One of his favorite sources was the Pink Sheets, a weekly printed on pink paper, which gave information about the stocks of companies so small that they were not traded on a stock exchange. Another was the National Quotation book, which came out only every six months and described stocks of companies so minuscule that they never even made it into the Pink Sheets. No company was too small, no detail too obscure, to pass through his sieve. “I would pore through volumes of businesses and I’d find one or two that I could put ten or fifteen thousand dollars into that were just ridiculously cheap.”
Warren was not proud; he also felt honored to borrow ideas from Graham, Pritzker, or any useful source. He called that riding coattails and did not care whether the idea was glamorous or mundane. One day he followed up on a lead of Graham’s, the Union Street Railway.13 This was a bus company in New Bedford, Massachusetts, selling at a big discount to its net assets.
“It had a hundred sixteen buses and a little amusement park at one time. I started buying the stock because they had eight hundred thousand dollars in treasury bonds, a couple of hundred thousand in cash, and outstanding bus tickets of ninety-six thousand dollars. Call it a million dollars, about sixty bucks a share. When I started buying it, the stock was selling around thirty or thirty-five bucks a share.” The whole company was selling for half the value of its cash in the bank. Buying the stock was playing a fifty-cent slot machine that was virtually guaranteed to pay off a buck.
Under the circumstances, the company was, naturally, trying to buy its own stock, running an ad in the local New Bedford paper inviting shareholders to sell it to them. Warren, facing competition, began running his own ad: “Write to Warren Buffett at such-and-such address if you want to sell your stock.” “Then, because it was a regulated utility, I got the list from the public-utility commission in Massachusetts that showed the largest shareholders. And I worked that to find more stock. And I wanted to see Mark Duff, who ran the company.”
Visiting management was part of Warren’s way of doing business. He used those meetings to learn as much as he could about a company. Getting personal access to management played to his ability to charm and impress powerful people with his knowledge and wit. And he also felt that by becoming friendly with the management of a company, he might be able to influence the company to do the right thing.
Graham, on the other hand, did not visit managements, much less try to influence them. He called this “self-help” and thought it was “cheating” to get the inside dope, even though it was legal. He felt that by definition being an investor meant being an outsider, someone who confronted managements rather than rubbing shoulders with them. Graham wanted to be on a level playing field with the little guy, using only information that was available to everyone.14
Following his own instincts, however, Warren decided to visit the Union Street Railway on a weekend.
“I got up at about four a.m. and drove up to New Bedford. Mark Duff was very nice, polite. Just as I was about ready to leave, he said, ‘By the way, we’ve been thinking of having a “return of capital” distribution to shareholders.’” That meant they were going to give back the extra money. “And I said, ‘Oh, that’s nice.’ And then he said, ‘Yes, and there’s a provision you may not be aware of in the Massachusetts statutes on public utilities that you have to do it in multiples of the par value of the stock.” The stock had a $25 par value, so that meant it would be paying out at least $25 per share.*17 “And I said, ‘Well. That’s a good start.’ Then he said, ‘Bear in mind, we’re thinking of using two units.’ That meant they were going to declare a fifty-dollar dividend on a stock that was selling at thirty-five or forty dollars at that time.” So if you bought a share you got all your money back right away, and then some. And afterward, you still owned the slice of the business represented by your share of stock.
“I got fifty bucks a share, and I still owned stock in the place. And there was still value in it. The bus companies hid assets in these so-called special reserves and land and buildings and car barns where they kept the old streetcars. And I’ll never know whether my trip up there precipitated that or not.” The conflict-wary Buffett by now had honed to a fine edge the skill of getting his way without asking for it out loud. Thus, while he thought he might have influenced Duff, he could not be certain what had prompted Duff’s decision. What mattered to him was that he got the result he wanted without a fight. He had made about $20,000 on this trade. Who knew there was so much money in buses?15
Nobody in the history of the Buffett family had ever made $20,000 on one idea. In 1955, that was several times more than the average person earned for a whole year’s work. Doubling your money and then some for a few weeks’ work was spectacular. And yet, what was more important to him was doing it without taking any significant risk.
Susie and Warren did not talk about the details of cocoa-bean arbitrage and bus-company stocks. She wasn’t interested in money, except as something to be spent. And what she knew was that even though waves of money were rolling in to the little apartment in White Plains, Warren gave her only a small household allowance. She hadn’t grown up keeping track of every tiny expense, so being married to a man who saved money by making deals with newsstands to buy week-old magazines meant a whole new way of life. She did her best to manage the household herself, but the disparity between what Warren was making and what he gave his wife had become stunning. One day she telephoned her neighbor Madeline O’Sullivan in a panic.
“Madeline, something terrible has happened,” she said. “You’ve got to come down here!” Madeline rushed down to the Buffett apartment and found Susie distraught. She had accidentally thrown a batch of dividend checks that had been sitting on Warren’s desk into the apartment’s incinerator chute, which led straight down to the building’s furnace.16
“Maybe the incinerator isn’t running,” Madeline said, so they called the building superintendent, who let them into the basement. Sure enough, the incinerator was cold. They rooted through the garbage looking for the checks, with Susie all the while wringing her hands and saying, “I can’t face Warren.” When they found the checks, Madeline’s eyes grew wide. They were for as much as thousands of dollars, not $25 or $10 as she had assumed.17 The Buffetts, living in the little apartment in White Plains, were getting truly rich.
As Howie screamed and their money grew, Warren became slightly more accommodating with the checkbook. Despite his thriftiness, he was so enthralled with Susie that he ultimately gave her what she wanted. That June, they returned to Omaha for his sister Bertie’s wedding to Charlie Snorf. By then, Warren had agreed that Susie could have some help with homemaking. So while they were in Omaha they started searching in a hurry for an au pair to return to White Plains with them.
By advertising in the newspaper, they hired a young woman from a small town who “seemed a very proper type”—but wasn’t. Warren threw her on a bus back to Omaha; Susie looked for a replacement, because she needed the help—raising Howie was more than a two-person job—and she knew they could afford it.
Warren’s brilliant performance at Graham-Newman had made him the golden boy of the firm. Ben Graham took a personal interest in Warren, and in his warmly outgoing and beleaguered wife. Graham had given them a movie camera and projector as a baby gift when Howie was born, and even showed up at their apartment with a teddy bear for the little boy.18 On one or two occasions when he and his wife, Estey, had the Buffetts over for dinner, he noticed that Warren gazed googly-eyed at Susie, and that the two of them held hands a lot. But he could also see that Warren did not woo his wife, and that Susie might have liked the occasional romantic gesture.19 When Susie mentioned with longing that Warren did not dance, Graham dropped by Warren’s desk with a gift certificate to the Arthur Murray dance studio in White Plains, where Graham clumped around the dance floor during his own lessons. Graham checked with the studio a little later and found that his protégé had never used the gift certificate. He mentioned this to Warren and encouraged
him to go ahead. Now on the hook, Warren stumbled through three lessons with Susie, then dropped out. He never did learn to dance.20
This didn’t get in the way of his rapid ascent at Graham-Newman. Within eighteen months of his starting there, both Ben Graham and Jerry Newman seemed to be treating Warren as a potential partner, which meant a certain amount of family socializing. In mid-1955, even the dyspeptic Jerry Newman extended an invitation to the Buffetts to what they thought was to be a “picnic” at Meadowpond, the Newmans’ mansion in Lewisboro, New York. Susie arrived wearing something suitable for a hayride, only to find the other women in dresses and pearls. Though they felt like a couple of hillbillies, the faux pas did nothing to hurt Warren’s golden boy status.
Walter Schloss was not invited to events like these. He had been pigeonholed as a journeyman employee who would never rise to partnership. Jerry Newman, who rarely bothered to be kind to anyone, treated Schloss with more than his usual contempt, so Schloss, married with two young children, decided to strike out on his own. It took him a while to get up the nerve to tell Graham,21 but by the end of 1955 he had started his own investment partnership, funded with $100,000 raised from a group of partners whose names, as Buffett later put it, “were straight from a roll call at Ellis Island.”22
Buffett was certain that Schloss could apply Graham’s methods successfully and admired him for having the guts to set up his own firm. Though he worried that “Big Walter” was starting out with so little capital that he would not be able to feed his family,23 Buffett put not a dime of his own money into Schloss’s partnership, just as he had not invested in Graham-Newman. It would be unthinkable for Warren Buffett to let someone else invest his money.
He did find someone to replace Schloss, however. Buffett had met Tom Knapp at a luncheon at Blythe and Company down on Wall Street.24 Ten years older than Warren, tall, handsome, dark-haired, blessed with a wicked sense of humor, Knapp had taken one of David Dodd’s night courses and gotten hooked; he changed his major from chemistry to business on the spot. Graham hired Knapp as the second gentile in the firm. “I told Jerry Newman, ‘It’s the old story—you hire one gentile, they take over the place,’” Buffett says.
By the time Knapp was sitting at Walter Schloss’s old desk next to Buffett, Warren had begun to be aware of the private side of Graham’s life. Knapp himself got initiated when Graham invited him to watch a speech at the New School for Social Research, where, he says, he found himself seated at a table with six women. “As Ben spoke,” Knapp says, “I became aware that each one of those women was in love with him. And they didn’t seem to be jealous of each other, and they all seemed to know him very, very well.”25
Indeed, by early 1956, Graham was bored by investing: his outside interests—women, the classics, and fine arts—tugged at him so strongly that he had a foot out the door. One day when Knapp was out, the receptionist directed a gangly young man into the windowless lair where Warren was filling out forms. Looming over him was Ed Anderson, who explained that he was a chemist, like Knapp, not a professional investor. He worked at the Livermore Laboratory of the Atomic Energy Commission in California, but followed the market in his spare time. He had read The Intelligent Investor, with its copious examples of cheap stocks like Easy Washing Machine, and was wildly impressed. My God! he thought. That can’t be true. How could you buy these companies for less money than they had cash in the bank?26
Intrigued, Anderson had been riding Graham’s coattails. After buying a single share of Graham-Newman, he used its quarterly statements to figure out what Graham was doing, then bought those stocks. Graham never discouraged this; he liked other people to learn from and emulate him.
Anderson had come in because he was thinking about buying another share of Graham-Newman, but he had noticed an oddity and he wanted to ask about it. Graham had loaded up on shares of American Telephone & Telegraph. It was the least Graham-like stock imaginable—owned, studied, and followed by all, valued fairly, with as little potential as it had risk. Was something going on? he asked Warren.
Warren thought for a second. It was impressive that this man with no business background—a chemist—had the perception to see that AT&T was out of pattern. Too many people thought that “business” was some sort of priesthood practiced only by those with special training. He said to Anderson, “This might not be the best time to buy another share.”27 They chatted a bit longer and then parted in a friendly way, intending to keep up the acquaintance. Warren was very glad that his friend Schloss had gone out on his own. From watching the firm’s trading patterns and keeping his ears open, he had already figured out that Graham was going to shut down his partnership.
Ben Graham’s career was coming to an end. He was sixty-two years old, and the market had surpassed the peak of 1929.28 Its priciness made him nervous. He had beaten the market by 2.5 percent for more than twenty years.29 He wanted to retire and move out to California to enjoy life. Jerry Newman was also retiring, but Jerry’s son, Mickey, would stay on. In the spring of 1956 Graham gave notice to his partners. But first he offered Warren the opportunity to become a general partner in the firm. That he would choose someone of Warren’s age and experience shows how valuable he had made himself in such a short time. Nevertheless: “If I had stayed I would have been sort of the Ben Graham of it, and Mickey would have been the Jerry Newman of it—but Mickey would have been the senior partner by miles. It would have been called Newman-Buffett.”
Even though Warren was flattered, he had gone to Graham-Newman to work for Ben. It wasn’t worth it to him to stay, not even to be thought of as Graham’s intellectual heir. Moreover, all the while that he was carrying out the bus bell-ringer and the cocoa-bean caper he was thinking, “I don’t like living in New York. I’m on the train back and forth all the time.” Above all, he was not cut out to work with a partner—least of all as someone’s junior partner. He turned the offer down.
22
Hidden Splendor
Omaha • 1956–1958
I had about $174,000, and I was going to retire. I rented a house at 5202 Underwood in Omaha for $175 a month. We’d live on $12,000 a year. My capital would grow.”
In retrospect, it would strike people as odd that at the age of twenty-six, Warren used the term “retire.” Maybe it was a way to downplay expectations. Or maybe it referred to his notion of capital as money that worked as a sort of servant to make you rich. The overseer of capital was not an employee.
Mathematically speaking, Warren could theoretically “retire” on his own money and still reach his goal of being a millionaire by age thirty-five.*18 Since entering Columbia with $9,800, he had grown his money by more than sixty-one percent a year. But he was in a hurry, and it would require a very aggressive compounding rate to meet his goal.1 Therefore he had decided to start a partnership like Graham-Newman’s sister hedge fund, Newman & Graham.2 It was possible that he did not think of this as having a “job.” In fact it was a near-perfect way of not having a job. He would have no boss, could invest from his house, and could put friends and relatives into the same stocks that he would have bought for himself. If he took a quarter of every dollar he earned for these partners as a fee and then reinvested that in the partnership, he could be a millionaire much faster. Armed with Ben Graham’s method of buying stocks and a Graham-like hedge fund, he had every reason to think of himself as a rich man.
There was only one problem with his idea. He couldn’t tolerate it if his partners criticized him because the stocks went down. But Warren had figured out a solution. He planned to invite only his family and friends—people he was sure trusted him—into the partnership. On May 1, 1956, he started Buffett Associates, Ltd., a partnership based on the Newman & Graham model,3 with seven partners.
Doc Thompson invested $25,000. “Doc Thompson was the kind of guy, he gave me every penny he had, basically. I was his boy.” Warren’s sister Doris, with her husband, Truman Wood, put in $10,000. His aunt Alice Buffett put in $35,000. “I had sol
d securities to other people before that, but now I became a fiduciary, and for people who were enormously important to me. These were the people who believed in me. There’s no way in the world I would have taken my aunt Alice’s or my sister’s or my father-in-law’s money if I had thought that I’d lose it. At that point I didn’t think I could lose money over time.”
He already had a separate partnership with his father, and his sister Bertie and her husband had no money they could part with. So his Wharton roommate Chuck Peterson, who put in $5,000, became his fourth partner. Al Jolson aside, he knew all about Warren’s brains and financial maturity from having been his roommate. Chuck had been one of the first to let Warren dispense him scrips as a prescriptionist, buying stocks from him before he went to New York City. “I learned real fast how bright he is and how honest he is and how capable,” he says. “I would trust him until proven otherwise.”4 Warren’s fifth partner was Peterson’s mother, Elizabeth, who invested $25,000 of the money she had inherited when her husband died the year before.
The sixth partner, Dan Monen, was a quiet, stocky, dark-haired young man who used to play with Warren as a child, digging up dandelions in Ernest Buffett’s backyard. Now Warren’s lawyer, he didn’t have much money but put in what he could: $5,000.
Warren was the seventh. He put in only $100. The rest of his share would come from future fees he earned by managing the partnership. “In effect, I got my leverage from managing the partnership. I was brimming with ideas, but I was not brimming with capital.” Actually, by most of the country’s standards, Warren was brimming with capital. But he viewed the partnership as a compounding machine—once money went into it, he did not intend to make withdrawals. So he needed to earn the $12,000 a year his family would live on from the rest of his funds. He invested that money separately.
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