The Snowball

by Alice Schroeder

  He also brought up another reason for this “less compulsive approach”: Personal goals, he said, had begun to intrude: “I would like to have an economic goal which allows for considerable noneconomic activity…. I am likely to limit myself to things which are reasonably easy, safe, profitable, and pleasant.”

  Buffett then stunned his partners by dropping his stated goal of beating the market by ten points a year to beating it by just five points a year—or to earning nine percent, whichever was less. If they could find better results elsewhere, he said, they should go, and he wouldn’t blame them.

  He knew that this was taking a risk. Some of the hot new mutual funds were doing much better than the partnership, doubling their money in a year. Each January, the partners could add money to the partnership—or take it out. Many other skippers were forecasting sunnier skies.

  Yet his timing in announcing that he was cutting the goal worked in his favor. The Dow produced an unusually poor year in 1966.13 Some of the partners, shaken by the market’s roiling, had advised him to sell stocks. He paid attention neither to the market nor to advice, and the partnership beat the Dow by thirty-six points, the best record in its ten-year history. “If you can’t join ’em, lick ’em,” he wrote.14 So, it was not a bad time to be offering his partners the chance to take their money elsewhere.

  One side effect of this strategy would be to test their trust in him. They would be making their decision without knowing the actual results of his latest year—and for 1967 he was about to report his second stellar year in a row. If they stayed in, it would be because of that trust and because they were willing to accept his more modest goal. Beating the market by five points a year, compounded over any long-term period, would produce stupendous wealth.*25 Even Ben Graham had beaten the market by just 2.5 percent a year. Buffett’s revised goal of nine percent put a floor on their results that was still two percent or more better than owning an average bond. That consistency, year after year, and not losing money, would lead to a stunning result. Sticking with him, an investor took only a modicum of risk, could achieve these extraordinary returns, and do so safely. Nevertheless, by lowering his target, Buffett had just taken his partners down a peg psychologically, and the results reflected that.

  For the first time, instead of investors rushing to put more money into the partnership, they pulled out a net $1.6 million of capital in January 1968. Yet it was a fraction of what might have been. Less than one in thirty dollars had gone elsewhere. And when he reported his 1967 results a few weeks later, Buffett Partnership, Ltd. had advanced thirty-six percent—versus the nineteen percent rise in the Dow. Thus, in two years, a dollar in Buffett’s stewardship grew more than sixty cents, while a dollar in the Dow was still a measly dollar.

  He wished the departing partners Godspeed with what might be perceived as the subtlest trace of irony: “This makes good sense for them, since most of them have the ability and motivation to surpass our objectives and I am relieved from pushing for results that I probably can’t attain under present conditions.”15

  “Financial genius is a rising market,” as Kenneth Galbraith would later say.16

  Now Buffett had more time to pursue the personal interests he had spoken about, and less pressure—at least in theory. After King’s speech, Rosenfield easily recruited Buffett to become a Grinnell trustee. Given Buffett’s dislike of committees and meetings, this signified how much he had been touched by the convocation—as well as how close he had grown to Rosenfield. Naturally, he went straight onto the finance committee, where he found the trustees to be a group of like-minded men. Bob Noyce, who ran a company called Fairchild Semiconductor, which made electronic circuits—something about which Buffett knew little and had even less interest—was chairman. Noyce, a former Grinnell graduate who had once been expelled from school for stealing a pig to roast at a luau—a serious offense in a pig-farming state—had the aura of a man who knew what he was about.17 Yet “he was really a regular guy. He didn’t seem like a scientist at all,” says Buffett. Above all, Noyce had an overarching hatred of hierarchy and a love of the underdog, in keeping with the guiding spirit of Grinnell.

  Buffett seemed to feel a sense of urgency to do something more for civil rights too. He felt he could best serve the cause by using his brains and financial savvy behind the scenes. Rosenfield began to introduce Buffett around the Democratic Party power network. Buffett started to get involved with Iowa’s Democratic Senator Harold Hughes and with Gene Glenn, who was running for the Senate.

  Then, in March 1968, the most controversial man in America, former Alabama Governor George Wallace, arrived at the Omaha City Auditorium to campaign for President.18

  More than five thousand people crammed into a room designed to seat 1,400 to see the man who had run for governor seven years before on the platform “Segregation now, segregation tomorrow, segregation forever.”19 It took less than eight minutes for his supporters to collect the signatures to place him on the Nebraska ballot. The odor of stink bombs filled the air. When Wallace began to speak, demonstrators pelted the platform with sticks, bits of placards, paper drinking cups, and stones.20 Chairs flew, nightsticks cracked, blood splattered, and the police sprayed the crowd with Mace. As the melee spilled out along 16th Street, rioters pulled drivers out of cars and beat them. People started throwing Molotov cocktails, flames raced through the neighborhood, sidewalks filled with broken glass, and looters pawed through the stores. Hours later the violence passed, and calm finally began to descend. Then an off-duty policeman shot and killed a sixteen-year-old black boy inside a pawnshop, mistaking him for a looter.21

  Over the next few days, high school students walked out of class, smashing windows and setting fires.22 A few days later, police and snipers armed with automatic weapons traded shots and arrested several people, including members of the Omaha Black Panthers.23

  The racial violence continued all that summer, even as Susie never stopped going to the North Side. She trusted in her excellent relations with the community and discounted the personal danger; Warren was not always aware of the details of what she was doing but did feel that at times she went too far in putting others’ interests before her own. His own horror of violence and fear of mob rule had roots that went back a generation.

  Howard Buffett had recounted over and over to his children a scene he had witnessed when he was sixteen years old—a day when thousands of people converged on the Douglas County Courthouse, broke in and attempted to lynch the mayor of Omaha, and beat, castrated, and lynched an elderly black man who had been accused of rape. Afterward they dragged his body through the streets, shot bullets into it, lynched it again, and set it afire. The Courthouse Riot became the most shameful episode in Omaha’s history. Howard missed seeing much of the violence, but witnessed the lynch mob turning a streetlamp into an improvised scaffold, and the mayor of Omaha hanging by a noose around his neck before being rescued in the nick of time.24 The memory haunted him for the rest of his life.25 He had seen with his own eyes the speed with which ordinary people, formed into a mob, could act out the lowest depths of human nature.

  King’s warning earlier that year about mass social unrest potentially leading to fascism required no explanation to Warren Buffett. His own commitment to siding with the underdog went beyond instinct and rested partly on this train of logic. Many people thought such a thing was inconceivable in the United States, but the seemingly impossible happened time and again. The law is not to change the heart, King said, but to restrain the heartless. And who are they, the heartless? That he did not say.

  A few weeks later, King flew to Memphis to speak at the Masonic temple. He reflected on a woman who had stabbed him in New York City and the persistent rumors that an assassin was waiting for him. “I don’t know what will happen now,” he told the audience. “We’ve got some difficult days ahead. But it really doesn’t matter with me now, because I’ve been to the mountaintop.” The next day, April 4, as he stood on the balcony of the Lorraine Motel p
reparing to lead a march of sanitation workers, he was fatally shot in the neck.26

  Grief, rage, and frustration poured out of black communities across America, turning urban centers into fiery combat zones.

  At this time, tens of thousands of students were demonstrating against the Vietnam War on college campuses. The Vietcong had launched the Tet Offensive, attacking a hundred South Vietnamese cities. Americans had been horrified by a photograph of a South Vietnamese police chief shooting a Vietcong guerrila in the head point-blank, an image that for the first time changed the Communists from an abstraction to human beings. The U.S. government had just eliminated most draft deferments, finally putting the sons of the upper middle class at risk of being drafted. Public sentiment turned decisively against the war. By the time King was shot, the country felt as though revolution could erupt at any moment.

  In their various ways, many people decided they were fed up, and done with being put down. Buffett’s friend Nick Newman abruptly announced that he would no longer attend meetings at clubs that discriminated against Jews as members.27 Warren, too, was moved to take action. Since his Graham-Newman days, he had broken away from the segregated 1950s culture and the anti-Semitism of his family’s elder generation to forge friendships and business connections with a wide circle of Jewish people. He even seemed to feel a sense of personal identification with Jews, some thought; their status as outsiders fit with his own sense of maladjustment and his alignment with the underdog. Some time before, Buffett had quietly resigned from the Rotary Club, repelled by the bigotry he saw as a member of its membership committee. But he never told anyone the reason. Now he made it his personal project to sponsor a Jew—his friend Herman Goldstein—for membership in the Omaha Club.

  Since one of the rationales that institutions like the Omaha Club used to defend their exclusionary policies was that “they have their own clubs that don’t admit us,” Buffett decided to ask Nick Newman to nominate him for the all-Jewish Highland Country Club.28 Some of its members objected, using the same logic employed by the Omaha Club: Why take in gentiles when we had to establish our club because their clubs wouldn’t have us?29 But a couple of rabbis got involved and an Anti-Defamation League spokesman appeared on Buffett’s behalf.30 Once accepted, Buffett quietly stormed the Omaha Club, armed with his Jewish country-club membership. Herman Goldstein was voted in, and the long-standing religious barrier to membership there finally toppled.

  Buffett had devised a clever solution, a way to get the club to do the right thing without confronting anyone. It avoided the thing he dreaded, but it also reflected his reasoning—probably correct—that marching and demonstrations would not change the minds of well-off businessmen.

  It also worked because he was now a well-known figure in Omaha. He was no longer an upstart; he had clout. The man who had once had to work to get off the blacklist of the Omaha Country Club had singlehandedly effected what was perhaps the most significant organizational change since its founding in one of Omaha’s most elite institutions.

  Yet Buffett wanted to play more than just a local role. With his money, he knew he could have an impact at the national level, for 1968 was an election year, and it would take a lot of money to try to unseat an incumbent President—Lyndon Johnson—in favor of an antiwar candidate.

  Vietnam was the central issue of the campaign, and Eugene McCarthy, the liberal Senator from Minnesota, was initially the only Democrat willing to run in the primaries against Johnson.

  The campaign had started in New Hampshire, where a McCarthy “children’s crusade” against the war sent nearly ten thousand young activists and college students to knock on almost every door in the state in heavy snow. He won forty-two percent of the New Hampshire vote, a strikingly strong showing against an incumbent President. Many students, blue-collar workers, and antiwar voters considered McCarthy a hero. Buffett became treasurer of his Nebraska campaign, and he and Susie attended a campaign event, she smiling broadly in an eye-catching dress and mob cap that she had had made out of fabric striped with McCarthy’s name.

  Then Johnson announced that he would not run again and John F. Kennedy’s brother Robert Kennedy entered the race. He and McCarthy raced through a bitter primary battle in which there was no clear front-runner until Kennedy won the California primary, giving him a decisive lead in delegates. But on the night of his victory, he was shot by an assassin, dying twenty-four hours later, and Johnson’s Vice President, Hubert Humphrey, announced his candidacy. He captured the nomination at a tumultuous Democratic convention in Chicago marked by battles between police equipped with nightsticks and Mace and rioting antiwar protesters. Buffett then supported Humphrey against the Republican Richard Nixon, who won the election. In later years, McCarthy switched parties several times and made several erratic independent runs for President, undermining his credibility as a serious politician.

  Buffett was notably loyal to his close friends. His enthusiasm for more distant acquaintances, and especially for public figures was fickle, however, waxing and waning with their stature in others’ eyes. In his insecurity, he worried constantly about how associating with others reflected on him. Eventually he regretted and downplayed his association with McCarthy. But his involvement in politics and his commitment of money signaled a sea change in Buffett’s life. For the first time he had made room for something besides investing, a “noneconomic activity” with roots in his family’s past and one that stretched toward the unknowable future.

  32

  Easy, Safe, Profitable, and Pleasant

  Omaha • 1968–1969

  In January 1968, Buffett had issued a call to his fellow Grahamites, summoning them together for the first time as a meeting of the faithful in the middle of a stock market gone mad. “[T]here has been a tremendous change in attitude in the last few years, and I think the gang that is assembling in La Jolla is about all that is left of the old guard,”1 he wrote, inviting Graham’s former students Bill Ruane, Walter Schloss, Marshall Weinberg, Jack Alexander, and Tom Knapp. He also invited Charlie Munger, whom he had introduced to Graham, as well as Munger’s partner, Roy Tolles, and Jack Alexander’s partner, Buddy Fox. Ed Anderson, who had left Munger’s partnership to become a partner in Tweedy, Browne, was on the guest list, too, as was Sandy Gottesman, who, Buffett told Graham, is “a good friend of mine and a great admirer of you.” Lastly, he said, “I think you probably remember Henry [Brandt], who works very closely with us.”2

  Fred Stanback, Buffett’s partner in deals like Sanborn Map and the best man at his wedding, was too busy to attend. A few years after Warren had finished at Columbia, he and Miss Nebraska 1949, Vanita Mae Brown, had reunited for dinner in New York. They made it a sort of double date by bringing along Susie and Fred, who had met Vanita at least once before through Warren. She was then Vanita Mae Brown Nederlander, having been briefly married to a member of the Nederlander family, theater owners who were part of an American entertainment dynasty. After the dinner, Fred, Warren’s most introverted friend, became, as another friend put it, “putty in her hands,” as if to prove the old maxim that opposites attract. Initially, their marriage probably seemed like a sort of charming postscript to Warren’s career at Columbia: a couple brought into the Buffetts’ circle from that era. He did have a tendency to arrange his friends’ lives, asking them to partner with him, putting them on his companies’ boards, and in general wrapping them into his life through ties of various kinds. Two friends married may have felt almost like a compliment to him, but it turned out to be the worst decision Fred ever made in his life.

  He and Vanita had been living in Salisbury, North Carolina, where Fred grew up and where his family had built their “Snap Back with Stanback” headache-powder business. Now Fred himself needed boxcarloads of headache powder; he was extracting himself from this pulse-pounding marriage. Vanita had thoroughly established herself in tiny Salisbury and remained there to torment him with all her considerable creativity while they battled in the courts. Thus, unlike
the rest of the Grahamites, Fred’s interest in the stock market had been temporarily diverted. It was at a time when the market was growing less attractive anyway: Hundreds of millions of dollars had been poured into it by people mindlessly coattailing so-called experts, who themselves had no more than a couple of years’ proven ability to make money. More than fifty new investment funds had come to market, with nearly sixty-five more waiting in the wings.3 For the first time in U.S. history, it became fashionable for a broad group of individuals to own stocks.4 Buffett would describe this phase as resembling “an ever-widening circle of chain letters,” even a “mania,” populated mostly by “the hopeful, credulous, and greedy, grasping for an excuse to believe.”5

  In a business that was still transacted through paper trade tickets and physical delivery of stock certificates, trading volume had reached such a level that the market was nearly crushed under the weight of paperwork. Huge numbers of orders were duplicated or never executed, the tickets misplaced or simply thrown in the garbage, while file rooms worth of stock certificates disappeared, presumed stolen, amid rumors that the Mafia had infiltrated the market. All sorts of reforms pushed through in 1967 and 1968 automated and computerized the trading systems in a desperate effort to catch up. One of the most important would shut down the old “under-the-counter” market. The National Association of Securities Dealers announced that it was about to bring online a new system called NASDAQ that would quote prices for smaller stocks.6 Instead of appearing on Pink Sheets that were stale the moment they were printed, the prices of most companies not listed on the stock exchanges would now be posted and updated electronically as they changed. Market makers had to show their hands and stand by the quotes they posted. Any trader who was very knowledgeable, good at haggling, and strong of backbone was not going to like the new system. In the middle of an already difficult market, it was going to make Buffett’s job harder.