He devised a formula to charge his new partners. “I got half the upside above a four percent threshold, and I took a quarter of the downside myself. So if I broke even, I lost money. And my obligation to pay back losses was not limited to my capital. It was unlimited.”5
At the time, Warren was already managing money for Anne Gottschaldt and Catherine Elberfeld, the mother and aunt of Fred Kuhlken, a friend from Columbia. When Fred left for Europe the year before, he had asked Warren to look after part of his aunt’s and mother’s money.6 Ever since, Warren had been investing it with utmost caution in government bonds under a different, more modest fee arrangement.
He could have invited Gottschaldt and Elberfeld into the partnership, but he felt that it was unfair to charge them a higher fee than they were already paying. Of course, if the partnership was the sure thing he thought it was, that meant he was depriving them of a golden opportunity. If something went wrong with the investments, however, his aunt and his sister and Doc Thompson would never condemn him. He wasn’t so sure about anybody else.
Acting as a “fiduciary” meant to Warren that any responsibility he took on would be unlimited. To lay out the ground rules for his partners, he called the first official meeting of Buffett Associates on the very day he founded the partnership. Chuck got them a reservation for dinner at the Omaha Club, the best place in town if you wanted a private room. Warren meant to carefully define and limit his responsibilities; one responsibility he was not assuming was picking up the check for dinner. He told Chuck to pass the word that everyone was going dutch.7 He then used the dinner as an opportunity to talk not just about the partnership’s ground rules, but about the stock market. Already he viewed the partnership as a teaching exercise.
The partners quickly split into two camps: the teetotalers and the rest. From his end of the table, Doc Thompson suggested, in a paternal way, that the other faction was going to hell. It was Warren, however, who was the preacher that night; they were there for him to hold forth.
“I started with an agreement with the investors, which has not needed to be changed much as we’ve evolved. All kinds of good things have flowed out of that, you know. It is the least complicated thing I can imagine.
“I gave them a little summary of the ground rules: Here’s what I can do. Here’s what I can’t do. And here are some things I don’t know whether I can do or not. Here’s how I’ll judge myself. It was fairly short. If you don’t feel this way you shouldn’t join, because I don’t want you unhappy while I’m happy or vice versa.”8
After Warren launched the partnership, the Buffetts returned to New York for their final summer. Warren would be helping Ben Graham and Jerry Newman as the partnership wound down. Mickey Newman was now the CEO of Philadelphia & Reading, a full-time job. With neither he nor Warren available to serve as general partner, Graham had decided to shut down the firm.9 Warren had rented a rustic seaside cottage on Long Island for his family from his friend Tom Knapp. The house, part of a group built for people fleeing an influenza epidemic many years before, sat on West Meadow Beach, near Stony Brook on Long Island’s North Shore, and faced Connecticut, across Long Island Sound.
During the week, Warren saved money by bunking in the city with his stockbroker friend Henry Brandt, whose wife and children were also summering on Long Island. On the weekends he joined his family at the shore and worked in a tiny bedroom in the house. The neighbors told the Knapps they never saw him.10 While Warren worked, Susie, who was afraid of the water and never swam, beachcombed with the kids along the bluffs near the water’s edge. Since the cottage had minimal plumbing facilities, the Buffetts fetched drinking water from a spring across the street, and Susie bathed Little Susie, now almost three, Howie, eighteen months old, and herself in the unheated outdoor shower.
That summer brought them two pieces of shocking news. The father of Warren’s boyhood friend Bob Russell had committed suicide. And Anne Gottschaldt and Catherine Elberfeld, the mother and aunt of Fred Kuhlken, Warren’s friend from Columbia, called to say that Fred had been killed in Portugal after his car skidded eighty feet and rammed into a cork tree.11
As the summer ended, the Buffetts made their plans to return to Omaha. The extreme caution Warren displayed in trying never to disappoint anyone stood in sharp contrast with his risky decision to pursue an investing career working on his own outside of New York City. The market was composed of relationships, people who lunched together at the Stock Exchange or played poker once a week. It hummed along on tips and rumors, gossip passed on by personal contacts and connections made at investor luncheons, in bars, on squash courts, at chance meetings at university-club coat checks. While every small regional city had its little brokerage firm or two—like Buffett-Falk—these were not important players. The hinterlands were staffed by stockbrokers—prescriptionists who survived or prospered by filling the scrips written by the Manhattan money doctors. At that time, no serious American money man worked anywhere but New York City. To leave all this, to go it alone, to think of getting really rich anywhere farther than a limo ride from Wall and Broad was a truly bold and venturesome stroke.
Indeed, for a college graduate to become self-employed, to work at home, to work alone, was strikingly unusual in the 1950s. The Man in the Gray Flannel Suit was the guy who got ahead.12 Businessmen joined a big organization—the bigger the better—then competed with polished ferocity for the best-paying job on the steady climb up the ladder of success, trying not to break a sweat or a golf club along the way. They competed to amass not riches but power—or at the very least to buy the right kind of house in a good suburban neighborhood, to get a new-model car every year, and to pave the way for a lifetime of security.
In his choice of occupation, therefore, Warren was as rare as a Buffett who voted for Democrats. Well aware of her husband’s unusual qualities—if not of the apparent riskiness of the course he was charting—Susie arranged for the movers to come, said good-bye to the neighbors, sent out the change-of-address cards, had the telephone service turned off, and packed up their belongings. She flew to Omaha with Little Susie and Howie and moved them all into the house Warren had rented from Chuck Peterson on Underwood Avenue. He had chosen an inviting gray two-story Tudor with picturesque half-beams, a big stone chimney, and a cathedral ceiling. Even the decision to rent a home had been unconventional; owning a home was the quintessence of what most young Americans aspired to in the mid-1950s. The hopelessness of the Depression and the dreary wartime days of making do were fading into memory. Americans stocked their new houses with all the exciting new features and appliances that were suddenly available: washer-dryers, freezers, dishwashers, electric mixers. The Buffetts had plenty of money to buy all these things. But Warren had other plans for his capital, so they rented. And the house they were renting, while attractive, was just barely big enough for them. Howie at almost two would have to sleep in a largish closet.
As Susie began to settle her family in Omaha, Warren closed out his own affairs in New York. He packed up his own desk and files, and sent out his own notices to the companies whose stocks he owned to ensure that the dividend checks followed him to Omaha. Then he got in his car and started driving back to Nebraska, visiting companies along the way.
“I did this zigzag across the country. I just thought it was a great time to hit these companies. I drove through Hazleton, Pennsylvania, and visited the Jeddo-Highland Coal Company. I went through Kalamazoo, and saw the Kalamazoo Stove and Furnace Company. This little odyssey went through Delaware, Ohio, and I visited Greif Bros. Cooperage. That was a company selling at a ridiculously cheap price”—a company he had first discovered in 1951 by flipping through the Moody’s Manuals. He and his father had each bought two hundred shares and put them in their little partnership.
Warren arrived in Omaha toward the end of the summer and found that he was needed at home. Little Sooz, calm and timid, sat watching while her brother’s inexhaustible demands vacuumed up her mother’s energies.13 But in the ev
enings she wanted her father; she was now afraid to go to bed. When they arrived at the house on Underwood, a moving-company man wearing glasses had spoken to her, and though she did not remember his saying anything untoward, she had frozen in terror and was now convinced that the “glasses man” lurked just outside her bedroom, next to a wrought-iron balcony that overlooked the living room. Warren had to inspect the balcony every night and reassure her that it was safe to go to sleep.
After he had taken care of the “glasses man,” he went down the hall to the tiny sunporch off his and Susie’s bedroom and got down to business, either partnership work or preparing his lessons—for the first thing he had done when he returned to Omaha, besides forming a partnership, was to take on two classes for the fall semester at the University of Omaha: Investment Analysis for Men Only, and Intelligent Investing. Before long he would add a third course, Investing for Women. The terrified boy who so recently couldn’t even strike up a conversation in a Dale Carnegie class had vanished. In his place was a still-awkward young man who nonetheless made a striking impression as he moved restlessly around the room, exhorting the students and spouting an inexhaustible series of facts and figures. Dressed as usual in a cheap suit that looked a couple of sizes too large, he seemed more like a youngish preacher from some missionary sect than a college lecturer.
Despite his brilliance, Warren was still very immature. For Susie, his helplessness at home meant that he was like having a third child to care for. His personality and interests also shaped their social life. In Omaha, a midsize Midwestern city with relatively few important cultural institutions, weekends were filled with weddings, parties, teas, and charity events. The Buffetts lived a much quieter life than most young married couples of their class and era. Although Susie began to climb the ladder of the Junior League and they joined a “gourmet group”—where Warren politely asked each month’s hostess to make him a hamburger—they socialized with friends less in crowds than in ones and twos. Most of their social life took place at dinner with other couples, in small groups, or at occasional dinner parties where Warren could talk about stocks. It was always the same: Warren entertained, either holding forth to an audience on stocks or playing the ukulele. Under Susie’s tutelage, he could now exchange remarks about other subjects more easily than before, but his mind remained fixated on making money. During meals and parties at home, he often fled small talk by leaving the table to go upstairs. But unlike Ben Graham, he was not upstairs reading Proust; he was working. As for Susie, she knew little and cared less about what Warren did. “I used to write ‘security analyst’ for his job, and people thought he checked burglar alarms,” she said.14
All Warren’s recreations remained repetitive, competitive, or, better yet, both. He found playing bridge with Susie unendurable because she wanted the other side to win, and soon sought other partners.15 His mind was like a restless monkey; to relax, he needed an active form of concentration that could keep the monkey occupied. Ping-Pong, bridge, poker, golf all absorbed him and took his mind off money temporarily. But he never hosted backyard barbecues, lazed around a swimming pool, stargazed, or simply went for a walk in the woods. A stargazing Warren would have looked at the Big Dipper and seen a dollar sign.
All of this, plus his nonconformist streak, meant that Warren was not a “joiner,” sitting through committee and board meetings. Still, family loyalty did lead him to say yes when his uncle Fred Buffett came over to the house and asked him to join the Rotary Club. He was fond of Fred, proprietor of the Buffett grocery; he and Fred went bowling at the Rotary (repetitive, competitive)—and besides, his grandfather had been president of the Rotary.
On the other hand, when asked to join the Knights of Ak-Sar-Ben, a more important group of civic leaders that combined philanthropy, business, boosterism, and social activities, he said no. For a budding money manager who needed to raise funds for his business, that was like thumbing his nose in the faces of the men who ran Omaha—an act of cocky self-assurance, even arrogance, which set him apart from much of his social set. His sister Doris had made her debut as a Princess of Ak-Sar-Ben. The sister of his brother-in-law and former roommate, Truman Wood, had been Queen of Ak-Sar-Ben. Friends like Chuck Peterson were regulars on its social circuit. As a Congressman, Howard had been obligated to join. But Warren found social hierarchy repugnant and he disdained the smoke-filled backroom clubbiness and conformity of the Ak-Sar-Ben crowd. These were the people who had looked down on his father as the “son of a grocer man.” Warren reveled in the chance to spurn Ak-Sar-Ben, and disparaged it with withering comments.
Susie had her own gentler brand of nonconformity. She began to bring Warren into her unusually diverse network of friends. Since high school, she had prided herself on her openness and her commitment to inclusiveness at a time when most people chose friends who were religious, cultural, ethnic, and economic clones. Unlike her own family, Susie did not think this way, and many of her friends—and by this time many of Warren’s—were Jewish. In segregated Omaha—not to mention within the Buffett and Thompson families—choosing to cross these social lines was a bold, even defiant act. Susie was aware of this, just as she had been aware in high school and college that dating a Jew was considered shocking. Although she came from a prominent family, social status had value to her mostly as a way to make her friends feel more included. Warren, the anti-elitist, found this aspect of Susie highly attractive. And the Jewish friends he’d made at Columbia and while working for Graham-Newman had opened his eyes to anti-Semitism.
In contrast to Susie, Warren’s mother had always been obsessed with fitting in. Leila had researched her ancestry and joined the Daughters of the American Revolution and the Huguenot Society, perhaps searching the past for a stability that she could not find in the present, and certainly not in her immediate family. She had recently received word from Norfolk State Hospital that her sister Bernice had thrown herself into the river in an apparent suicide attempt. Leila, now responsible for Bernice and their mother, handled their affairs in businesslike fashion, striving to be a dutiful daughter while keeping some distance from the family’s problems. She and her sister Edie went to visit Bernice and their mother periodically, Leila with less enthusiasm. The Stahl family’s history of mental illness was a threatening and shameful topic in the Buffett family, just as it was in society as a whole at the time. Ozzie and Harriet Nelson, Ward and June Cleaver, the prototypical white Anglo-Saxon Protestant American families so ubiquitous on television that they seemed to define an idyllic sort of normality, did not have mentally ill or suicidal family members. The Buffetts’ perception of the family history was further muddied by uncertainty over Stella’s and Bernice’s diagnoses. The doctors could give only vague descriptions of what were clearly serious problems. Obviously, however, the mental illness was inherited, and it manifested in adulthood. Warren and Doris, who were close to their aunt Edie, knew that their mother had grown apart from her as Edie, too, had become more impulsive and moody. They had some suspicions that Leila’s own behavior and personality might be at least partly related to the family lineage. The ticking clock hung over them, and they examined themselves for any signs of abnormality.
Warren, who desperately wanted to be but had never felt “normal,” assuaged his anxiety with statistics, reasoning that the mysterious disorder seemed to affect only the family’s women. He never dwelled on the unpleasant. He would later come to think of his memory as functioning like a bathtub. The tub filled with ideas and experiences and matters that interested him. When he had no more use for information, whoosh—the plug popped up, and the memory drained away. If new information about a subject appeared, it would replace the old version. If he didn’t want to think about something at all, down the drain it went. Certain events, facts, memories, and even people appeared to vanish. Painful memories were the first to be flushed. The water went somewhere, and along with it might go context, nuance, and perspective, but what mattered was that it was gone. The bathtub memory’s efficie
ncy freed up enormous amounts of space for the new and the productive. At times, however, disturbing thoughts did bubble up from somewhere, as when he expressed concern for other people: for example, several friends who cared for mentally ill wives. Buffett thought of the bathtub memory as a helper that allowed him to “look forward,” rather than “looking backward” all the time like his mother. And it allowed him, at the age of twenty-six, to ruminate in depth on business to the exclusion of almost everything else—in pursuit of his goal of becoming a millionaire.
The fastest way to that goal was to raise more money to manage. In August, he went back to New York to attend the final shareholders’ meeting of the Graham-Newman Corporation. Everyone important on Wall Street seemed to be present at Graham-Newman’s wake. Investor Lou Green, his head wreathed in clouds of foul-smelling smoke from an enormous stogie, towered over them from his six-foot-four height.16 He accused Graham of making a big mistake. Why had Graham and Newman not developed talent? he asked. “They’d been working here for thirty years building up this business,” he declared to everyone standing nearby. “And all they would have had to run it was this kid named Warren Buffett. He’s the best they could come up with. And who’d want to ride with him?”17
Warren’s long-ago mistake of telling Lou Green that he bought Marshall-Wells “because Ben Graham bought it” had now come back to dilute Graham’s endorsement of him in front of an important audience, with unknowable consequences. Yet Graham’s imprimatur had already paid him one important dividend. Homer Dodge, a Harvard-educated physics professor who was the president of Norwich University in Northfield, Vermont, until 1951, and a long-time investor in Graham-Newman, had gone to Graham and asked him what he should do with his money now that Graham-Newman was shutting down. “And Ben said, ‘Well, I’ve got this fellow who used to work with us that might be a possibility.’”
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