figure out a way to buy five more shares myself. I had this big ambition. I was going to own one-tenth of one percent of the company. It had 175,000 shares outstanding, and I figured if the company would become worth one billion dollars someday and I owned that much, I would be worth a million dollars. So I needed 175 shares.”2

  Yet in the meantime, his job was to sell on commission, and beyond this narrow circle, Warren found that almost insurmountably difficult. He got a taste of the obstacles his father had faced to build his brokerage business back when the grand old families of Omaha—the owners of the banks, stockyards, breweries, the big department stores—peered down their noses at the grandson of a grocer
. Alone in Omaha now, with his parents back in Washington, Warren felt that he got no respect.

  These were the days when all stocks were sold by full-service stockbrokers, and most people bought individual stocks rather than mutual funds. Everybody paid fixed commissions of six cents a share. Transactions took place in person or over the telephone, as part of a relationship. Every trade was preceded by a few minutes of chat with “your broker,” part salesman, part adviser, part friend. Your broker might live in your neighborhood, and you saw him at parties, you golfed with him at your country club, and he came to your daughter’s wedding. General Motors brought out new models of its cars every year, and a businessman might trade his car more often than his stocks. That is, if he owned any stocks.

  Important accounts didn’t take Warren seriously. Nebraska Consolidated Mills, a client of his father’s, once scheduled him to come out at five-thirty a.m.3 “I was twenty-one. And I’d go around to all these people to sell them stocks, and when I’d get all through they’d say, ‘What does your dad think?’ I got that all the time.” Warren, who looked like a “dork,” struggled to make sales.4 He didn’t know how to read people, couldn’t make small talk, and certainly wasn’t a good listener. His mode of conversation was to broadcast rather than receive. When nervous, he sprayed forth information about his favorite stocks like a fire hose. Some potential clients listened to his pitch, checked with other sources, and used his ideas, but bought the stocks through other brokers, so he didn’t get the commission. He was shocked at this perfidy from people he’d spoken to face-to-face and would be seeing again around town. He felt cheated. Other times he was simply baffled. Once he walked in on a guy who was in his seventies sitting with a pile of dollar bills on his desk and a secretary in his lap. Every time she kissed him, the man gave her a dollar bill.

  “My dad hadn’t taught me what to do in that sort of circumstance. Generally speaking, I was not getting reinforcement. When I first started selling GEICO to people, Buffett-Falk had this little office downtown, and the stock certificates would come in and Jerome Newman’s name would be on those certificates. He was the seller I was buying from. And the guys at Buffett-Falk said, ‘What the hell. If you think you’re smarter than Jerry Newman…’”

  In fact, Graham-Newman was forming a new partnership, and some of the investors had given the firm GEICO shares to fund money into the partnership. So in effect, it was they who were selling, not Graham-Newman. Warren didn’t know that.5 But when it came to GEICO, he didn’t care who was selling. It did not occur to him to ask anyone at the firm why they were selling. He was unshakeably certain of his own opinion. Nor did he hide that fact.

  “I was sort of a wise guy, with this graduate degree, among people who hadn’t gone to college. One time an insurance agent, Ralph Campbell, came in to see Mr. Falk and said, ‘What’s this kid doing going around promoting this company?’ GEICO was a company that didn’t use insurance agents. And I said, like a wise guy, ‘Mr. Campbell, you better buy this stock for unemployment insurance.’”

  The full import of Dale Carnegie’s first rule, don’t criticize, hadn’t sunk in. Warren used what would later become the trademark Buffett wit to show that he knew more than everybody else, but why would anyone have been willing to believe that of a twenty-one-year-old? And yet he did. It must have stunned people at Buffett-Falk to watch him, morning through night, ripping through the manuals, adding to his file cabinets of knowledge.

  “I went through the Moody’s Manuals page by page. Ten thousand pages in the Moody’s Industrial, Transportation, Banks and Finance Manuals—twice. I actually looked at every business—although I didn’t look very hard at some.”

  Even though endlessly fascinated by the game of finding stocks, Warren wanted to be more than an investor, more than a salesman. He wanted to be a teacher, to emulate Ben Graham. He signed up to teach a night course at the University of Omaha.

  At first he partnered with his stockbroker friend Bob Soener, who taught the first four weeks of “Profitable Investing in Stocks.” While Soener explained to the class basics such as how to read the Wall Street Journal, Warren stood in the hallway listening for any good investment ideas. Then he took over for the next six weeks.6 Eventually he taught the whole course and gave it the more cautious name of “Sound Investing in Stocks.” In front of his classroom, he lit up, pacing the floor as if he couldn’t get the words out fast enough, even though the students had to struggle not to drown in the flood of information he threw at them. But despite his deep vein of knowledge, he never promised the class they would get rich or that taking his class would give them any particular result. Nor did he brag about his own success at investing.

  His students ranged from stock-market professionals to people who had no head for business—housewives, doctors, retirees. They symbolized a subtle shift: Long-absent investors were starting to come back for the first time since the 1920s—part of why Graham thought the market was overvalued. Warren adapted his teaching to the range of their knowledge and skills. He modeled his teaching style after Graham’s, using the “Company A, Company B” method and some of his mentor’s other little teaching tricks. He handed out grades with the strictest fairness. His aunt Alice took the course and sat in the classroom gazing at him with adoring eyes.7 He gave her a C.

  People were always throwing out the names of stocks, asking him whether to buy or sell. He could speak from memory for five or even ten minutes about any stock they named: its financial data, price/earnings ratio, the volume of shares that traded—and from all appearances, he could do this for hundreds of stocks, as if he were quoting baseball statistics.8 Sometimes a woman in the front row would say, “My late mother gave me ABC stock, and now it’s up a little bit. What should I do?” Then he would say, “Well, I think I would sell that, and maybe buy…,” giving three or four options such as GEICO or one of a few stocks about which he was entirely confident (and already owned).9 The students remarked on his unusual conservatism when responding to their questions about how to invest.

  Meanwhile, Warren was working like a woodpecker in April to make money for himself. He was going to be taking care of a family soon, which would divide his income into two streams. Part of what he made—his stream—would go back into the mill and continue to grow. And part he would spend for him and Susie to live, a significant change in his circumstances. Until now, he had been able to pare his expenses by living in the maid’s room at Columbia, eating cheese sandwiches, and taking his dates to lectures or playing the ukulele for them instead of escorting them to the posh “21” Club. Now that he was back in Nebraska, he was able to cut his costs even further by living in his parents’ house, even though it meant occasional contact with Leila when they came back from Washington.

  He had never needed motivation to try to work his capital as hard as possible, and now he sat in the office at Buffett-Falk with his feet on his desk, searching systematically through the Graham and Dodd book for more ideas.10 He found a stock, Philadelphia and Reading Coal & Iron Company, a company that mined anthracite coal. It looked cheap because it was selling for $19 and a fraction, but had about $8 a share worth of culm banks.*14 Warren would happily spend hours figuring out how much coal mines and culm banks were worth in order to make a rational decision about a stock. He bought Philadelphia and Reading Coal & Iron shares himself and sold them to his aunt Alice and Chuck Peterson. When the stock immediately dropped to $9 a share, he saw that as a reason to buy even more.

  He bought a textile company called Cleveland Worsted Mills. It had current assets*15 of $146 per share, and the stock was selling for less than that. He felt the price did not reflect the value of “several well-equipped mills.”

  Warren wrote a short report on the stock. He liked the fact that the company was paying out a lot of what it earned to shareholders—giving them a bird in the hand. “The $8 dividend provides a well-protected 7% yield on the current price of approximately $115,” the report noted.11 He wrote “well-protected” be
cause he thought Cleveland Worsted Mills had enough earnings to cover its dividend. That proved less than prescient.

  “I called it Cleveland’s Worst Mill after they cut off paying the dividend.” Warren was so mad that he decided to spend some money to find out what was wrong. “I went to an annual meeting of Cleveland’s Worst Mill, and I flew all the way to Cleveland. I got there about five minutes late, and the meeting had been adjourned. And here I was, this kid from Omaha, twenty-two years old, with my own money in the stock. The chairman said, ‘Sorry, too late.’ But then their sales agent, who was on the board of directors, actually took pity on me, and so he got me off on the side and talked to me and answered some questions.” The answers, however, changed nothing. Warren felt awful; he had gotten other people to buy Cleveland’s Worst Mill too.

  There was nothing he hated more than selling people investments that lost them money. He couldn’t stand disappointing people. This was what it had been like back in the sixth grade when the Cities Service Preferred stock he’d gotten Doris to invest in was clobbered. She hadn’t hesitated to “remind” him about it, and he’d felt responsible. Now, he would do anything to avoid the feeling of letting someone down.

  Warren began looking for any way to make himself less dependent on the job he was starting to hate. He had always enjoyed owning businesses, and decided to buy a gas station with a friend from the National Guard, Jim Schaeffer. They bought a Sinclair station that was next to a Texaco station “that consistently out-sold us, which drove us crazy.” Warren and his brother-in-law Truman Wood, who had married Doris, even worked at the station themselves on weekends. They washed windshields “with a smile”—despite Warren’s aversion to manual labor—and did everything they could to attract new customers, but instead drivers continued to pull in to the Texaco station across the street. Its owner “was very well established and very well liked. He beat us every month. That’s when I learned the power of customer loyalty. The guy had been in business forever and had a clientele. Nothing we could do was going to change that.