The Snowball

by Alice Schroeder

  The train filled much of the former ballroom’s space. It stood on pilings, with passageways underneath so that the diorama could be viewed from inside. Three locomotives carrying long chains of cars raced along an enormous spiraling track. They rocketed past villages and dove through forests, disappeared into tunnels, climbed mountains and dipped through valleys, stopping and starting at signals, and derailing just often enough to add a thrill when Buffett switched on the engines.33

  Shining with the reflected glow of a delayed childhood, burnished with the patina of Omaha’s railroading history, the train was Warren’s totem. His children were forbidden to go near it. By now, his relentless obsession with money and obliviousness to his family were a running joke among his friends. “Warren, those are your children—you recognize them, don’t you?” people said.34 When he was not traveling, he could be found wandering through the house, nose buried in an annual report. The family swirled around him and his holy pursuit—the disengaged, silent presence, feet up in his stringy bathrobe, eyes fixed on the Wall Street Journal at the breakfast table.

  The bookkeeping and banking and safety-depositing and post-officing required for his complicated empire, which had grown to almost four million dollars, eleven partnerships, and well over a hundred investors, now became almost overwhelming. Amazingly, Warren was still handling all the money and doing all the clerical work himself: filing the tax returns, typing the letters, depositing the dividend and capital checks, stopping for a meal at the Spare Time Café along the way, stuffing the stock certificates in the safety deposit box.

  On January 1, 1962, Buffett dissolved all of the partnerships into a single entity, Buffett Partnership, Ltd.—or BPL. The partnerships had produced a stellar forty-six percent return in 1961, compared with the Dow’s twenty-two percent. After the partners invested more money that January 1, the new Buffett Partnership, Ltd., started the year with net assets of $7.2 million. In just six years, his partnerships had grown bigger than Graham-Newman. Yet when Peat, Marwick, Mitchell audited it, the auditor, Verne McKenzie, pored over the BPL files not in a conference room on Wall Street but in the alcove off Warren’s bedroom upstairs, where the two of them worked side by side.

  Even Buffett realized by now that his growing collection of files, phone bills, and stock trades had reached the limits of what he could handle working in a home office. He disliked taking on overhead, but he could afford it.

  Including his outside investments—which totaled well over half a million dollars by now—Warren had become a millionaire at age thirty.35 So he rented office space in Kiewit Plaza, a new white granite building a straight shot down Farnam Street about twenty blocks from his house and less than two miles from downtown. He and his father now shared space, a longtime goal of Warren’s, as well as a secretary. But Howard was clearly very ill. He soldiered gamely into the office with a stiff gait, making the effort. Warren’s face would shadow when he learned some new piece of ominous news about his father’s health, but mostly he tried to avoid knowing the details.

  The new secretary tried to tell Warren what to do. “She thought she was a little motherly,” he says, “in the sense of trying to steer me.”

  Nobody steered Warren Buffett. He fired her on the spot.

  But he did need help. Just before moving into Kiewit Plaza he had also hired Bill Scott, a trust officer from the U.S. National Bank who had read an article in the Commercial & Financial Chronicle that Warren had written about an obscure insurance company. Scott signed up for Buffett’s investing course, and then, he says, “I set out to suck up to him until I got a job.” Buffett started going over to the Scotts’ house on Sunday mornings after he dropped his kids off at church to talk about stocks, and eventually offered him a job.36

  Scott began to help Buffett as he herded money into the partnership as fast as the two of them could open the mail. Buffett had his mother join for the first time, along with Scott, Don Danly, and Marge Loring, the widow of Warren’s bridge partner Russ Loring, and even Fred Stanback, who had a family business and heretofore had worked with Warren only on specific ideas.37 And for the first time, Warren put his own money—all of it, almost $450,000—into the partnership.38 With that, his and Susie’s share of the partnership rose to more than a million dollars after his six years of work; together they owned fourteen percent of BPL.

  The timing was stupendous. In mid-March 1962, the market finally broke. It continued its slide until the end of June. Stocks were suddenly cheaper than they had been in many years. Buffett was now sitting on a single partnership with a huge pile of cash to invest. Its portfolio was relatively unscathed in the downturn—“Compared to more conventional (often termed conservative, which is not synonymous) methods of common stock investing, it would appear that our method involved considerably less risk,” he wrote in a letter to his partners.39 He went racing through the stock tables. He often paraphrased Graham, saying: “Be fearful when others are greedy, and greedy when others are fearful.” This was the time to be greedy.40

  25

  The Windmill War

  Omaha and Beatrice, Nebraska • 1960–1963

  In the late 1950s and the early 1960s, while Buffett wrestled with Sanborn, consolidated the partnerships, and moved into the office with his father, he embarked on another project, again some distance from Omaha. The second major orchestration of his supporting group, this was the first in which he actually took control of a company. And it would consume far more of his time and energy than had Sanborn Map.

  Dempster Mill Manufacturing, a family-run company in the worst sense of the word, made windmills and water irrigation systems in Beatrice,*21 Nebraska. This episode of Buffett’s career had started like putting a quarter in yet another slot machine to get a dollar back—or so it seemed. The stock sold for $18 a share and the company had a steadily growing book value of $72 a share. (“Book value” is the stated value of a company’s assets less what it owes—like a house less the mortgage, or cash in the bank less a credit card balance.) In the case of Dempster, the assets were windmills, irrigation equipment, and its own manufacturing plant.

  In 1958, Warren had driven out to Beatrice, a windswept prairie town that depended on Dempster as its sole important employer. He was armed with a list of nineteen questions, such as: “How many dealers does the company have?” and “During the Depression, how bad did the bad debt experience ever get?”1 After the visit he decided that the company was “well-heeled financially but not making dough.”2 Its president, Clyde Dempster, was running it into the ground.3

  Since Dempster was just another cigar butt, Warren applied his cigar-butt technique, which was to keep buying a stock as long as it continued to sell below book value. If the price rose for any reason, he could sell out at a profit. If it didn’t, and he ended up buying until he owned so much stock that he controlled the company, he could sell off—that is, liquidate—its assets at a profit.4

  As with Sanborn, Buffett couldn’t afford as much of Dempster as he wanted. He called Walter Schloss and Tom Knapp, and said, “I want you to go thirds with me.”5 Over several years, the trio got hold of eleven percent of the stock—second only to the Dempster family—and Warren joined the board. In early 1960, the board hired Lee Dimon, formerly purchasing manager of Minneapolis Molding Co., as Dempster’s general manager, over Buffett’s reservations.6 Buffett maneuvered Clyde Dempster into a figurehead role and continued buying stock.7 He wanted every share that he could lay his hands on. He rang up Schloss in New York and said, “Walter, I want to buy your stock.”

  “Gee, I don’t want to sell it to you,” said Schloss. “You know, it’s a nice little company.”

  “Look, I’m doing all the work on this idea. I’d like your stock,” said Buffett.

  “Warren, you’re a friend of mine. If you want it—take it,” said Schloss.8

  In the adult version of absconding with Doris’s bicycle, Buffett took it. He had a weakness: If he felt he needed something, he needed it, and that need mus
t be satisfied. He did this, however, without any apparent malice or arrogance. If anything, it was the opposite; he was just so terribly needy. People like Schloss generally gave in to him because they liked him, and besides, whatever it was he wanted, he obviously seemed to feel he needed it more than they did.

  As he gained more stock, Buffett also bought out the Dempster family. With that transaction, he achieved control, eased out Clyde Dempster, and made an offer to all other shareholders on the same terms.9

  Here Buffett was treading on tricky ground. As chairman, he felt he could not rightly urge other investors to sell when he was buying. He even bent over backward to warn them that he thought Dempster stock would do well. Nevertheless, money and human nature could be counted on to do their job. People convinced themselves that they would rather have the cash than a thinly traded stock of dubious value. Soon, therefore, Dempster made up twenty-one percent of the partnership’s assets.

  In July 1961, Warren wrote his partners that the partnership had invested in a nameless company that might prove to be “a deterrent to short-range performance, but it gives strong promise of superior results over a several-year period.”10 He named Dempster, which the partnership now controlled, and wrote a little sermon about it in his January 1962 letter, explaining Ben Graham’s philosophy of cigar butts.11 The “deterrent to short-range performance” part would prove more prescient than he expected.

  During 1962, Buffett coached Lee Dimon and tried to explain to him how to manage inventory. But Dimon seemed to think he could just keep buying windmill parts no matter how many windmills Dempster sold. As a former purchasing manager, he knew how to purchase—so he did. The warehouse bulged with windmill parts12 as Dempster sucked up cash. By early 1962, the company’s bank prepared to seize the inventory as security for its loan, then grew alarmed enough to make noises about shutting Dempster down.

  Buffett was looking at only a few months before it all caved in and he would have to report to the partners that a business into which he had sunk a million dollars of their money was broke. He tried to recruit his old Columbia friend Bob Dunn to leave his job at U.S. Steel, move to Beatrice, and run Dempster. Dunn actually made a trip out to Beatrice but in the end wasn’t interested. Buffett rarely asked advice, but finally that April he took the situation up with his friend Munger while he and Susie were visiting Los Angeles.

  “We were going to dinner with the Grahams and the Mungers, Susie and I. We met them at the Captain’s Table on El Segundo in L.A. During the dinner, I’m telling Charlie, ‘I’m in this mess with this company; I’ve got this jerk running Dempster, and the inventories keep going up and up.’” Munger, who dissected his law clients’ businesses and thought like a manager, said immediately, “Well, I know this guy that used to bring around tough situations out here. Harry Bottle.” He knew of Bottle through an acquaintance who specialized in business turnarounds.

  Six days later, lured by a $50,000 sign-on bonus, Harry Bottle was in Beatrice. This meant that for the second time—counting the motherly secretary—Buffett had to fire someone. He already knew from that experience that he hated firing people. Not only that, Dempster was the only major business in town, and he had heard through the board that, upon Dimon’s appointment to general manager, his wife had crowned herself queen of Beatrice.

  Buffett dreaded confrontation. His first instinct was to avoid it, and he ran like a singed cat if anyone threatened to explode at him the way his mother had. But he had also learned to shut down emotionally in the face of a possible eruption. The trick, he felt, was “to create a shell around yourself with respect to that, without creating a shell that extends beyond” the situation, to keep from becoming a hardened person.

  Whatever happened when he fired Lee Dimon, Harriett Dimon afterward wrote Warren a letter in which she accused him of being “abrupt and unethical,” and, through his coldness, of destroying her husband’s confidence. Buffett, at almost thirty-two, had not yet learned to fire people with empathy.

  Within days he sent his new employee Bill Scott over to Beatrice to help Harry Bottle rummage around the parts department and decide what to toss out and what to reprice.13 They swept through the place like a swarm of boll weevils and slashed inventory, sold off equipment, closed five branches, raised prices for repair parts, and shut down unprofitable product lines. They laid off a hundred people. This extensive shrinkage of the business by its new out-of-town management on the heels of the firing prompted the townspeople of Beatrice to eye Buffett with increasing distrust, suspecting that he was a ruthless liquidator.

  By year-end 1962, Bottle had pulled Dempster into the black. In his January 1963 letter to partners, Buffett called Dempster the high point of the year, and named Harry Bottle the man of the year.14 He estimated the value of the company, worth $35 per share a year earlier, at $51 per share. The bank was happy. As the assets were sold and the inventory whittled, Dempster piled up about $2 million in cash, worth $15 per share. Meanwhile, Buffett had borrowed—another $20 against each share to have funds to invest. With that, Dempster’s investment portfolio was as large as the rest of the partnership’s.

  Now Buffett was faced with a Sanborn-type problem. Ironically, he had become one of those executives with a cash hoard. The market had rebounded smartly from its lows of June 1962. Trying to use Dempster’s extra money, he sent Bottle and Scott to upstate New York to see a manufacturing plant of the Oval Wood Dish Company, which made Popsicle sticks, wooden spoons, and the like, but didn’t buy it.15 Buffett tried to sell Dempster privately but found no takers at his price, so in August he notified the shareholders that the company was for sale, and ran an ad in the Wall Street Journal:

  Profitable Manufacturing Company for Sale

  …Company is a leading farm equipment, fertilizer applicating equipment and water systems manufacturer. [Dempster] will be sold as a going concern at a public sale on September 30, 1963, subject to a negotiated sale until Sept. 13, 1963…. Contact, Mr. Harry T. Bottle, President.

  He gave buyers a month to get their bids in before the public auction. He had already been talking to most of the obvious candidates.

  Beatrice went berserk at the thought of another new owner that might impose layoffs or a plant closing on its biggest and virtually only employer. In the postwar boom, plants opened, they didn’t close. Less than a quarter century after the end of the Great Depression, the prospect of mass unemployment brought back haunting memories of gray-faced men in soup lines, drifters wearing patched coats, a quarter of the nation unemployed, hunger and malnutrition, demeaning government make-work jobs.

  The people of Beatrice pulled out the pitchforks.16 Buffett was shocked. He had saved a dying company. Didn’t they understand that? Without him, Dempster would have gone under.17 He had not expected the ferocity, the personal vitriol. He had no idea that they would hate him.

  The townspeople launched a crusade to foil Buffett by raising nearly $3 million to keep the ownership in Beatrice.18 Day by day the Beatrice Daily Sun breathlessly counted down to the deadline as the town fought to save its only factory. The day of the deadline, fire sirens sounded and bells rang out as the mayor stepped to a microphone and announced that Buffett had been defeated; Charles B. Dempster, grandson of the company’s founder, headed an investor group that pledged to keep the plant open.19 Cash in hand, Buffett handed out more than $2 million to his shareholders.20 But the experience scarred him. Instead of becoming toughened against animosity, he vowed never to let it happen again. He couldn’t take a whole town hating him.

  One day not long after, Buffett called Walter Schloss, saying, “You know, Walter, I have these small positions in five different companies, and I’ll sell them to you.” These were Jeddo-Highland Coal, Merchants National Property, Vermont Marble, Genesee & Wyoming Railroad, and another whose name is lost in time. “Well, what price would you want, Warren?” Schloss asked. “I’ll sell them to you at the price that I’m carrying them at,” Buffett said. “Okay, I’ll buy them from
you,” said Schloss immediately.

  “I didn’t say, ‘Well, you know, you have to look up each one and check what it’s worth,’” Schloss says. “I trusted Warren. If I had said, ‘Well, I can buy it for ninety percent of what you’re carrying it at,’ Warren would have said—‘Forget it!’ I did him a favor, so he wanted to do me one too. If he had also made a profit, then that was fine. And they all worked out brilliantly. I felt that it was his way of saying thank you for selling me your Dempster stock. I don’t say that’s the reason, but that’s what I mean by being an honest guy.”

  26

  Haystacks of Gold

  Omaha and California • 1963–1964

  Warren may have said he wanted to become a millionaire, but he never said that he would stop there. Later he would describe himself during this period as “a lousy sport at doing anything I didn’t want to do.” What he wanted to do was invest. His children now ranged from five to ten years old, and one friend described Susie as “sort of a single mother.” Warren would show up at school events or toss around a football if asked, but he never initiated a game. He seemed too preoccupied to notice his children’s longing for attention. Susie taught the children that his special mission must be respected; she told them, “He can only be so much, so don’t expect any more from him.” That applied to her, too; Warren was obviously devoted to his wife, and showed that in public, caressing “Susan-o” affectionately and recounting tender, funny variations of how she, the gentle angel, had stooped to marry him, the ukulele-playing financial prodigy who was a secret wreck. At the same time he was so used to her attention and remained so undomesticated that once, when she was nauseous and asked him to bring her a basin, he came back with a colander. She pointed out the holes; he rattled around in the kitchen and returned triumphantly bearing the colander on a cookie sheet. After that, she knew it was hopeless.