The Snowball

by Alice Schroeder

  With momentum behind him, Warren realized it was time to leave a house where there was barely room for a family with two young children—one an unusually energetic three-and-a-half-year-old—and a third on the way. The Buffetts bought their first house. It stood on Farnam Street, a Dutch Cape set back on a large corner lot overlooked by evergreens, next to one of Omaha’s busiest thoroughfares. While the largest house on the block, it had an unpretentious and charming air, with dormers set into the sloping shingled roof and an eyebrow window.42 Warren paid $31,500 to Sam Reynolds, a local businessman, and promptly named it “Buffett’s Folly.”43 In his mind $31,500 was a million dollars after compounding for a dozen years or so, because he could invest it at such an impressive rate of return. Thus, he felt as though he were spending an outrageous million dollars on the house.

  Just before the moving van left the house on Underwood Avenue, Warren took five-year-old Little Susie back up the stairs to the wrought-iron balcony. “The glasses man is staying here,” he said. “You need to say good-bye to him.” Susie Jr. said good-bye, and, indeed, the glasses man remained behind.44

  Big Susie’s job was to oversee the move, get them settled into the house, and lasso Howie while more than eight months pregnant with her third child. As longtime friends observed, Howie was a “hell-raiser.” The inexhaustible Buffett energy poured from him in such a whirlwind that he was nicknamed the Tornado, a cousin to Warren’s childhood nickname, Firebolt—but with a very different connotation. As soon as Howie could walk, says Buffett, he became peripatetic. He dug up the garden with his Tonka toys, and Susie took them away, then he tore the house apart to find them. Once he did, he dug the garden up again. Susie snatched away the front-loader, and the battle repeated itself.45

  A week after arriving at Farnam Street and just a day before the Mo-Buff partnership was born, the Buffetts’ second son, Peter, arrived. From the start he was a quiet, easy baby. But shortly after his birth, Susie came down with a kidney infection.46 Since her rheumatic fever and ear infections as a child, she had always considered herself healthy. The kidney infection did not concern her as much as shielding Warren from dealing with it; his discomfort around illness was so great that she had trained the family to pay attention to him whenever somebody got sick, as if he, too, were ill and required care. Her real focus was on having a home of her own at last. Even illness and the demands of caring for a new baby and two small children could not suppress her urge to decorate. As it sprang to life, she redid the house in cheery contemporary style, with chrome-and-leather furniture and huge, bright modern paintings covering the white walls. The $15,000 decorating bill totaled almost half of what the house itself had cost, which “just about killed Warren,” according to Bob Billig, a golfing pal.47 He didn’t notice colors or respond to visual aesthetics and so was indifferent to the result, seeing only the outrageous bill.

  “Do I really want to spend $300,000 for this haircut?” was his attitude. If Susie wanted to spend some trifling sum of money, he would say, “I’m not sure I want to blow $500,000 that way.”48 But since Susie wanted to spend money that he wanted to withhold, and since he wanted Susie to be happy and she wanted to please him, their personalities were gradually meshing into a system of bargaining and trades.

  The outrageous bill included the cost of a device that became an object of wonderment among their friends and neighbors—one of the first color television sets in Omaha.49 Susie liked having her house as the hub of the neighborhood, so before long, on Saturday mornings, all the kids from the block would pile onto the black leather sofa in the little TV room and watch cartoons.50

  Willa Johnson, a large, capable black housekeeper who quietly became Susie’s extra set of hands, eyes, and ears, joined the household, freeing Susie to find an outlet for her creativity. She and a friend, Thama Friedman, decided to set up a contemporary art gallery. As with everything involving money, the decision had to be cleared with Warren. Before forking over Susie’s share, he “interviewed” them in his sitting room and asked, “Do you expect to make money?” Friedman answered, “No,” whereupon Buffett replied, “Okay, Susie can come in as an ‘investor.’”51 He liked the idea of her doing something of her own and, according to Friedman, wanted them to step back and think about the gallery in a businesslike way while being realistic that it was a hobby. Warren always thought of money in terms of the return on capital laid out, and since the gallery wasn’t going to make a profit, he wanted them to limit their spending. Susie’s involvement in the gallery was truly a hobby, says Friedman, who managed it day to day.

  Susie was considered a flexible, easygoing, but attentive mother by her friends and relatives. Now that the Buffetts lived closer to both their parents, the children spent more time with their grandparents. The atmosphere at the Thompsons’, a block and a half away, was relaxed and enjoyable; they didn’t care if Howie broke a window or the kids made a mess. Dorothy Thompson got into the spirit of things, playing games, organizing Easter egg hunts, and making elaborate multilayered ice-cream cones. The children loved Doc Thompson, despite his sober self-importance and the way he pontificated. Once he sat Howie on his knee. “Don’t drink alcohol,” he said, over and over. “It will kill your brain cells, and you don’t have any to waste.”52

  On Sundays, Doc Thompson sometimes came over and preached in a jelly-bean-colored suit right in Warren and Susie’s living room. Otherwise, Howie and Susie Jr. went to the Buffetts’, where Leila towed them off to church. Compared to the Thompsons, she and Howard seemed stiff and straitlaced. Howard remained such a Victorian throwback that when he called Doris and Warren with news about their sister Bertie, he could only choke out, “All hell’s broken loose!” They finally managed to discover, from someone else, that she had lost her baby. Howard couldn’t bring himself to say the word “miscarriage.”

  With their large new house, Warren and Susie began to play host for the families. At her first family Thanksgiving dinner, Susie prepared the turkey herself, thinking the easy way would be to cook it overnight at 100 degrees. After the turkey fell apart, she called on Mrs. Hegman, a cook inherited from Leila, to come and help. Someone other than Warren had to carve, however, since he was useless with a knife. And at family gatherings when his mother was present, as soon as he could get away with it, he disappeared upstairs to work.

  Susie had covered Warren’s new little office off the master bedroom with greenback-patterned wallpaper. Comfortably surrounded by money, he now set about buying cheap stocks as fast as his fingers could fly through the Moody’s Manuals: businesses that sold basic items or commodities that could be easily valued, like Davenport Hosiery, Meadow River Coal & Land, Westpan Hydrocarbon, and Maracaibo Oil Exploration. For the partnership, for himself, for Susie, or for all of these whenever he had money, he put it to work as fast as he could bring it through the door.

  Often he needed secrecy to execute his ideas and he used intelligent, willing people like Dan Monen to act as his proxies. Another of these proxies was Daniel Cowin, a value hunter who worked for the small brokerage firm Hettleman & Co. in New York. Warren had met Dan through their late friend from Columbia, Fred Kuhlken.53 Hettleman made investments in little stocks with capitalizations of a few million, often the kind of obscure bargains that Warren liked.

  “Fred had written and described Dan as a young star on Wall Street and said we were made for each other. I immediately decided that Fred was one hundred percent right on both counts. In the next few years, Dan and I were constantly together whenever I visited New York.”54

  Cowin was nine years older, with deep-set eyes and a penetrating gaze. When the two of them were together, it seemed, on the surface, like a grown man hobnobbing with a college boy, but they had much in common. Cowin had grown up poor during the Depression after his father lost the family’s money, and as a teenager he had supported his family. He put the money he got for a thirteenth-birthday gift into stocks.55 He gravitated toward a career in investing after his Navy service, working inde
pendently even at an investment house, keeping his ideas to himself. Unlike Buffett, however, he had a strong appreciation for cutting-edge art, was creative around the house—spraying pinecones silver for the Christmas dinner table—and collected photography and antiques. What attracted Buffett to him was that Cowin traded well and worked his own ideas.56 Cowin had also endeared himself to Warren early on, when he was at Graham-Newman, by lending him $50,000 for a week so that Warren could buy some mutual-fund shares to achieve a thousand-dollar tax saving.57 Over time, they collaborated, with Dan the balding senior partner: more experienced and with more money to invest, but sharing information and ideas.

  Buffett and Cowin used to call each other weekly when the Pink Sheets that listed small stocks came out, and compare notes. “Did you get that one?” “Yes! I bought that, that’s mine!”—both feeling like winners when they had picked the same ones. “It was like picking a horse,” says Dan’s wife, Joyce.58 They thought about taking over the National Casket Company, code-naming it the Container Company. “Dan was a digger,” Buffett says, “which I guess makes sense.”

  Once, Buffett says, they had even tried to buy a Maryland “town” that the Federal Housing Authority was auctioning off for peanuts: it consisted of the post office, the town hall, and a large number of rental properties that were charging below-market rents. The town had been built during the Depression. Buffett recalls that the ad for the town made them salivate with Snidely Whiplash dreams of quickly raising the rents to a market rate. But even for “peanuts,” the town was expensive and they couldn’t get together enough cash.59

  Warren could never get enough cash. He was always trying to raise money. The Graham connection was about to pay off again. Bernie Sarnat—a pioneer in plastic and reconstructive surgery—went to have a chat one day with Ben Graham, his wife’s first cousin. Ben had moved across the street from the Sarnats when he and Estey retired to California. Sarnat says he asked Graham what he should do with his money now, “what little money he had in his partnership. Well,” recalls Sarnat, “he said, ‘Oh, buy AT&T,’ and he handed me shares in three closed-end funds and some stock. And then he very casually mentioned, ‘One of my former students is doing some investing. Warren Buffett.’ And that was it. So casually that I didn’t even pick it up.”

  Hardly anybody knew Warren Buffett. He might as well have been a patch of moss hidden under a rock in Omaha. Sarnat’s wife, Rhoda, a social worker, took a walk every day with her cousin-in-law Estey. “One day not long after,” she recalls, “Estey said to me, ‘Listen, Rhoda, people are always approaching us to invest in their partnerships, because if they can tell people that Ben Graham invests in them, they have it made. We say no to everybody. But that Warren Buffett—he has potential. We’re investing with him, and you’d better do it too.’

  “My only question was,” says Rhoda, “‘Estey, I know you think he’s bright, but I’m more interested in whether he’s honest.’ Estey said, ‘Absolutely. Totally. I trust him a hundred percent.’” The Sarnats and Estey Graham put $10,000 and $15,000, respectively, into Mo-Buff. By then, the Monens’ investment had grown to $100,000.

  Some of the students in Warren’s investing classes had also joined the partnerships, as had Wally Keenan, his former Dale Carnegie instructor. In fact, by 1959, he was getting somewhat of a name around town, in part through his teaching. No longer hidden, his qualities—good and bad—had begun to be recognized in Omaha. The side of him that had taken the counterposition in the teenage radio show American School of the Air came across in Omaha as brash, a know-it-all. “I used to love to take the opposite side of any argument,” he says, “no matter what. I could turn in a second.” People thought it was nervy of him to ask for money to invest without telling them what he would be buying. “There were people in Omaha who thought what I was doing was some sort of Ponzi scheme,” he recalls. It had repercussions. When Warren had reapplied for full membership in the Omaha Country Club, he was blackballed. To be blackballed from the country club was a serious matter; someone disliked him enough to show it in a tangible and embarrassing way. It was one thing to identify with outsiders, but he also wanted to belong. Besides, Warren liked to play golf, and the club had a good course. Through connections, he worked at it until he got off the blacklist.

  But his talents shone through to many more people now, and brought him partners of increasing prominence. In February 1959, Casper Offutt and his son, Cap Jr., members of one of Omaha’s most prominent families, approached him about a partnership of their own. When Warren explained that they would not know what he was buying, Cap Sr. said, “Well, I’m not going to put any money in if I don’t know what it is, if you’ve got complete control and I don’t have any voice in it.”60 But Cap Jr., together with his brother John and William Glenn, a businessman for whom Chuck Peterson managed real estate properties, invested anyway. They put $50,000 into Glenoff, the seventh partnership.

  And all the while that Warren was investing during these early years of the partnerships, he never deviated from the principles of Ben Graham. Everything he bought was extraordinarily cheap, cigar butts all, soggy stogies containing one free puff. But that was before he met Charlie Munger.

  23

  The Omaha Club

  Omaha • 1959

  Like a steel bank vault door, the arched portals of the Omaha Club swung closed behind the bankers and insurance men and railroad executives of the city as George, the black doorman, welcomed them inside. Come from playing squash in the basement or from their offices downtown, the men loitered by the tiled fireplace in the front hall, chatting until the women entered through a separate side door in the building’s Italian Renaissance facade to join them. The assembled parties ascended the curving mahogany staircase to the second floor, passing on the way the life-size painting of a Scotsman catching a trout in a stream. The Omaha Club was where the town came to dance, to raise money, to get married, and to celebrate anniversaries. But above all, it was where the town came to do business, for at its tables you were left to talk in peace.

  One summer Friday in 1959, Buffett strode through the club’s entrance to have lunch with two of his partners, Neal Davis and his brother-in-law Lee Seeman, who had arranged for him to meet Davis’s best friend since childhood. It was Neal’s father, Dr. Eddie Davis, who had said to Warren, “You remind me of Charlie Munger” when the Davises had joined the partnership. Now Munger was in town to settle his father’s estate.1

  Munger knew only a few facts about the crew-cut Buffett kid, six years his junior. But, consistent with his expectations of life in general, his expectations of this meeting were not high.2 He had developed the habit of expecting little so as never to be disappointed. And rarely did Charles T. Munger meet anyone to whom he enjoyed listening as much as himself.

  The Mungers had started in poverty, but by the latter part of the nineteenth century, T. C. Munger, Charlie’s grandfather, a federal judge, had brought the family to prominence, welcome in every drawing room in Omaha—rather than only at the back door, delivering groceries, like the Buffetts. Judge Munger, an iron disciplinarian, had forced the whole family to read Robinson Crusoe to absorb the book’s portrayal of the conquest of nature through discipline. He was known for giving longer jury instructions than any judge in the middle west.3 He liked to lecture his relatives on the virtue of saving and the vices of gambling and saloons. Charlie’s straitlaced aunt Ufie, who listened, had “kept hard at two separate careers until past eighty, dominated her church, saved her money, and, duty-ridden, attended as a matter of course her beloved husband’s autopsy.”4

  Judge Munger’s son Al followed his father into the law, becoming a respectable but not rich attorney who counted among his clients the Omaha World-Herald and other important local institutions. Lighthearted, unlike his father, he was often seen enjoying a pipe, hunting, or catching a fish. His son later said of him that Al Munger “achieved exactly what he wished to achieve, no more or less…with less fuss than either his father or
his son, each of whom spent considerable time foreseeing troubles that never happened.”5

  Al’s wife, the beautiful, witty Florence “Toody” Russell, came from another clan raised on duty and moral rectitude, an enterprising family of New England intellectuals known for what Charlie referred to as “plenty of plain living and high thinking.” When she announced she was marrying Al Munger, her elderly grandmother observed his thick spectacles and five-foot, five-and-a-half-inch frame and was flabbergasted. “Whoever would have thought she had the sense?” she supposedly exclaimed.

  Al and Toody Munger had three children: Charles, Carol, and Mary. A photograph of Charlie as an infant shows him already wearing the petulant expression so typical of him later in life. At Dundee Elementary School, his most prominent features were a pair of huge elfin ears and, when he chose to reveal it, a broad smile. He was recognized as intelligent, “lively,” and “too independent-minded to bow down to meet certain teachers’ expectations,” according to his sister Carol Estabrook.6 “Smart, and a smarty,” is how the Mungers’ neighbor Dorothy Davis recalls Charlie from his earliest childhood.7 Mrs. Davis tried to control Charlie’s influence on her son, Neal, but nothing tamed Charlie’s mouth, not even the sight of her with a switch in her hand, coming after the boys to lash their bare calves.

  Warren had borne the indignities of childhood with only brief rebellion before learning to hide his misery and adopt artful strategies to cope. Too proud to submit, Charlie suffered through the woes of youth by employing his talent for wounding sarcasm. Matched as a dance partner every single Friday at Addie Fogg’s dance class with Mary McArthur, the only girl shorter than he, Charlie made no secret of his irritation at the routine that emphasized his status as the second-shortest child in the class.8 At Central High School, he gained the nickname “Brains” and a reputation for hyperactiveness—and for being aloof.9