The Snowball

by Alice Schroeder

  Now the board had no choice. It agreed to split the two businesses. Even so, the issue remained of how to deal with the tax. One of the insurance men said, “Let’s just swallow the tax.”

  “And I said, ‘Wait a minute. Let’s—“Let’s” is a contraction. It means “let us.” Who is this us? If everyone around the table wants to do it per capita, that’s fine, but if you want to do it in a ratio of shares owned, and you get ten shares’ worth of tax and I get twenty-four thousand shares’ worth, forget it.’ He was talking about swallowing two million dollars’ worth of tax just because he didn’t want to go to the trouble of doing the share buyback.6 I remember the cigars getting passed around. I was paying for thirty percent of every one of those cigars. I was the only guy not smoking cigars. They should have paid for a third of my bubble gum.”

  In the end, however, the board capitulated. Thus, through force of energy, organization, and will, early in 1960 Warren won the fight. Sanborn made a Rockwood-type offer to shareholders, exchanging a portion of the investment portfolio for stock.7

  The Sanborn deal set a new high-water mark: Buffett could use his brains and his partnerships’ money to alter the course of even a stubborn and unwilling company.

  During this episode, as Buffett traveled back and forth to New York and worked on the Sanborn project, figuring out where to get the stock he needed for control, how to make the board fall in line, and how not to swallow the tax, all the while looking for other investment ideas, his mind whirled with the thousands of numbers that clicked and spun inside his head. At home, he would disappear upstairs to do his reading and thinking.

  Susie understood his work as a sort of holy mission. Still, she tried to get him out of his study and into the family’s world: scheduled outings, vacations, dinners in restaurants. She had a saying: “Anyone can be a father, but you have to be a daddy too.”8 Yet she was talking to someone who’d never had the kind of daddy to which she was referring. “Let’s go to Bronco’s,” she would say, and stuff a gang of neighborhood kids into the car for a burger run. At the table, Warren would laugh when something funny happened and would appear engaged, but he rarely spoke. His mind could have been anywhere.9 On vacation once in California, he took a bunch of kids to Disneyland one night and sat on a bench reading while the kids ran wild and had a grand time.10

  Peter was now almost two, Howie five, and Little Sooz—who occupied her own pink checked-gingham kingdom with a canopy bed up a separate flight of stairs—six and a half. Howie tested his parents with destruction to see how much it took to get a reaction from them. He picked on Peter, who was slow to start talking, prodding him as if he were a science experiment to see how he would respond.11 Little Susie policed them both to keep things under control. She started figuring out ways to get back at Howie, once telling him to stick holes with a fork around the bottom of a milk carton. While Howie was enjoying the sight of milk spurting all over the kitchen table, she ran upstairs, crying, “Mommmmmm, Howie’s being bad again!”12 Warren simply turned to Susie to cope with their son’s explosive energy. And Howie remembers that his mother almost “never got angry, and was always supportive.”13

  Susie juggled all this while playing the part of the standard-issue upper-middle-class wife circa 1960: appearing every day in her trademark look, a tailored dress or pantsuit, often in sunshine yellow, and a lacquered bouffant wig; taking perfect care of her husband and family; becoming a community leader; and gracefully entertaining her husband’s business associates as if this required no more effort than tossing a Swanson TV Dinner into the oven. Warren let her hire help, and soon a series of au pairs took up residence in an airy, light-filled room with its own bath on the second floor. Letha Clark, the new housekeeper, assumed some of the burden. Susie often started her day around noon by hosting a charity luncheon. After school, she shuttled Little Susie to Blue Birds. She would always describe herself as a simple person, but she steadily added layers of complexity to her life. She was setting up a group called the Volunteer Bureau14 to do office work and teach swimming at the University of Omaha. “You, too, can be a Paul Revere” was its motto, invoking an image of one individual saving an entire nation through his (or her) daring and self-sacrificing deeds.

  Susie—like Paul Revere—was impatient to mount and ride;15 she dashed back and forth between family obligations and the growing number of people who wanted her attention. Many of these were disadvantaged or traumatized in some way.

  Her closest friend, Bella Eisenberg, was an Auschwitz survivor who had made her way to America and Omaha after the camp was liberated. She thought of Susie as someone you could call at four o’clock in the morning when the demons got hold of you.16 Another, Eunice Denenberg, was only a child when she found her father after he hanged himself. Rarest of all among well-off white families, the Buffetts had black friends, including the most intimidating pitcher in baseball, Bob Gibson, and his wife, Charlene. Being a star athlete meant little in 1960 if you were black. “Those were the days when white people wouldn’t be seen with black people in Omaha,” says Buffett’s childhood friend Byron Swanson.17

  Susie reached out to everyone; in fact, the more troubled the person, the more willingly she helped. She took a deep interest in the personal lives of people she barely knew. Warren recalls an incident when he left her on line at a concession stand during a football game. By the time he returned from the men’s room a few minutes later, the woman standing on line next to Susie was saying to her, “Now, I’ve never told anybody this before in my life…” as Susie listened, appearing fascinated. Almost everyone she met glowed under this kind of attention and felt touched by the encounter. But even with her closest friends, Susie nearly always took care not to share her own problems.

  She played the same role of ministering angel with her own family, above all with her sister. Dottie, who was musical like Susie, had founded the Opera Guild, and remained the beauty of the family, but seemed vacant and, as one person put it, “valiantly unhappy.” She maintained a pleasant surface but told Susie that she never cried because if she ever started, she would never stop. Homer, her husband, appeared frustrated that he could not penetrate his wife’s cocoon. Still, the Rogerses kept up their vigorous social schedule, and at night, amid the drinks and merriment, their two young sons roamed underfoot. At times, Homer punished them harshly or Dottie teased Billy cruelly—so Susie mothered her nephews along with her own children.

  She also helped the senior Buffetts, who were saddled with both Howard’s health issues and his ideology. Just as the rest of America had caught up to his level of paranoia about Communism, Howard leapfrogged ahead. By the late Eisenhower years, Americans felt their country, grown soft and fat in its prosperity, was losing the arms race and were haunted by the frightening image of Premier Nikita Khrushchev banging his shoe on a table at the United Nations and thundering “We will bury you.” All 180 million Americans ducked-and-covered in air-raid drills, the youngest crouched under their elementary-school desks. More than one billion people were now living under Communism in almost twenty countries around the globe. The rapid advance of Communism over such a broad swath of the world stunned much of the nation. Howard joined a newly formed group, the John Birch Society, which combined paranoia about Communism with what he described as concern for the “moral and spiritual problem of America, which would be with us even if Communism were stopped tomorrow.”18 He covered his office walls with maps showing the menacing red advance of Communism. He and Doris helped bring the Christian Anti-Communist Crusade to Omaha19 and threw themselves behind a movement of ideological conservatives that was coalescing around Arizona Senator Barry Goldwater. Howard was respected as a philosophical purist among the libertarian-leaning wing of the Republican Party, but anyone associated with the Birchers attracted both alarm and ridicule. After he went to the local press to defend his Birch membership, people increasingly wrote him off as an eccentric. That Omaha snickered at his revered father was painful to Warren.

  Bu
t his anxiety on Howard’s behalf had even more to do with eighteen months of mysterious symptoms that doctors could not seem to diagnose despite a trip to the Mayo Clinic in Rochester, Minnesota.20 Finally, in May of 1958, Howard had been told he had colon cancer that required immediate surgery.21 Warren had been upset by the diagnosis, but angered by what he considered its inexcusable tardiness. Since then, Susie had shielded him from the details of his father’s illness.22 She gave him head rubs and kept up the household schedule. She also devoted herself to propping up Leila during Howard’s surgery and long recuperation. She did all of this cheerfully; not only that, she seemed to thrive as the calm, soothing presence on whom everyone could depend in this crisis. She helped her older children understand the illness and saw that all of them, including little Peter, visited their grandfather regularly. Howie watched college football in the afternoons with Howard, who would sit in his recliner and switch sides repeatedly during games, cheering for whichever team was losing. When Howie asked him why, he said, “They’re the underdogs now.” 23

  Throughout his father’s ordeal, Warren used business as a distraction. He kept his head buried in American Banker or the Oil & Gas Journal except for brief interludes when he wandered into the kitchen for some popcorn or a Pepsi from the wooden crates that only he was allowed to touch.

  Yet somehow, despite Howard’s distress and illness, the quiet, withdrawn man who was the Warren Buffett his family saw became a presence in public no matter what was going on at home. He displayed an authority, an almost electric charge of energy, that radiated to an audience. “He just used to ooze that stuff wherever he went,” says Chuck Peterson.24 The man who had so impressed Charlie Munger talked constantly and convincingly about investing and the partnerships; he raised money as fast as he could talk—but not as fast as he could invest.

  Munger listened to Buffett’s investing and money-raising exploits on their almost-daily phone calls, wondering at the natural salesmanship that enabled Buffett to promote himself so well. His trips to New York became more frequent now that Henry Brandt prospected for him. Cash poured into the partnerships’ coffers, 1960 a watershed year. Warren’s aunt Katie and uncle Fred put nearly $8,000 into Buffett Associates early in the year. Another $51,000 came into Underwood, partly through Chuck Peterson’s connections. Then, “Chuck said to me, ‘I’d like you and Susie to come to dinner and meet the Angles.’ Well, I didn’t know them. He said they’re both doctors, and real smart people.”

  Carol and Bill Angle lived across the street from Peterson. Bill Angle, a cardiologist, was a whimsical man who would stay up all night in the winter, spraying water around his front yard and making impeccably glazed snowmen, frosty replicas of his chubby self, standing next to frozen “ponds.” His wife specialized in pediatric research.

  “We picked them up and there were six of us in the car. We headed over to the Omaha Country Club. Carol Angle was a very good-looking woman, and smart. All during dinner, she couldn’t take her eyes off me. I mean, she was just fascinated. I was going crazy, talking about everything in the world and trying desperately to impress her. And she was just taking in every word.”

  After the presentation, which Peterson recalls as typically persuasive, “we left the country club and drove back. All the way in the car she still couldn’t take her eyes off me. We dropped the Angles off. And I said to Chuck, ‘I made quite an impression tonight.’ He said, ‘No, dummy. She’s deaf. She’s reading your lips.’ Since I couldn’t stop talking, she couldn’t stop looking at me.”25

  But he certainly had made an impression, for afterward the Angles hosted a dinner at the Hilltop House for a dozen doctors they knew, at which Bill Angle suggested that they form a partnership and each chip in $10,000. One doctor asked, “What happens if we lose all our money?” “Bill Angle gave him this disgusted look. And he said, ‘Well, then we form another partnership.’”

  The Emdee partnership, Buffett’s eighth, was launched on August 15, 1960, with $110,000. The twelfth doctor, the one who worried about losing all his money, did not join.

  There were other skeptics. Not everyone in Omaha liked what they heard about Warren Buffett. His secretiveness put people off. Some thought the young hotshot wouldn’t amount to anything, and believed the authority he radiated was unearned arrogance. Some resisted the idea of a nobody succeeding without kowtowing his way to the top. One member of a prominent Omaha family was lunching with half a dozen people at the Blackstone Hotel when Buffett’s name came up. “He’ll be broke in a year,” the man said. “Just give him a year and he’s gone.”26 A partner at Kirkpatrick Pettis, which Howard’s firm had merged with in 1957, said time after time, “The jury’s still out on him.”27

  That fall, the already frothy stock market took off on a tear. The economy had been slogging along in a mild recession, and the country’s mood was dark because the Soviets seemed to be winning the arms and space races. But when John F. Kennedy won the presidency in a squeaker of an election, the pending change in administrations to a man from a vigorous young generation uplifted the nation. In one of his early speeches, Kennedy set out a goal: sending a man to the moon and back. The market shot up, and once again comparisons were made to 1929. Warren had never ridden out a speculative market, yet he remained unruffled. It was as if he had been waiting for this moment. Instead of pulling back, as Graham might have done, he did something remarkable. He went into overdrive raising money for the partnerships.

  He put Bertie and her husband, his uncle George from Albuquerque, and his cousin Bill into Buffett Associates, the original partnership. Wayne Eves, his friend John Cleary’s partner, got on board too. And he finally put Fred Kulhken’s mother and aunt, Anne Gottschaldt and Catherine Elberfeld, into the partnership. Their presence suggested that he felt the timing was not just highly propitious but also safe.

  Three more people went into Underwood. Waiting for a cab in the rain after attending one of Ben Graham’s lectures in New York, Warren met Frank Matthews Jr., son of the former Secretary of the Navy before whom Vanita Mae Brown had once claimed to be married to Warren—Matthews became a partner.28 Warren set up Ann Investments, his ninth partnership, for a member of another prominent Omaha family, Elizabeth Storz. He put Mattie Topp, who owned the fanciest dress shop in town, along with her two daughters and sons-in-law and $250,000, into the tenth, Buffett-TD.

  Legally, he could take on only a hundred partners without having to register with the SEC as an investment adviser. As the partnerships burgeoned, he started encouraging people to team up informally and come in as a single partner. Eventually he would put people into pools, combining their money himself.29 He later described the tactic as questionable—but it worked. His compulsion to get more money, to make more money, drove him on. Warren was on fire, shuttling back and forth to New York at a frantic pace. He began to suffer from stress-related back pain. It often worsened when he was on an airplane, and he tried all sorts of things to alleviate it—everything but staying home.

  By now his name was passed along like a secret. Invest with Warren Buffett to get rich. But the routine had changed. By 1960 it took at least $8,000 to get in the door. And he no longer asked people to invest with him. They had to bring it up. It had to be their idea. People not only would have no inkling what he was doing, they had to put themselves in this position.*20 It converted them into enthusiasts for Buffett, and reduced the odds of their complaining about anything he did. Instead of asking a favor, he was granting one; people felt indebted to him for taking their money. Making people ask put him psychologically in charge. He would come to use this technique often, in many contexts, for the rest of his life. Along with getting him what he wanted, it seemed to soothe his persisting fears of being responsible for other people’s fates.

  Though his insecurity was rampant as ever, his success and Susie’s care and tutoring had given him a bit of polish and flair. He was starting to appear powerful, not vulnerable. Plenty of people were happy to ask him to invest for them. Buf
fett formed the eleventh and last of his partnerships, Buffett-Holland, on May 16, 1961, for Dick and Mary Holland, friends he had met through his lawyer and partner Dan Monen. When Dick Holland decided to invest in the partnership, members of his family pressured him not to do it. Buffett’s abilities were apparent to him, Holland says, even though in Omaha people were still “laughing up their sleeves” at Warren’s ambitions.30 Yet in 1959 the partnerships had outperformed the market by six percent. In 1960 they leaped to nearly $1.9 million in assets by beating the market by twenty-nine percent. Even more impressive than any single year’s profits was the compounding power of repeated growth. A thousand dollars invested in Buffett Fund, the second partnership, was now worth $2,407 four years later. Invested in the Dow Jones Industrial Average, it would have been worth just $1,426.31 More important, he accomplished this higher return while taking less risk than the market as a whole.

  And Buffett’s fees, reinvested, had by the end of 1960 earned him $243,494. More than thirteen percent of the partnerships’ assets now belonged to him alone. Yet even as his share of the partnerships increased, he had made the partners so much money that they were no longer simply happy; many regarded him with awe.

  Bill Angle, his partner in Emdee, was foremost among them. He Tom-Sawyered himself into becoming Warren’s “partner” in building a gigantic model train set with an HO gauge track on the third floor of the Buffetts’ house, which had been a ballroom in a former life and was now the family attic. Warreny, the boy who had lingered at the Brandeis store every Christmas, longing for the huge, magical model train that he couldn’t have, awoke inside the grown man. He “supervised” as Angle did all the work to create Warren’s childhood fantasy.

  Warren also tried to Tom-Sawyer Chuck Peterson into investing in it. “Warren, you must be out of your mind,” Peterson said. “Why would I want to go fifty-fifty with you on a train that you possess?” But Warren didn’t get this, so carried away was he by enthusiasm for the train and its accoutrements. “You can come over and use it,” he said. 32