The irony was that the partnership was swimming in a sea of money.14 And on Wall Street, brokers in pinstripes were getting high on cash. A new breed of men, who had come of age after World War II without the lessons of the Crash and the Great Depression seared into their brains, had risen on the Street. As they pushed stocks to never-before-seen values, Buffett began selling down his American Express position, which by now was worth $15 million more than the $13 million that it had cost, accounting for two-thirds of the partnership’s gain. But he didn’t want to plow that money back into Berkshire Hathaway.
Rather, his most important task that year was to find something new to which he could hitch the broken-down nag of Berkshire before its “substantial drag” on his performance became intolerable. In Omaha, he had long had his eye on a company, National Indemnity, headquartered just a few blocks away from his Kiewit Plaza office. Buffett first met its founder, Jack Ringwalt, in the early 1950s, in the boardroom at the broker Cruttenden and Company. Ringwalt was one of the smartest, most enterprising men in town. Then Warren’s aunt Alice had tried to steer Ringwalt into the Buffett Partnership.15 Ringwalt later claimed that Buffett had demanded a minimum investment of $50,000 (though Buffett was taking far less than that from nearly everyone at the time). “If you think I am going to let a punk kid like you handle $50,000 of my money, you are even nuttier than I think you are,” Ringwalt supposedly replied, and declined to invest. Ringwalt considered himself an investing expert, however, and Buffett’s penchant for secrecy put many people off.16
Buffett kept an eye on National Indemnity nonetheless. A nonstop learning machine, he wanted to know everything there was to know about the insurance business. He checked out armloads of books from the library and came to understand Ringwalt’s strategy, which was to insure the most difficult customers. Ringwalt, Buffett saw, was the mix-up player of insurance—the cautious risk-taker and the penny-pinching, aggressive underwriter who went around the office every night and turned off all the lights.17 For a fancy price, he insured the unusual: circus performers, lion tamers, the body parts of burlesque stars.18 “There’s no such thing as a bad risk,” Ringwalt liked to say, “only bad rates.” His first break had come when a bank asked him to guarantee that a bootlegger—presumed murdered—would not return to Omaha, because the presumptive widow wanted to withdraw his account without waiting the legally required seven years. Ringwalt figured the alleged murderer’s lawyer might have a pretty good idea whether the missing bootlegger’s blood no longer pulsed. He had helped the accused murderer beat the rap, but the dead man’s widow (and the bank) suspected that was mainly just good lawyering, not exoneration. Still, the lawyer couldn’t say whether his client had confessed to him. So Ringwalt got him to put up some of his own money on the guarantee, on the theory that unless the bootlegger had croaked louder than a bullfrog, the lawyer wouldn’t take the risk. Sure enough, the cash told all; the bootlegger never reappeared, and the bank never made a claim. Jack Ringwalt was enterprising, and a natural handicapper.
From there, he expanded into insuring taxicabs, then he put up the stakes for radio-station treasure hunts, hiding the clues in lipstick cases, burying them himself, using clues so obscure that only one prize was ever claimed. He soon became the fastest-moving, most swashbuckling, energetic businessman in Omaha. His daughter referred to him by the racy-sounding nickname Jet Jack. He managed National Indemnity’s investments himself, buying tiny positions in hundreds of stocks, scribbled almost illegibly on ledger sheets: fifty shares of National Distillers, 2,500 of Shaver Food Marts. He carried around hundreds of stock certificates in an old gym bag.
In the early 1960s, Buffett had called his friend Charlie Heider, who was on the board of National Indemnity, and asked whether Ringwalt had any interest in selling. Heider’s answer was intriguing.
“For fifteen minutes every year, Jack would want to sell National Indemnity. Something would make him mad. Some claim would come in that irritated him, or something of that sort. So Charlie Heider and I discussed this phenomenon of Jack being in heat once a year for fifteen minutes. And I told him if he ever caught him in this particular phase to let me know.”
One gray and gloomy February Omaha day in 1967, Heider was having lunch with Ringwalt, who said, “I don’t like this weather.” The conversation wound around to the fact that he wanted to sell National Indemnity. Ringwalt had convinced himself he was better off without it; the fifteen-minute window had appeared. “There’s somebody here in town who might want to buy it,” Heider said. “Warren Buffett.” Ringwalt allowed as how he might be interested. Heider called Buffett afterward and told him that Jack Ringwalt would possibly sell the company for so many million. “Do you care to meet with him in the coming days?”
“What about this afternoon?” Buffett said immediately. Ringwalt was leaving for Florida the next morning, but Heider convinced him to go down to Kiewit Plaza first.19
Buffett asked Ringwalt to explain why he hadn’t sold to anyone yet. Ringwalt said that all the offers came from crooks. He started laying down conditions. He said he wanted to keep the company in Omaha. Sensing that the fifteen-minute window was about to disappear, Buffett agreed he wouldn’t move the company.
Ringwalt said he didn’t want any employees fired. Buffett said that was okay. Ringwalt said all the other offers had been too low. “How much do you want?” Buffett asked. Fifty dollars a share, said Ringwalt, fifteen dollars more than Warren thought it was worth. “I’ll take it,” Buffett said.
“So we made a deal in that fifteen-minute zone. Then, Jack, having made the deal, really didn’t want to do it. But he was an honest guy and wouldn’t back out of a deal. However, he said to me after we’d shaken hands, ‘Well, I suppose you’ll want audited financial statements.’ And if I’d have said yes, he would’ve said, ‘Well, that’s too bad, then, we don’t have a deal.’ So I just responded, ‘I wouldn’t dream of looking at audited financial statements—they’re the worst kind.’ Then Jack said to me, ‘I suppose you’ll want me to sell my insurance agencies to you as well.’”
It would have been natural for Buffett to want the agencies. They controlled relationships with some of the customers who did business with National Indemnity. “I just said, ‘Jack, I wouldn’t buy those agencies under any circumstances.’ If I’d said yes, that I wanted him to sell the agencies to Berkshire—he would’ve said, ‘Well, I can’t do that, Warren. We must’ve misunderstood each other.’
“So we went through about three or four iterations like this. And finally Jack gave up and sold me the business, though I don’t think he really wanted to do it.”
Buffett wanted him to do it, because Berkshire Hathaway was a lousy business that he had partially liquidated, and this was his chance to swap those funds for a great business. Since he knew that Ringwalt would be having second thoughts while away in Florida, he moved fast to seal the deal before Ringwalt could change his mind. Both men wanted a contract no more than one page long.20 Buffett had final papers drawn up quickly and the funds deposited in the U.S. National Bank.21
When Ringwalt returned from Florida a week later, Buffett freight-trained him with a deal ready to close. But Ringwalt showed up to the closing meeting ten minutes late. Buffett and Heider would later explain this by saying that Ringwalt was driving around the block looking for a parking meter with time left on it.22 Ringwalt always said he was just late. But maybe he’d realized he wasn’t actually better off without it, and was dragging his feet, sorry at having bowwowed himself into thinking he was better off without National Indemnity.
Buffett, of course, knew full well that the partnership was better off with it; National Indemnity was the chance to give his fortunes a gigantic push. A short time later, he wrote a paper on the subject under the dull title “Thoughts Regarding Capital Requirements for Insurance Companies.”
The word “capital”—money—was an important hint at what Buffett was thinking when he acquired National Indemnity, for capital was his partne
rship’s lifeblood. He was pulling capital from Berkshire and it needed to be put to work. National Indemnity took a lot of risk and needed gobs of capital to do so. “By most standards,” he wrote, “National Indemnity is pushing its capital quite hard. It is the availability of additional resources in Berkshire Hathaway that enables us to follow the policy of aggressively using our capital which, on a long-range basis, should result in the greatest profitability within National Indemnity…. Berkshire Hathaway could put additional capital into National Indemnity, should underwriting turn sour.”23
Buffett had figured out a whole new type of business. If National Indemnity made money, he could send those profits out to buy other businesses and stocks, instead of leaving them to hibernate in National Indemnity’s vault. But if the lion ate the lion tamer, National Indemnity might need money to pay the lion tamer’s weeping family. Then the money could come back home to National Insurance from the other businesses.
Grafting the insurance business onto Berkshire Hathaway, the mess of a textile mill, made its capital homeostatic. It could respond internally to the environment at Buffett’s command, rather than hibernating like a lizard when it got cold or running out when the sun shone to find a rock on which to sun itself.
The key was to price the risks right. Thus he needed Jack Ringwalt, who had talked himself into selling his own business, to stick around. Buffett paid Ringwalt handsomely and cultivated him as a friend; and as with Ben Rosner and Associated Cotton Shops, he had bought an excellent business run by an able manager.
The two men often played tennis in California. Ringwalt, whose taste in clothes resembled Buffett’s, would show up in a grimy old sweatshirt that his daughter had made for him. His racy nickname, Jet Jack, stretched in huge letters over his bay window of a gut. Once when he and Buffett were having lunch at a Jolly Roger restaurant, a little kid came up to him. “Can I have your autograph, Jet Jack?” he asked. Ringwalt swelled with pride. The kid thought he was a celebrity: an astronaut or a movie star. He may not have looked the part except to a little kid, but in his heart, he still felt like Jet Jack.
And rightly so, because the swashbuckle came from inside, not from the way he looked. Ringwalt may have sold his company, but he had gotten back a bit of his own—for what he did with some of the money he got from selling National Indemnity was to buy stock in Berkshire Hathaway.24
31
The Scaffold Sways the Future
Omaha • 1967–1968
The greatest wave of riots, lootings, and burnings since the Civil War swept the country during the summer of 1967. Afterward, Dr. Martin Luther King said, “Many more riots of the kind we had last summer and we shall be in danger of a right-wing takeover of the fascist type!”1 Privately angry at the movement’s lack of progress, King still refused to endorse violent resistance; some activists felt that the Student Nonviolent Coordinating Committee and Dr. King’s Southern Christian Leadership Conference should have mounted a much more confrontational response to the ugly force of nightsticks and cross burnings they faced that summer.
Omaha’s nonviolent activists counted the Buffetts—both of whom were now influential in town—among their informal network. Rackie Newman, the wife of Warren’s best friend in Omaha, Nick Newman, was working with Susie to pressure the YMCA and the boards of other organizations to give a fairer share of money to their branches in impoverished areas. Through the United Methodist Community Center, run by an African-American friend, Rodney Wead,2 Susie and Rackie sent black kids to summer camp and set up an interracial dialogue group for local high school students.3 Wead had become a frequent presence in the Buffett house. John Harding, who ran Buffett’s back office, collected thousands of signatures for an open-housing petition. Nick Newman helped bring Warren directly into the struggle by sponsoring his participation in various local civil-rights groups. Warren’s role was not to labor, but to speak. He, Newman, and Harding testified before the legislature in Lincoln on open housing. For her part, Susie went out and at least a few times actually bought houses, fronting for blacks who wanted to move into white neighborhoods.4
Recently, Warren had been introduced to Joe Rosenfield, who ran the Younkers chain of department stores based in nearby Des Moines.5 Rosenfield was well connected in both local and national politics and shared the Buffetts’ political views. He was also a trustee of Grinnell College, which sat like a tiny radical island in the middle of the farming hamlet of Grinnell, Iowa.6 Its liberal-minded students tended to go into social services after graduation, and the school was focusing its funding on increasing its African-American enrollment.
Eighty-some years after its founding in 1846, Grinnell had nearly gone broke, but in the quarter century since Rosenfield had taken over the endowment, he had built it to nearly $10 million.7 He had a keen wit, as well as an edge of sadness about him, having lost his only son in a tragic accident; Susie Buffett quickly developed a special relationship with him. Given all their shared interests, Rosenfield naturally wanted to involve the Buffetts with Grinnell, his most important cause.
In October 1967, the college was presenting a three-day fund-raising convocation on “the liberal arts college in a world of change” and had assembled a brilliant panoply of 1960s culture in its speakers’ roster—including author Ralph Ellison, whose novel Invisible Man had won a National Book Award; social biologist Ashley Montagu, who had questioned the validity of race as a biological concept; communications theorist Marshall McLuhan, who had popularized the idea of a media-driven “global village” contemporary artist Robert Rauschenberg; and Fred Friendly, the retired former president of CBS News. But the speaker they were all waiting for was Dr. Martin Luther King Jr.8 Nobel Peace Prize winners were not everyday visitors to Iowa. Rosenfield had invited the Buffetts to the convocation; they were among the five thousand people who packed themselves into Darby Gymnasium for that Sunday morning’s program.
King flew in with the president of Morehouse College, who was going to introduce him. They were hours late; state troopers, deputies, police, and private security guards had been standing on alert since before ten a.m., ready for trouble. As they waited, the audience grew hungry and restless.
Finally King strode to the podium, dressed in his preacher’s robes. He had chosen the theme of “Remaining Awake During a Revolution,” and his resonant voice rang out with a quote from poet James Russell Lowell’s “The Present Crisis,” the anthem of the civil-rights movement.
Truth forever on the scaffold,
Wrong forever on the throne:
Yet that scaffold sways the future,
And behind the dim unknown,
Standeth God within the shadow
Keeping watch above His own.9
He spoke of the meaning of suffering. Inspired to nonviolent resistance by Gandhi, King invoked the lessons of the Sermon on the Mount. Blessed are the persecuted, it said, for theirs is the kingdom of heaven. Blessed are the meek, for they shall inherit the earth.
As touched as she was by Dr. King’s powerful words, Susie must also have been deeply moved by the way he transfixed her husband.10 Buffett had always responded to powerful, charismatic orators. Now he saw King standing before him: moral courage in the flesh, a man who had been beaten and imprisoned, put in shackles and sentenced to hard labor, stabbed and clubbed for his beliefs, a man who had carried a movement on the strength of his ideas for nearly a decade despite enraged opposition, violence, and limited success. King had once described the power of nonviolence, which “has a way of disarming the opponent. It exposes his moral defenses. It weakens his morale and at the same time it works on his conscience…. Even if he tries to kill you, you develop the inner conviction that some things are so precious, that there are some things so dear, some things so eternally worthful, that they are worth dying for. If an individual has not discovered something that he will die for, he isn’t fit to live. When one discovers this, there is power in this method.”11
King was a prophet, a man who saw a vision of
glory, of evil exposed through visible suffering, of people roused from sleep by the sight of horrors. He called his followers to nail themselves to his vision, to lift it up behind them and drag it through the streets. Christianity, he said, has always insisted that the cross we bear precedes the crown we wear. One of his lines, which he repeated in many of his speeches, struck Buffett’s heart and pierced his reason.12
“The laws are not to change the heart,” he said, “but to restrain the heartless.”
“With that great voice of his, he just rumbled that out, and then went on and used that as a theme.”
Susie had often told her husband that there was more to life than sitting in a room making money. That October 1967, in the throes of the civil-rights struggle, he had written a special letter to the partners, which showed that something in his thoughts had changed. This letter went out a little earlier than the annual report he wrote to the partners each year, and it laid out his strategy without revealing the year’s pending results. After describing the “hyper-reactive pattern of market behavior against which my analytical techniques have limited value,” he went on to say: “My own personal interests dictate a less compulsive approach to superior investment results than when I was younger and leaner…. I am out of step with present conditions. On one point, however, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean forgoing large, and apparently easy, profits to embrace an approach which I don’t fully understand, have not practiced successfully, and which, possibly, could lead to substantial permanent loss of capital.”
The Snowball Page 39