In January 1966, another $6.8 million had rolled in from his partners; Buffett found himself with a $44 million partnership and too few cigar butts to light with his cash. Thus, for the first time, he had set aside some money and left it unused—an extraordinary decision.10 Ever since the day he left Columbia Business School, his problem had always been getting his hands on enough money to pump into a seemingly endless supply of investment ideas.
Then, on February 9, 1966, the Dow had briefly streaked across the mythical one thousand mark before closing just a few points below. The chant began: Dow one thousand! Dow one thousand! The market would not break through the barrier again that year, but the euphoria carried on anyway.
Buffett had been worrying all year about disappointing his partners. Although he started his latest letter to them cheerily with the news about the huge profits on American Express—“Our War on Poverty was successful in 1965,” he wrote, alluding to President Johnson’s program to bring about a “Great Society” through a vast array of new social-welfare programs—he then delivered the real news in what would be the first of many similar warnings: “I now feel that we are much closer to the point where increased size may prove disadvantageous.” And with that he announced that he would be shutting the door to the partnership, locking it, and putting away the key.
There would be no more new partners. He made a joke of it. Susie couldn’t have any more kids, he wrote, because they wouldn’t be allowed in. This joke was not particularly apt, since none of their children had ever actually been partners—or would be. He was determined to manage their expectations about money, in order to ensure that they would find their own way in life. From an early age, each of the kids knew not to expect financial help from him except to pay for their education. He could have brought the children into the partnership as a learning exercise—to teach them about money, about investing, and about how he spent his time. Certainly he used it that way with those who were members of the partnership. But Warren rarely—if ever—“taught” those he saw day to day. For him, teaching was a performance, a conscious act that took place before an audience. His kids got no lessons.
Instead, he bought them stock in the benighted Berkshire Hathaway. As trustee of the trust left to his children by his father, he sold the farm that Howard had bought as a refuge for the family and used the money to buy the stock. Given that Warren didn’t approve of unearned wealth—which was how he viewed inheritance—he might have left the farm alone. A small farm in Nebraska would never be worth much, and the kids would never become rich from their grandfather’s inheritance. But by investing the proceeds in his floundering textile business, he increased his hold on Berkshire by another two thousand shares. Why he cared so much about it was a mystery to observers, but ever since Buffetting his way to control of Berkshire, he seemed obsessed by it.
The Buffett kids were not expecting to get rich. They did not even really know that their family was rich.11 Their parents wanted them to be raised unspoiled, and they were. Like children everywhere, they had to do chores to get their allowances. But when it came to money, their family’s odd disconnection meant that Susie and Warren tussled over her allowance as if the Buffetts were broke; then she got the money anyway and used it to give them an upper-middle-class life. The children went on nice vacations, enjoyed themselves at the country club, wore good clothes, and saw their mother’s Cadillac and fur coats. But they never got to take money for granted. Their father niggled over small amounts of money all the time and surprised them by denying little requests. If he took them to a movie, he might not pay for popcorn. If one of the kids asked for something, his answer might well be no: If I did it for you, I’d have to do it for everyone.
Whatever message he and Susie were trying to give the children about money, one unvarying theme came through: Money was important. They were growing up in a household where it was routinely used as a tool of control. Warren would take Big Susie to a store for her birthday and give her ninety minutes to race through and buy whatever she could grab. The Buffett side of the family had always been about making deals. Although Susie felt that Warren’s obsession with making money was unworthy, she still angled to get more of it from him. Now she was struggling with her weight and this too became a money deal. Warren’s childhood obsession with weighing machines—he would have weighed himself fifty times a day—had been no passing phase; he was obsessed with his family’s weight and preoccupied with keeping them all thin.
The family’s eating habits helped neither his cause nor their health. Susie, who had suffered from a mysterious and excruciating abdominal adhesion two years before, cooked unenthusiastically. She and Warren both willingly ate the same thing day after day: mostly meat and potatoes. Unlike Warren, Susie would eat vegetables, but she refused every fruit except watermelon. She picked at healthy food while living on chocolate and Rice Krispies treats, frosting out of a can, cookies, Tootsie Rolls, and milk, milk, milk. Warren breakfasted on Fritos and Pepsi, ate handfuls of chocolate and popcorn, and chose steaks, hamburgers, and the odd sandwich as his mainstay meals.
Finally, Susie asked him to make a deal to pay her to keep her weight at 118 pounds. Since she cared less about money than her husband did, however, motivation was a problem for her. All month long she picked and snacked; but then, as the weigh-in date approached, she would get on the scale. If the news was bad and she had to take the pounds off fast, “Uh-oh,” she’d say to one of Susie Jr.’s friends: “Kelsey, I’ve got to call your mom for her diuretic pills.”12
Warren disciplined himself to maintain his own weight by dangling money in front of his kids. When they were younger, he made out unsigned checks to them for $10,000 and said that if he didn’t weigh 173 pounds on such-and-such a date, he would sign the checks. Little Susie and Howie went crazy trying to tempt him with ice cream and chocolate cake. But the prospect of giving up money pained Warren far more than giving up a treat. He made out those checks over and over, but he never had to sign a single one.13
Instead of his children, one of the last new partners Warren allowed to join his partnership was Marshall Weinberg, a stockbroker friend of Walter Schloss who had taken Graham’s seminar twice. A cultivated man with a bent for the arts and philosophy, Weinberg had met Buffett at one of Graham’s lectures at the New School in New York. Lunching together a few times and talking of stocks, they had become friends. Weinberg soon gave up on interesting Buffett in music, art, philosophy, or travel, but Buffett traded through him at times and Weinberg became interested in joining the partnership. So on one of the Buffetts’ frequent trips to New York, Warren agreed to meet with him to discuss it.
Loping downstairs from his room at the Plaza, Warren met Weinberg in the lobby. Then Susie glided in, and Warren lit up. She sidled over to him and gave him a hug, then put her hand behind him as if he were a child and gazed at Weinberg with her large brown eyes. “How are you?” she asked, beaming at him. She wanted to know everything about him. He felt he was being welcomed into a family and went away thinking that he had made a new friend in Susie. He also intuited that he had just met Buffett’s most powerful asset.14
Weinberg had squeaked through the door just in time. Through 1966, the urban riots continued, the war in Vietnam escalated, and antiwar protesters rallied in New York, Boston, Philadelphia, Chicago, Washington, and San Francisco. The stock market began to decline, down ten percent from the beginning of the year. Buffett had never stopped looking for things to buy, no matter how uphill the climb, but despite the market’s easing, the days of cigar butts scattered everywhere were gone. He became seriously worried about how to keep up his performance. He thought more often of buying entire businesses now. In fact, he had gotten started on an entirely new venture, one that consumed large amounts of his time.
29
What a Worsted Is
Omaha • 1966–1967
Buffett ran a $50 million partnership that owned a textile business, yet he had never stopped looking like the Raggedy Ma
n.1 His only concession to the sideburns and long hair that other men wore was a little patch of fine dark hairs that he occasionally let sprout from his crew cut like baby grass over his domed forehead.
The rest of the world was turning mod. Men wore Nehru jackets, turtlenecks, and wide geometric-and floral-patterned ties. Buffett never varied his skinny striped ties and white shirt, though the shirt’s collar had grown tighter, and the jacket of the old gray suit he wore day after day bunched around his shoulders and gapped at the neckline. He refused to part with his favorite camel-colored V-neck sweater, although its elbows had grown thin. His shoes had holes in the soles. When Chuck Peterson tried to introduce him to a potential investor at a party, the man’s reaction had been “You’re kidding!” He didn’t even want to talk to Buffett, based purely on the way Warren dressed.2 Susie had no influence; her husband’s taste had formed back in 1949 when he was selling suits at JC Penney’s, and Mr. Lanford told him that “nobody knows what a worsted is.”
He now bought his suits at Parsow’s, downstairs in the lobby of Kiewit Plaza, where Sol Parsow was always trying to upgrade his taste. Buffett considered Parsow a “very wild dresser” and paid no attention to his suggestions. Warren’s idea of a proper suit was one “that you could bury a ninety-year-old banker from a small town in western Nebraska in.”3 Parsow prided himself on giving Buffett good advice about stocks, however. He had steered him away from hatter Byer-Rolnick, warning that hats were going out of style. He had also kept him from investing in Oxxford Clothes, delivering the news that suits were not a growth business in the 1960s.4 Buffett, however, had ignored Parsow’s warning not to buy suit-lining maker Berkshire Hathaway.5
Since he knew nothing about clothing, why the next episode of his career would consist of buying a department store remains somewhat mysterious. It took a whopper of an idea to crack open his wallet these days. But in 1966 he was having trouble finding things to buy for the partnership.
It was one of his newer friends, David “Sandy” Gottesman, who brought him this latest idea. Gottesman was like Fred Stanback, Bill Ruane, Dan Cowin, Tom Knapp, Henry Brandt, Ed Anderson, and Charlie Munger: people who worked their own ideas and fed ideas to him. The ever-handy Ruane had connected them at a lunch in New York City. Gottesman, a fellow Harvard graduate from a different year, worked for a small investment bank and sometimes found the odd cigar butt or two.6 Buffett considered him a shrewd, disciplined, hard-nosed, opinionated, unabashed capitalist. Naturally, they hit it off.
“From then on,” says Gottesman, “every time I had a good idea, I would call Warren. It was like vetting. If you could get Warren interested in something, you knew that you had the right idea.” The quintessential New Yorker, Gottesman valued his time with Buffett highly enough to be willing to travel to Omaha often. “We’d stay up till late at night talking about stocks,” he says, “and then I’d go back the next morning and go to work in New York. We also talked every Sunday night at around ten o’clock for maybe an hour and a half about stocks. I was looking forward to that conversation all week, thinking about what are the stocks I’m going to talk to him about. No matter what I talked to him about, he knew as much as I did about them, most of the time. After I hung up,” says Gottesman, “I used to go to bed around midnight or afterward, and I couldn’t go to sleep for a couple of hours, I was so charged up.”
In January 1966, Gottesman had brought Buffett an idea: Hochschild-Kohn, a venerable department store headquartered in a building a city block in size that sat at an intersection in downtown Baltimore. Although it was kitty-corner to three competitors—Hutzler’s, Hecht Co., and Stewart’s—all four stores had prospered since the times when ladies donned hats and gloves and rode the streetcar downtown to spend all day shopping and having lunch. The well-regarded Hochschild-Kohn sold apparel, home furnishings, and housewares. Its proprietors, the Kohn family, drove old cars and lived modestly—just the kind of people Buffett liked.
Martin Kohn, the company’s CEO, had called Gottesman to tell him that several branches of the family were thinking of selling and would probably accept a discount price. The Kohns “took enormous pride in this store,” says Gottesman, “but if it had a good dress department, they never bought a dress there. It was too expensive for them.”
When Charlie Munger was in Omaha, he, Buffett, and Gottesman usually played a lot of golf, and they’d sit at the grill at the Omaha Country Club drinking pitchers of iced tea, talking stocks, and kidding around. But although they liked the same kind of stocks, the three had never partnered on a deal. This time, Gottesman called Buffett and told him the part about Hochschild-Kohn’s discount price and the Kohns’ parsimony, and Buffett got hooked. He owned no other retailing stock besides a little F. W. Woolworth. Department stores rose and fell on fashion and customer tastes; he knew as much about that as how to bake a soufflé.
He wanted Munger, to tap into his incisive way of sizing up businesses. The two of them flew into Baltimore, and liked the Kohns immediately. They were the soul of integrity, reliable people with connections all over town.7 After the episodes with Lee Dimon at Dempster and Seabury Stanton at Berkshire, Buffett knew that if he were to buy a company, he needed a manager he could count on to run the business for him. He felt that Louis Kohn was that man. Kohn had a financial background and understood the numbers and profit margins well. Buffett had become confident of his ability to assess people quickly after experience with bringing in three hundred partners and meeting countless business executives over the years. The two men looked at the balance sheet and made a $12 million bid on the spot.
Munger did the negotiating with Louis Kohn’s relative Martin, the outgoing CEO, whom he considered “this wonderful old guy who headed the place.” He told Martin Kohn, “I came in here and I saw a lot of old women with swollen ankles standing behind your perfume counter, with unfunded pension liabilities. Do you really want to sell this business, which is the work of your life, to somebody who might worry you about their pensions? Don’t you want to take care of your own?”8 Kohn tossed the towel into Munger’s lap so fast that Charlie could barely catch it.9
On January 30, 1966, Buffett, Munger, and Gottesman formed a holding company, Diversified Retailing Company, Inc., to “acquire diversified businesses, especially in the retail field.”10 Buffett owned eighty percent of DRC. Gottesman and Munger each took ten percent. Buffett and Munger then went to the Maryland National Bank and asked for a loan to make the purchase. The lending officer looked at them goggle-eyed and exclaimed, “Six million dollars for little old Hochschild-Kohn?”11 Even after hearing this, Buffett and Munger—characteristically—did not question their own judgment and run screaming out the door.
“We thought we were buying a second-class department store at a third-class price” is how Buffett describes little old Hochschild-Kohn.
He had never borrowed any significant money to buy a company. But they figured the margin of safety reduced their risk, and interest rates were cheap at the time. Profits in department stores were thin, but as those profits grew over the years, the interest on the debt would stay the same and any increase in the profits would flow to themselves. If the profits grew over the years.
“Buying Hochschild-Kohn was like the story of a man who buys a yacht,” says Munger. “The two happy days are the day he buys it and the day he sells it.”12
Louis Kohn and Sandy Gottesman flew out to Laguna Beach, where the Buffetts were renting a house, and holed up in a nearby motel. Buffett strategized with Kohn and Gottesman. He was already becoming fond of Louis Kohn. “He was as high-grade a guy that you could ever imagine, had an IQ way up there, very decent guy, and he came into the partnership when we bought Hochschild-Kohn. I loved the guy.” The Kohns were another couple for him and Susie to socialize with—meaning that he and Kohn could talk business while Susie entertained Kohn’s wife. The Buffetts’ social life by now included a significant number of people who lived outside of Omaha, people they usually saw on one of Warren’s
business trips or, as now, when friends visited the Buffetts in California.
But Buffett began to grow concerned on his next trip to Baltimore, when Kohn showed him a plan the company had been developing for some time to build two new stores, one in York, Pennsylvania, the other in Maryland. The idea was to capitalize on the exodus from city to suburb that was sending people to suburban shopping malls.
“They’d been planning those two stores for a couple of years. The guy that had the men’s furnishings department had his section laid out. He knew exactly how he was going to decorate it. The woman who ran the high-priced dress department had hers all planned too.” Buffett didn’t like confrontation and dreaded disappointing people, but he and Charlie agreed that neither of these locations made sense. He spiked the York store and the Hochschild-Kohn employees and management resisted. Lacking the stomach for a fight, Warren gave in. But he drew the line at the Columbia, Maryland, store. “I ended up killing that. And everybody died. They just died.”
Then more signs of trouble arrived in the form of numbers coming from Baltimore, revealing that every time one of the four department stores downtown put in an elevator, the other three had to do the same. Every time one store upgraded its window displays or bought new cash-register systems, the others had to follow suit. Buffett and Munger came to call this “standing on tiptoe at a parade.” Once anybody did it, everybody had to do it.13
The Snowball Page 37