The Snowball

by Alice Schroeder

  Yet the predictability of Warren’s habits gave a certain stability to the Buffett household, as Susie’s come-on-in, take-a-number atmosphere unfolded around them. In the evenings he reenacted his own father’s routine, arriving at the same time every night, slamming the door from the garage, and yelling, “I’m home!” before heading to the living room to read the newspaper. He wasn’t uncaring, and he was often available. But in conversation his words often had a subtly prepared, even rehearsed quality. He was always one step ahead. Whatever went on inside his mind took place between the lines; it came through in the silences, the flashes of wit, the tremulous flight from certain topics of conversation. His feelings danced behind so many veils that even he seemed unaware of them most of the time.

  Susie herself was less available these days. Like her father, she stayed busy and surrounded by people; she avoided being alone and unoccupied. She was vice president of the theater guild and involved with United Community Services. She shopped and dined with her large group of women friends, spending far more time with those in the Jewish and black communities than among white socialites.

  Susie was becoming prominent among a group of Omaha women who were passionate civil-rights supporters. The battle to end segregation in employment and public facilities, and to remove obstacles to voting rights, was accelerating around the country. She helped organize the Omaha branch of the Panel of Americans, a speakers’ bureau that sent one Jew, one Catholic, one white Protestant, and one black Protestant to talk to civic groups, churches, and other organizations about their experiences. The panel was a way of trying to bring people together; one of Susie’s friends satirized her role on it as “to apologize for being a WASP.” The panel members answered audience questions such as: Why would a Negro want to move to a different part of town? Are any of you prejudiced against one another? Do Jews believe that Christ has been or that He is still coming? Don’t you think that sit-ins are just stirring up trouble? At a time when “Negroes” could not use public “white only” restrooms throughout much of the South, the sight of a black woman sitting as an equal on the same stage as white women stirred the audiences.1

  In the afternoons, often with Susie Jr. in tow, Susie shot back and forth to meetings and committees on the north side of town, trying to tackle the city’s worst problem: dilapidated housing and abysmal living conditions in the ghetto.2 The police stopped her several times. “Why are you in this neighborhood?” they’d ask.

  “Honey,” the fretful Doc Thompson told Susie Jr., “your mother is going to get killed.” He made her carry a police whistle when she rode with her mother. “Honey, you’re going to get kidnapped,” he said.3

  Susie’s role as problem-solver and emotional carpet-sweeper meant that people thought of calling her whenever there was trouble, of any kind. She had referred to Warren as her “first patient,”4 and there were others. She stepped in more often now to manage Dottie’s life as her sister’s ability to cope declined and her drinking increased. She counseled Doris through her divorce from Truman and gave her a copy of a book, Viktor Frankl’s Man’s Search for Meaning, that Doris turned to again and again looking for hope amid misery.5 For several days, Susie housed an Ethiopian student whom her friend Sue Brownlee was sponsoring in Omaha because Brownlee’s father was visiting, and he would have been horrified at a “black woman sleeping in his bed.”6 As a cultural experience for the family, Susie arranged for an Egyptian exchange student who was attending the University of Omaha to move in with them for a semester.7 Outside of Warren’s study, the Buffetts’ home was never a refuge from the world, and opportunities for solitude were rare. Yet despite the freewheeling atmosphere, the children were growing up with a balance of freedom and discipline, strong ethical principles instilled by both parents, an excellent education, and an emphasis on enriching experiences. Warren and Susie had many long conversations about how to bring up children in a rich family so that they became self-sufficient rather than feeling entitled.

  What the children lacked was attention. Their father was almost exclusively focused on work. Their mother was like a gardener with too many tomato plants, running with her watering can toward whoever was neediest at any given time. The children responded to this upbringing in their different ways. The older Little Susie got, the fewer overtures she made for her mother’s attention and the more authority she assumed over her brothers. She also worked as a crossing guard on the busy street outside their house, and spent much of her time with her own friends.8

  Howie, the tornado, tunneled through the backyard, leaped off the banisters, hung from the curtains, and tore through the house. Every day was April Fool’s Day. He dumped a bucket of water from the roof onto Phyllis the babysitter. Everybody knew it wasn’t safe to drink a glass of anything he handed them. But he was also easily wounded, tenderhearted like his mother, and burdened by a need for attention that outstripped her supply. When Susie reached her limit, she sometimes locked Howie in his room.9

  Peter, who was naturally quiet, felt rewarded for staying in the background as his siblings ruled through squabbles, with bossy Little Susie striving to contain Howie’s whirlwind.10 Placid by nature, Peter retreated inside his head when the energy around him grew too intense. He played “Yankee Doodle” on the piano in a minor key whenever he was unhappy, rather than express his feelings in words.11

  Warren approved of his wife’s sprawling interests, was proud of her generosity and her leadership role in Omaha, and appreciated her attentiveness to the children, which freed him to focus on his work. He, too, was always adding one more thing to his list, but unlike her he never overextended himself. When something new came into his life, something else went out. The two exceptions were money and friends.

  Thanks to both, by 1963 a number of professional investors had figured out that this Buffett fellow out in Omaha knew what he was doing. Even some who normally would never have heard of Warren Buffett were starting to seek him out. He no longer had to charm, much less prospect; he simply laid down the terms on which he would take people’s money.

  Those outside Omaha often knew more about him than his own neighbors. A friend of Little Susie’s was in the family car on the way to the 1964 New York World’s Fair when her parents stopped for gas. They struck up a conversation with the woman at the next pump, who turned out to be the mother’s former high school teacher. The woman was traveling from Elmira, New York, to Omaha, carrying with her $10,000 to invest with Warren Buffett. Do you know him? she asked. Should I invest with him? He’s our neighbor, the family said. Yes, you should. They got back in the car and headed onward to the World’s Fair, thinking no more of it. With five kids and a new house, it didn’t occur to them to invest for themselves.12

  Another would-be partner, Laurence Tisch, one of two brothers who were building a New York hotel empire, sent in a check for $30,000 made out to Charlie Munger. Buffett called him and said he was glad to have Tisch join the partnership, but next time, “make the check out to me.”

  Munger could have used the money. Whatever Laurence Tisch may have thought, in 1963 he and Buffett were not partners. Munger had just opened a partnership of his own after waiting until he had accumulated a fair amount of money—around $300,000—by investing in real estate. But this was peanuts by Buffett’s standards, a fraction of Warren and Susie’s wealth.

  “Charlie had a lot of children early on. That hindered him a lot in getting independent. Starting early with no encumbrances is a big advantage. Even when I came back from Graham-Newman, I mean, I had my 174,000 bucks, I felt like I could do what I wanted to do. I could take courses with my father-in-law the psychologist. I could go out there to the university and sit in the library and read all day.”

  In fact, Buffett had been encouraging Munger to think seriously about investing as a career ever since they first met. He would say to him, It’s nice to be a lawyer and to do real estate on the side, but if you want to make some real money, you ought to start something like my partnerships.13 In 19
62, Munger had gone into partnership with his poker buddy Jack Wheeler. Wheeler was a trader on the Pacific Coast Stock Exchange, the Wild West version in miniature of what was going on back east: a floor full of screaming traders, aggressive men looking to make a killing the fastest way they could. He owned an investing partnership, Wheeler, Cruttenden & Company, which included two “specialist posts” on the exchange, where traders took orders from brokers to trade stocks on the floor. They renamed the business Wheeler, Munger & Co., and sold the trading operation.

  Munger continued his law practice but bolted from his old firm together with several other lawyers, among them Roy Tolles and Rod Hills. They founded a new firm, Munger, Tolles, Hills & Wood, that suited their ideals of how a law firm should be managed.14 All along, Munger had naturally resisted following the rules of a law firm run by anyone but himself.

  “It’s no coincidence that the year he started his partnership was the same year he started his new law firm. The partners at the old firm found it abhorrent that a young lawyer in their firm would want to be a member of that gambling den, the Pacific Coast Stock Exchange. When Charlie and Roy left the firm, they sat down with the senior partners and said that they wanted these senior partners to understand that the day would come when every first-rate law firm had a member of the Pacific Coast Stock Exchange. This is probably apocryphal, but you can easily picture Charlie delivering that message to them as a parting shot.”

  At their new firm, Munger and Hills imposed an elitist, Darwinian ethos designed to attract the brightest and most ambitious. The partners all voted on one another’s pay, which was circulated for everyone to know. Even as the firm launched, however, Munger was already spending a significant amount of time at the Pacific Coast Stock Exchange. Within three years, when he was forty-one, he abandoned the law altogether to work full-time at investing. But he still consulted to the firm and kept an office there, where he remained an important, almost spiritual presence. Tolles, too, shifted most of his attention to investing. Hills, by far the most ambitious and dedicated to law of the three, ran the firm and kept it going.

  In his new role as a money manager, Munger had to raise money to manage. Buffett had always hustled for investors in an understated way, often using others as his promoters—people like Bill Angle and Henry Brandt, who found and prepared prospects—so that he could show off his impressive track record with a pleasing modesty. But however gracefully he’d hustled, he’d still done it. Munger felt this was demeaning. “I didn’t really like raising money,” he says. “I always felt that a gentleman should have his money.” Now, however, he managed to parlay his law practice into an investing partnership by raising funds from his powerful Los Angeles business connections. While his partnership was of course much smaller than Buffett’s, the money would be enough.

  Jack Wheeler had explained to him that, as a member of the exchange, under its rules he could borrow an additional ninety-five cents for every dollar invested.15 Thus, if he put up $500, he could borrow another $475 and invest a total of $975. If the investment earned a profit of twenty-five percent, the profit on Munger’s $500 of capital would be nearly double that.16 While having the potential to nearly double his returns, this borrowing likewise nearly doubled his risk. If he lost twenty-five percent, he would lose nearly half his capital. But Munger, more than Buffett—far more than Buffett—was willing to take on some debt if he was positive the odds were right.

  He and Wheeler set themselves up at the exchange in a “crude, cheap” office festooned with radiator pipes and stuck their secretary, Vivian, in the tiny private back office overlooking an alley.17 Wheeler, a big spender who liked to live large, had just had a hip replacement and soon started showing up for work on the golf course most mornings.18 Munger fell into a routine, arriving at five a.m., before the market opened on the East Coast, and checking the quotation board.19 Buffett had connected him with Ed Anderson, the Graham-Newman investor who had worked for the Atomic Energy Commission and seemed so smart; Munger hired him as his assistant.

  Most of the traders at the stock exchange had ignored Munger’s arrival on the scene, but one of them, J. Patrick Guerin, took note. Guerin had bought the trading part of Wheeler’s partnership when Wheeler had spun it off and gone into business with Munger. A rough-and-tumble guy who was scrambling like mad to better himself, Guerin had grown up with a “divorced father,” says Munger, “and his mother was a drunk, so he raised himself on the streets. He was high IQ, rebellious, and maladjusted.”20 After a stint in the Air Force, Guerin had worked as a salesman for IBM, then became a stockbroker at a couple of small firms that peddled third-class stocks because they carried the highest profit, or “spread,” for the firm. This was a part of stockbroking Buffett had detested; Guerin, too, found it a relief to escape life as a “prescriptionist.”

  By the time Munger met him, the lean, handsome Guerin had learned to roll his crisp shirt cuff down over his tanned forearm to cover his tattoo. He seemed to have a great number of friends as well as a tinge of Hollywood in his blood; one day he brought his friend, the actor Charlton Heston, down to the exchange for a tour.21 He did the trading for Wheeler, Munger, and says he immediately recognized that Munger had a money mind and began to cultivate him. He came to the conclusion that he’d been on the wrong side of the Wheeler deal right away, and began to emulate Munger and Buffett, with the goal of forming his own investing partnership.

  “With some, the idea of buying dollar bills for forty cents takes, and with some it doesn’t take. It’s like an inoculation. It’s extraordinary to me. If it doesn’t grab them right away, I find that you can talk to them for years and show them records—you can do everything—and it just doesn’t make any difference. I’ve never seen anyone who became a convert over a ten-year period with this approach. It’s always instant recognition or nothing. Whatever it is, I’ve never understood it. But with a fellow like Rick Guerin—no business background in terms of studying it, but he saw it like that, he understood what it’s about, and he was applying it five minutes later. And Rick was smart enough to know that you should get a great teacher, which is what I was lucky enough to do with Ben Graham.”

  As the day progressed at the Pacific Coast Stock Exchange, Munger would sit, lost in thought, usually reading. “Charlie! Charlie!” Ed Anderson would shout from the next desk. Munger would say nothing, or grunt something in response.22 Eventually, Anderson learned to make Munger respond clearly to questions, erasing ambiguity; a simple grunt was not sufficient. But it took time and experience for most people to figure out that Munger’s mind and mouth often went their separate ways.

  Guerin did not know this yet. One day he came into the office from his booth on the floor. “Charlie,” he said. “I’ve just been offered fifty thousand shares of XYZ at fifteen dollars. This looks like a good deal.”

  “Hmmm, uhm,” said Munger.

  “Look, Charlie,” Guerin carried on, “if this interests you, I’m going to buy it.”

  “Yeah, yeah,” said Munger.

  A little later, Guerin walked back into the office and said, “Charlie, we got them.”

  “Got what?” said Munger.

  “We bought the fifty thousand shares at fifteen dollars.” Big money.

  “What!?” screamed Munger. “What are you talking about! I don’t want ’em! Sell ’em! Get rid of ’em right now!”

  Guerin tried to explain. He called on Anderson for backup: “Ed, did you hear this when I said it earlier?”

  “Charlie, I was sitting here listening to it, just as Rick said,” Anderson interjected.

  “I don’t care! I don’t care! Sell ’em! Sell ’em! Sell ’em!” yelled Munger.

  Guerin ran out the door and got rid of the shares. “That was an object lesson,” says Anderson.23

  Munger bought cigar butts, did arbitrage, even acquired small businesses—much of this in Buffett’s style—but he seemed to be heading in a slightly different direction than Buffett. Periodically, he said to Ed And
erson, “I just like the great businesses.” He told Anderson to write up companies like Allergan, the contact-lens-solution maker. Anderson misunderstood and wrote a Grahamian report emphasizing the company’s balance sheet. Munger dressed him down for it; he wanted to hear about the intangible qualities of Allergan: the strength of its management, the durability of its brand, what it would take for someone else to compete with it.

  Munger had invested in a Caterpillar tractor dealership and saw how it gobbled up money, which sat in the yard in the form of slow-selling tractors. To grow, the business had to buy more tractors, gobbling up more money. Munger wanted to own a business that did not require continual investment, and spat out more cash than it consumed. But what were the qualities of such a business? And what gave such a business an enduring competitive advantage? Munger was always asking people, “What’s the best business you’ve ever heard of?” But he was a man of no great patience, and inclined to think that people could read his mind.24

  His impatience stood out more than any theory that was emerging inside his head. He wanted to get really rich, really fast. He and Roy Tolles made bets on whose portfolio would be up more than one hundred percent in a year. And he was willing to borrow money to make money, whereas Buffett had never borrowed a significant sum in his life. “I need three million dollars,” Munger would say, on one of his frequent visits to the Union Bank of California. “Sign here,” the bank would reply.25 With these huge sums, Munger did enormous trades like British Columbia Power, which was selling at around $19 and being taken over by the Canadian government at a little more than $22. Munger put not just his whole partnership, but all the money he had, and all that he could borrow into an arbitrage on this single stock26—but only because there was almost no chance that this deal would fall apart. When the transaction went through, the deal paid off handsomely.