From a family that treasured learning, he grew up intellectually ambitious and enrolled in the University of Michigan at seventeen, majoring in mathematics. He enlisted in the Army a year after Pearl Harbor, halfway through his sophomore year. While in the service he attended the University of New Mexico and California Institute of Technology for credits in meteorology, though he never actually graduated. After more coursework he worked in Nome, Alaska, as an Army meteorologist. Later, Munger would make a point of saying that he never saw active duty and would emphasize his luck in having been stationed out of harm’s way. The main risk that he took was financial: He augmented his army pay by playing poker. He found he was good at it. It turned out to be his version of the racetrack. He said he learned to fold fast when odds were bad and bet heavily when they were good, lessons he would use to advantage later in life.
With the help of well-oiled family connections, he brazened his way into Harvard Law School after the war without ever having finished his undergraduate degree.10 By then he was married to Nancy Huggins, an impulsive match entered into when he was twenty-one and she nineteen. He had sprouted into a medium-height, well-dressed young man whose close-cut dark hair and alert eyes gave him a polished look. But his most prominent feature—apart from his ears, now only slightly winged from his skull—was a hallmark skeptical expression. He wore it often while racing through Harvard—without learning anything, he says.11 Then, he later told his friends, he looked at a map and asked himself, “What city is growing and full of opportunity, so that I could make a lot of money, but not so big and well developed that it would be hard to rise into the ranks of the city’s prominent men?” He chose Los Angeles.12 Pasadena—the gracious old Spanish-flavored Los Angeles suburb where he had attended Caltech—had impressed him. It was there that he had met his wife, the daughter of a locally prominent family. Nancy was “willful, indulged,” says her daughter Molly, not exactly ideal traits given her new husband’s temperament.13 Within a few years their marriage was in trouble. Nonetheless, after Harvard they hightailed it back to her hometown, with their son, Teddy, and settled in Pasadena, where Charlie became a successful lawyer.
By 1953, after three children and eight years of incompatibility, fighting, and misery, Munger found himself divorcing at a time when divorce was a disgrace. Despite their problems, he and Nancy worked out a civilized arrangement regarding their son and two daughters. Munger moved into a room at the University Club, bought a dented yellow Pontiac with a bad paint job “to discourage gold diggers,” and became a devoted Saturday father.14 Then, within a year of the separation, Teddy, now eight years old, was diagnosed with leukemia. Munger and his ex-wife scoured the medical community but quickly discovered the disease was incurable. They sat in the leukemia ward with the other parents and grandparents in different stages of watching their children waste away.15
Teddy was in and out of the hospital often. Charlie would visit, hold him in his arms, then walk the streets of Pasadena, crying for his son. He found the combination of his failed marriage and his son’s terminal illness almost unbearable. The loneliness of living as a divorced single father in the 1950s also chafed at him. He felt a failure without an intact family, and wanted to live surrounded by children.
When things went wrong, Munger would set out toward new goals rather than let himself dwell on the negative.16 That could come across as pragmatic, or even callous, but he viewed it as keeping the horizon in sight. “You should never, when facing some unbelievable tragedy, let one tragedy increase into two or three through your failure of will,” he would later say.17
So even as he cared for his dying son, Munger decided to marry again. His method of analyzing the odds of a successful match made him pessimistic, however.
“Charlie was despairing over whether he would ever meet anyone else. ‘How can I find somebody? Out of twenty million people in California, half are women. Of these ten million, only two million are of an appropriate age. From that group, a million and a half would be married, leaving five hundred thousand. Three hundred thousand of them are too dumb, fifty thousand are too smart, and of the remaining hundred fifty thousand, the number I would want to marry would fit on a basketball court. I’ve got to find one of those. And then I’ve got to be on her basketball court.’”
Munger’s mental habit of setting low expectations was well established. He equated this with the route to happiness, since he felt that high expectations led to fault-finding. Low expectations made it harder to be disappointed. Paradoxically, however, they could also confound success.
Out of desperation, Munger started reviewing divorce and death notices to find newly single women. That got his friends’ attention. Thinking this pathetic, they began to intervene. One of his law partners came up with another Nancy, a divorcée with two young boys. Nancy Barry Borthwick, a petite brunette, played tennis avidly, skied, and golfed. She was also a Phi Beta Kappa economics graduate of Stanford.
On their first date he warned her, “I’m didactic.” The thought of a man infected by the urge to preach failed to put Nancy off, which augured well for their relationship. They started taking their children on outings. At first Teddy went along with them, but he soon became too ill. Later, thirty-one-year-old Charlie spent much of his son’s final weeks sitting by Teddy’s bedside. By the time Teddy died in 1955 at age nine, Charlie had lost between ten and fifteen pounds. “I can’t imagine any experience in life worse than losing a child inch by inch,” he said later.18
Charlie married Nancy Borthwick in January 1956. She quickly became his ballast. He desperately needed someone to arrange his life. Nancy had moxie, pricking Charlie’s balloon without hesitation when it inflated with too much hot air. She was an excellent manager, observant, calm, reasonable, and practical. Nancy curbed his caprices when Charlie took off on occasional bolts of impulsiveness. In time, they added three sons and a daughter to his two girls and her two boys. She set about raising eight children while keeping house and taking care of Charlie.19 He became known to his children as a “book with legs,” constantly studying science and the achievements of great men. Meanwhile, he continued seeking his fortune at the law firm of Musick, Peeler & Garrett, but realized that the law would not make him rich. He began to develop some profitable sidelines. “Charlie, as a very young lawyer, was probably getting $20 an hour. He thought to himself, ‘Who’s my most valuable client?’ And he decided it was himself. So he decided to sell himself an hour each day. He did it early in the morning, working on these construction projects and real estate deals. Everybody should do this, be the client, and then work for other people, too, and sell yourself an hour a day.”
“I had a considerable passion to get rich,” Munger said. “Not because I wanted Ferraris—I wanted the independence. I desperately wanted it. I thought it was undignified to have to send invoices to other people. I don’t know where I got that notion from, but I had it.”20 He saw himself as the gentleman squire. Money wasn’t a competition to him. He wanted to join the right clubs but he didn’t care whether the other members were richer than him. Beneath the surface arrogance, his deep respect for authentic achievement gave him a genuine humility that would be crucial in forming a relationship with the man he was about to meet.
That man who sat across from him in a private room of the Omaha Club and started to talk was dressed like a youngish salesman come to sell insurance to the gentleman squire. The worldly Munger by now was well ensconced in Los Angeles business and society, and looked the part. As soon as the Davises and Seemans had made the introductions, however, the two fell into a tête-à-tête. Charlie allowed that he had actually “slaved” a short stint at the Buffett grocery store, where “you were just goddamn busy from the first hour of morning until night.”21 Ernest had let the sons of favored customers like Toody Munger loaf, however, at least compared to the rest of the beleaguered clerks.22 After the pleasantries, the conversation picked up speed and the rest of the party listened, rapt, as Warren began to talk about in
vesting and Ben Graham. Charlie grasped the concepts right away. “He had spent plenty of time thinking about investing and business by then,” Buffett says.
He told Charlie the story of National American insurance. Munger had gone to Central High with Howard and Hayden Ahmanson. He was amazed that someone like Buffett, who was not from California, could know so much about the Ahmansons and their savings and loan. Before long, the two men were talking simultaneously, yet they seemed to understand each other perfectly.23 After a while, Charlie asked, “Warren, what do you do specifically?”
Well, I’ve got these partnerships, Buffett explained, and I do this, and this, and that. In 1957, he said, his partnerships had earned over ten percent in a year when the market had declined over eight percent. The next year the partnerships’ investments had risen more than forty percent in value.24 Buffett’s fees so far from managing the partnerships, reinvested, came to $83,085. These fees had mushroomed his initial contribution of only $700—$100 contributed to each of the seven partnerships25—into a stake worth 9.5 percent of the combined value of all the partnerships. Moreover, his performance was well on its way to beating the Dow again in 1959, which would make him richer still and raise his stake again. Meanwhile, his investors were thrilled; new partners kept joining. Charlie listened. Eventually he asked, “Do you think that I could do something like that out in California?” Warren paused for a moment and looked at him. This was an unconventional question coming from a successful Los Angeles lawyer. “Yeah,” he said, “I’m quite sure you could do it.”26 As the luncheon wound its way to an end, the Seemans and the Davises decided it was time to go. When they got on the elevator, their last sight was of Buffett and Munger, still sitting at the table, engrossed.27
A few nights later, the two men took their wives to Johnny’s Café, a red-velvet steak joint, where Munger became so self-intoxicated at one of his own jokes that he slipped out of the booth and began rolling on the floor with laughter. When the Mungers returned to Los Angeles, the conversation continued in installments, the two men talking on the phone for an hour or two with increasing frequency. Buffett, once obsessed with Ping-Pong, had found something far more interesting.
“Why are you paying so much attention to him?” Nancy asked her husband.
“You don’t understand,” said Charlie. “That is no ordinary human being.”28
24
The Locomotive
New York City and Omaha • 1958–1962
Warren and Susie seemed like ordinary people. They kept a low profile. Their house was large but not ostentatious. It had a log cabin in the backyard for the kids. The back door was never locked; neighborhood children wandered in and out. Inside the house, the Buffetts clickety-clacked on their different tracks at gathering speed. As Susie added stop after stop to her local schedule, Warren headed out on a nonstop trip to Dollar Mountain.
Until 1958, his straightforward route was to buy a stock and wait for the cigar butt to light. Then he usually sold the stock, sometimes with regret, to buy another he wanted more, his ambitions limited by his partnerships’ capital.
Now, however, he was managing more than $1 million in seven partnerships plus Buffett & Buffett and his personal money,1 which let him operate on a different scale. His network of business pals like Stanback, Knapp, Brandt, Cowin, Schloss, and Ruane had grown by the addition of Munger; the two of them ran up outrageous—by their standards—phone bills every month. Munger had introduced him to his friend Roy Tolles, a lanky former Marine fighter pilot who wore a constant placid smile and kept the thoughts inside his quick mind to himself—except for the occasional barbed zingers he had a way of throwing out, which made people “want to keep a few Band-Aids around,” as one friend put it. Buffett, like Munger, could parry and riposte with the best, and added Tolles to his collection. This knack for signing up volunteers to his cause had created a large, if loosely organized, support structure. Warren more or less automatically Tom-Sawyered these supporters, hived off into several cells, into helping his interests, which had grown so fast that he could no longer carry out every detail of them by himself.
The days when Warren simply sat in his study at home, picking stocks out of Security Analysis or the Moody’s Manuals, were gone. Increasingly, he began to work on large-scale, lucrative projects that required time and planning to execute—even more so than buying up the shares of National American insurance. These projects would sometimes evolve into complicated, even dramatic episodes that would absorb his attention for months, or occasionally years, at a stretch. Sometimes several of these investing projects operated simultaneously. Already preoccupied to the point that he was barely present to his family much of the time, this expansion of scale would exacerbate that tendency, while binding him more tightly to his friends.
The first of these complicated episodes involved a company called Sanborn Map. It published minutely detailed maps of power lines, water mains, driveways, building engineering, roof composition, and emergency stairwells for all the cities of the United States, maps that were mainly bought by insurance companies.2 The business was no winner, its customer base slowly shrinking as insurers merged. But its stock was cheap at $45 per share, since Sanborn’s investment portfolio alone was worth $65 per share. To get hold of that investment portfolio, however, Warren needed not just money from his partnerships but also help from other people.
Beginning in November 1958, he put more than one-third of the partnerships’ assets into Sanborn. He bought the stock for himself and for Susie. He had his aunt Alice, his father, his mother, his sisters, all buy it. He passed the Sanborn idea along to Cowin, to Stanback, to Knapp, and to Schloss. Some people got in on it as a favor from him. He took an override—a percentage of the profits—from others as a way of leveraging his capital. To get more shares under his control, he added Don Danly, his pinball-and-pilferage pal from high school; his father’s best friend, Vic Spittler; Dottie’s husband, Homer Rogers; and Howard Browne, the head of Tweedy, Browne and Reilly, the brokerage firm where Tom Knapp worked. He also put Catherine Elberfeld and Anne Gottschaldt, the aunt and mother of his friend Fred Kuhlken, into the stock. Since he had still not brought Gottschaldt and Elberfeld into a partnership, this strongly suggested that he thought Sanborn was a sure thing. Eventually he controlled enough of Sanborn’s shares to be elected to the board.
In March 1959, Warren took one of his regular trips to New York, staying out on Long Island at Anne Gottschaldt’s little white colonial house. By now she and her sister had adopted him as a sort of surrogate son, as if to replace the long-dead Fred. Warren kept spare sets of underwear and pajamas at her house, and Gottschaldt made him hamburgers for breakfast. On these journeys, he always set out with a list of between ten and thirty things he wanted to accomplish. He would go to the Standard & Poor’s library to look up some information. He would visit some companies, visit some brokers, and always spend time with Brandt, Cowin, Schloss, Knapp, and Ruane, his New York City network.
This particular trip was lengthy, about ten days. He had sit-downs with prospects for the partnership and another important appointment: his first meeting as a board member at Sanborn Map.
Sanborn’s board consisted almost entirely of insurance-company representatives—its biggest customers—so it operated more like a club than a business, except that the board meeting wasn’t followed by a round of golf. None of the board members owned more than token amounts of stock.3 At the meeting, Warren proposed that the company distribute the investments to the shareholders. But since the Depression and World War II, American businesses treated money as a scarce commodity to be hoarded and husbanded. This way of thinking had become automatic, its underlying premise unexamined, even though the economic justification for it had long disappeared. The board responded to the idea of separating the investment portfolio from the map business as preposterous. Then, toward the end of the meeting, the board broke out the humidor and passed around cigars. While they smoked, Warren sat fuming. “That’s m
y money paying for those cigars,” he thought. On the way back to the airport, he took pictures of his children out of his wallet and looked at them to bring his blood pressure down.
Frustrated, Warren decided that he would take the company away from Sanborn’s undeserving board on behalf of the other shareholders. They deserved it more. Therefore, Buffett’s group—Fred Stanback, Walter Schloss, Alice Buffett, Dan Cowin, Henry Brandt, Catherine Elberfeld, Anne Gottschaldt, and some of the others—kept buying. Warren also used new money coming into the partnerships. He had Howard put a number of his brokerage clients into Sanborn. Warren was probably doing his father a financial favor, even as he tightened his grip on the company.
Before long, people friendly to Warren, including the famous money manager Phil Carret, who had bought Greif Bros. and Cleveland’s Worst Mill after hearing of these stocks through Warren, had corralled about 24,000 shares. Once they had effective control, Warren decided it was time to act. The stock market was high, and he wanted Sanborn to unload its investments at an opportune time. Booz Allen Hamilton, the company’s strategic consultants, had already submitted a plan to do this,4 but the sticking point was taxes. If Sanborn sold the investments, it would have to pay a tax bill of about $2 million. Warren offered a solution similar to the Rockwood & Co. tax trick of swapping the investments, tax-free, for stock.
Another board meeting took place at which nothing happened except for more of the investors’ money going up in cigar smoke. For a second time Buffett rode back to the airport looking at pictures of his kids to calm himself down. Three days later, he threatened to call a special meeting and take control of the company unless the directors took action by October 31.5 His patience had run out.
The Snowball Page 29