The Snowball

by Alice Schroeder

  He and Cowin set about buying stock. Had anyone known Buffett was buying, it might have pushed up the price, so he bought through Howard Browne of Tweedy, Browne. The firm was a favorite broker of Buffett’s because everyone there, especially Browne, was closemouthed, of utmost importance to Buffett given his insistence on secrecy. Tweedy, Browne had code-named the Buffett partnership’s account BWX.27

  When Buffett arrived at Tweedy, Browne, which maintained a tiny office at 52 Wall Street, in the same art deco building where Ben Graham had once worked, it felt like entering an old-fashioned barbershop, with its black-and-white ceramic tile floor. In a little office to the left sat the firm’s secretary and office manager. To the right lay the trading room. Past that, in a small rented alcove half filled with a water cooler and a coatrack—in effect a sort of closet—sat Walter Schloss, running his partnership from a battered desk. Using Graham’s method without the slightest variation, he had been averaging returns of better than twenty percent a year since leaving Graham-Newman. To pay his rent to Tweedy, Browne, in lieu of cash he gave the firm commissions by trading stocks. His trades were few, and he was getting a great bargain on the rent. He limited his other expenses to the cost of a subscription to Value Line Investment Survey, some paper and pencils, subway tokens, and nothing else.

  Along the center of the trading room ran a twenty-foot wooden table, which the firm had acquired somewhere on its way to a garbage dump. Its surface bore the marks of generations of schoolchildren armed with penknives. To write down figures, a tablet had to be placed underneath the paper; otherwise, “Todd loves Mary” would be embossed into the text.

  On one side of the child-scarred table, Howard Browne ruled with benign authority. He and his partners faced the firm’s trader, who—like all traders—sat, jumpy and restless, waiting for the phone to ring so that he could trade. Next to him, an empty space at the table served as the “visitors’ desk.” The cheapest of wooden filing cabinets lined the walls.

  Nowhere else in New York did Buffett feel so at home as sitting at the Tweedy, Browne visitors’ desk. The firm had branched out into arbitrage, workouts (all-but-completed turnaround situations where a little money remained to be made), and “stubs”(companies being acquired and broken up)—all the sorts of things he liked. It traded securities such as fifteen-year Jamaica (Queens) Water warrants—rights to buy the water company’s stock, which rose whenever there was speculation that New York City would someday take over the waterworks. They fell again when speculation lulled. Tweedy, Browne bought them every time they dropped and sold them every time they rose, over and over and over again.

  The firm also made a specialty of fencing with the managements of these obscure, undervalued businesses, trying to force out hidden value, as with Sanborn Map. “We were always in court suing,” one partner says.28 All of it reeked of the old Graham-Newman days and bore little similarity to the gargantuan American Express deal, but Buffett loved the atmosphere. Tom Knapp researched stocks and spent his days plotting practical jokes when he wasn’t orchestrating trades. He had commandeered a huge storage closet, filling it with the four-cent Blue Eagle stamps he and Buffett had made the mistake of buying and topographical maps of the Maine coastline. The pile of maps continually grew, for Knapp was funneling the cash he made from stocks into buying up the coast of Maine.29 The pile of Blue Eagles slowly shrank as Tweedy, Browne pasted forty stamps onto each batch of the Pink Sheets they sent to Buffett once a week, every week.

  The Pink Sheet quotations for stocks not listed on the New York Stock Exchange were stale the moment they went to print. Buffett used his Pink Sheets merely as a starting point for the telephonic bazaar in which calls to numerous brokers might be required to make a trade. He was a master at working this system through his brokers. The lack of a publicly posted price helped reduce competition. Someone who was willing to call every market-maker and squeeze them mercilessly had a meaningful advantage over the less energetic or the more fainthearted.

  Browne would call Buffett to let him know they had XYZ stock on offer at $5 a share.

  “Hmmm, $4¾ bid,” Buffett would say, without hesitation. This maneuver, Casting the Line, would fish out how hungry the seller was.

  After calling the client to see if he would take a lower price, Browne would call Buffett with the response: “Sorry. Can’t take less than five bucks.”

  “Unthinkable,” Buffett would answer.

  A few days later, Browne would call Buffett again. “We got the stock at $4¾. We’ll go along with $4¾ bid.”

  “Sorry,” Buffett would now say instantly. “$4½ bid.”

  Browne would go back to the seller, who would say, “What the hell? What happened to the $4¾?”

  “We’re just passing along the message. $4½ bid.”

  More calls would go back and forth until a week later, Browne came back to Buffett: “Okay. $4½ bid,” he’d say.

  “Sorry,” Buffett would say, and drop it another eighth. “$4⅜.”

  Thus he Buffetted the price ever lower. And rarely—almost never—did he want a stock badly enough to raise his bid.30

  He placed his first order for Berkshire Hathaway through Tweedy on December 12, 1962, for two thousand shares at $7.50 a share, paying the broker a $20 commission.31 He told Tweedy to keep buying.

  Cowin got the scuttlebutt on Berkshire from board member Stanley Rubin, Berkshire’s top salesman, who happened to be a friend of Otis Stanton, another member of the board. Otis Stanton felt his brother was out of touch. Protected by his secretaries in his ivory tower, Seabury was doing more and more drinking as the clash between his lofty vision and reality worsened.32 Otis was by now sharply at odds with Seabury.33 He felt his brother should have taken a strike rather than giving in to demands for higher wages.34 He also disapproved of Seabury’s choice of a successor, his son, Jack, who was a pleasant enough young man but not up to the job—according to Otis. Otis had his own idea about who should succeed Seabury—Ken Chace, the vice president of manufacturing.

  Seabury Stanton responded to Buffett’s purchases as though a takeover threat was imminent, and made several tender offers for the stock. This was exactly what Buffett wanted, for his purchases were predicated on the theory that, eventually, Seabury would buy him out. He wanted the Berkshire stock not to keep it but to sell it. Nevertheless, in every trade there is a buyer and a seller. Seabury Stanton had so far withstood the forces of cheap foreign fabric and Hurricane Carol. Instead of Seabury getting Buffetted, there was a chance that Buffett could get Seaburied.

  Eventually, Warren drove up to New Bedford to see the place for himself. For once, he was not just dropping in. Miss Tabor, who was fiercely loyal to Seabury, decided which callers would be allowed through the glass doors and up the narrow stairs to Stanton’s penthouse office. When she grimly ushered Warren into Stanton’s palatially furnished, ballroom-size wood-paneled lair, he saw that there was no place anywhere near Stanton’s desk to sit. This, clearly, was a man used to summoning people to stand before him while he sat behind his desk and directed them what to do.

  The two men seated themselves at the uncomfortable rectangular glass conference table in a corner, and Buffett asked where Stanton stood on the next tender offer. Stanton looked at him through the wire-rimmed glasses perched on the tip of his nose. “He was reasonably cordial. But then he said, ‘We’ll probably have a tender one of these days, and what price would you sell at, Mr. Buffett?’ or words to that effect. The stock at the time was selling at something like $9 or $10 a share.

  “I said I’d sell at $11.50 a share on a tender offer, if they had one. And he said, ‘Well, will you promise me that if we have a tender offer you’ll tender?’

  “I said, ‘Well, you know, if it’s in the reasonably near future, but not if it’s twenty years from now.’ But I said, ‘Fine.’

  “So now I was frozen. I felt that I couldn’t buy any more stock because I knew too much about what he might do. So I went home, and not too long after
, a letter comes from the Old Colony Trust Company, which was part of First National of Boston, offering $11⅜ per share to anyone who would tender their Berkshire.” That was 12½ cents less per share than agreed.

  Buffett was furious. “It really burned me up. You know, this guy was trying to chisel an eighth of a point from having, in effect, shaken my hand saying this was the deal.”

  Warren was used to doing the Buffetting, and now Stanton had tried to chisel him. He sent Dan Cowin to New Bedford to try to reason with Stanton not to renege on the deal. The two men argued, and Stanton denied that he had made a deal with Buffett; he told Cowin that it was his company and he would do as he pleased. That was a mistake. For trying to chisel Warren Buffett, Seabury Stanton was going to be sorry, very sorry. Buffett decided that—instead of selling—now, he would buy.

  He vowed that he would have Berkshire; he would buy it all. He would own it lock, stock, loom, and spindle. That Berkshire Hathaway was a failing, futile enterprise daunted him not. It was cheap, and he craved it. Above all, he wanted Seabury Stanton not to have it. Buffett and the other shareholders deserved it more. In his determination, he ignored all the lessons learned from the experience at Dempster—save one. And that was the one he should have ignored.

  Buffett sent his scouts out, looking for more chunks of the closely held stock. Cowin got hold of enough to join Berkshire’s board. But other people began to take notice too. Jack Alexander, Buffett’s old friend from Columbia, had an investment partnership with his classmate Buddy Fox. “One day we saw that Warren was buying this Berkshire Hathaway,” he says. “And we started to buy.” On a trip to New York from their office in Connecticut they told him they were following him in the stock, “He got very upset. ‘Look,’ he said, ‘you’re riding on my coattails. That’s not right. Cut it out.’”

  Fox and Alexander were taken aback. What were they doing wrong? Buffett gave them to understand that he was seeking control. Yet coattail-riding, even in control situations, was a popular pastime among the Graham crowd. It was considered sporting conduct. In effect, Buffett took their stock. I need it more than you, he said. They agreed to sell their stock to him at the then-market price, because it clearly mattered to him so much. He appeared to have some sort of mysterious attachment to Berkshire Hathaway. “It wasn’t that important to us. It was obviously very important to him,” Alexander says.

  Like Fox and Alexander, a few others had also become Buffett-watchers, tracking Warren’s trail like the spoor of Bigfoot. This created competition for the stock. He made it understood among the Grahamites that they were to keep their mitts off Berkshire. The only exception was Henry Brandt; he let Brandt—in recompense for his services—buy it below $8.00. He had begun to carry himself with a bit of swagger, which some people found irritating. Yet his surefootedness, the way he always seemed to be so right, kept them fascinated. Even his cheapskate qualities were part of the aura. For years he had been possibly the only person doing business regularly in New York who managed to get by with not only free lodging (by staying with Fred Kuhlken’s mother, Anne Gottschaldt, on Long Island), but free office space to boot (at Tweedy, Browne).

  Photo Insert One

  Image 1

  Warren, around age two.

  Image 2

  Warren in 1933 on the running board of the family’s first car, a used Chevrolet.

  Image 3

  Warren dressed in one of his earliest costumes, which his father brought back from a business trip to New York City.

  Image 4

  Ernest Buffett surrounded by his grandchildren: Warren and Doris at left, Bertie in Ernest’s lap.

  Image 5

  Sidney Buffett, who founded the family grocery store in 1869, in a 1930 photograph with Alice Buffett, his granddaughter.

  Image 6

  The Stahl sisters in West Point, Nebraska, around 1913. Warren's mother Leila is top right. Seated beside her is Edith and, in front, Bernice.

  Image 7

  Warren’s father Howard (right rear) plays with his siblings George, Clarence, and Alice in the family’s fringed surrey. His mother Henrietta (holding younger brother Fred in her lap) sits in the back seat.

  Image 8

  Howard and Leila Buffett, shortly after their marriage in 1925.

  Image 9

  Warren and Bertie in front of the family’s Buick, around 1938.

  Image 10

  A revealing family portrait, around 1937.

  Image 11

  Warren, age six, holds his favorite toy, a nickel-plated money-changer, in a photograph with his sisters from the winter of 1936-1937. He and Doris later recalled the unhappiness their faces expressed.

  Image 12

  The eighth-grade class at Rosehill School, May 1938, showing the girls and boys of the disastrous “triple date” and Warren’s other crush, Clo-Ann Kaul.

  Image 13

  Fred and Ernest Buffett in front of the Buffett & Son grocery store.

  Image 14

  Bertie, Leila, and Warren sing to Doris’s accompaniment in Washington around 1945.

  Image 15

  A 1948 campaign flyer for the only election Howard ever lost.

  Image 16

  Howard Buffett, Congressman.

  Image 17

  Warren (second left) and his father (fourth left) on a fishing trip with the Nebraska congressional delegation around 1945. The Buffetts look as though they’d rather be elsewhere.

  Image 18

  As a preteen, Warren’s first love was Daisy Mae Scragg. She always loved Li’l Abner, no matter how he treated her.

  Image 19

  Warren takes the contrarian view in a January 1946 debate about Congress’s problems; this aired on the Washington radio station WTOP’s “American School of the Air.”

  Image 20

  Warren in the late 1940s, playing the uke in his classic battered tennis shoes and saggy socks.

  Image 21

  The Buffetts in the summer of 1950. “Doris and Bertie were knockouts,” says Warren, who felt socially maladjusted.

  Image 22

  Warren’s pledge photo for Alpha Sigma Phi fraternity at the University of Pennsylvania, January 1948. Howard Buffett was also an Alpha Sig.

  Image 23

  Warren, Norma Thurston, and Don Danly pose next to the Springfield Rolls-Royce Brewster Coupe. Don and Warren bought it as a stunt in 1948.

  Now that Susie accompanied him on some of these trips, however, at her behest he had upgraded from hosteling with his deceased college friend’s mother to taking a room at the Plaza Hotel. Not only was the Plaza more convenient for business, but from Susie’s perspective, it put department stores like Bergdorf Goodman, Best & Company, and Henri Bendel close at hand. Then a rumor circulated among Buffett’s friends—the kinds of rumors that always swirled around Buffett, like the one that had him stashing his daughter in a dresser drawer rather than buying her a crib—a rumor that he had found the Plaza’s cheapest room, a tiny windowless cubicle like his old maid’s room at Columbia, and cut a deal to stay there at a beggarly price whenever he came alone to New York.35 Regardless of the rumor’s truth, each time he checked in to the Plaza he doubtless felt a pang of regret, for he no longer stayed in New York scot-free.

  The trips to Bergdorf’s were another aspect of how much the New York routine had changed. Susie spent her days going to lunch and shopping; in the evenings they went to dinner, then Broadway or cabaret shows. He liked to see her enjoy herself, and she had become used to shopping at the better stores. Nevertheless, while she now had the power to loosen the purse strings, their game was to tussle over how much money she got to spend. Her way of justifying spending was to do it on someone else’s behalf. Susie Jr. was often a beneficiary; her closets filled with clothes from Bergdorf’s. One time Susie came back from New York with an ermine jacket. They had met a friend of Warren’s who took them to a furrier. “I felt like I had to buy something,” she said. “They were being so nice to me.” She had
done it for the furrier’s sake.

  Now, all this protecting Berkshire from coattailing would be for naught unless Buffett figured out how to run it well enough to keep Susie in ermine jackets. He made another visit to New Bedford, going by the mill to see Jack Stanton, the heir apparent. Somebody was going to have to run the place once it was wrested from Seabury’s hands, and Warren needed to know who that would be.

  But Stanton claimed to be very busy, and sent Ken Chace to escort Buffett around the mill.*22 Stanton had no idea that his uncle had already suggested Chace as a possible replacement for Seabury.

  Ken Chace was a chemical engineer by training, forty-seven, quiet, controlled, and sincere. He did not know that he was a contender to run the company; nonetheless, he spent two days teaching Buffett the textile business while Buffett asked question after question and Chace explained the mills’ problems. Buffett was impressed by his candor and equally impressed by his attitude. Chace made it clear that he thought the Stantons foolish for pouring money into a business that was on its way down the drain.36 When the tour was over, Buffett told Chace he would “be in touch.”37

  A month or so later, Stanley Rubin had to be called into service to persuade Chace not to take a job at a competing textile mill. Meanwhile, Buffett was scrambling to buy more stock, including shares that belonged to various members of the Chace family.

  Buffett’s final target was Otis Stanton, who wanted his brother to retire. He had no confidence in Seabury’s son, Jack, and doubted Seabury would ever let go of the reins.

  Otis and his wife, Mary, agreed to meet Buffett at the Wamsutta Club in New Bedford.38 Over lunch at the graceful Italianate mansion, a relic of New Bedford’s onetime grandeur, Otis acknowledged that he would sell, on the condition that Buffett make an equivalent offer to Seabury. Warren agreed. Then Mary Stanton asked if they could keep just a couple of shares out of the two thousand they were selling, out of family sentiment. Just a couple of shares.