“She traveled widely in the world, so found occasions to give dinners,” says Don Graham. “If she had gone to Malaysia, when the prime minister came to town, she’d give a dinner for him. The ambassador would look up what they did last time, and there was always a meal at Mrs. Graham’s house, so there would be another one. Someone would publish a book, someone would have a birthday, and she’d give a dinner because she loved to give a dinner.” Graham used the dinners as a way of making new friends and as a way of getting people to know one another. “She would sort of adopt people in different administrations,” says Don.28 This particular administration, however, was Richard Nixon’s. Graham had made few friends there, other than Secretary of State Henry Kissinger, and he had to defend socializing with her.
“So all of a sudden I’m at the Madison Hotel with Susie, and about five o’clock somebody slips something under the door and it describes the party, which I had been invited to weeks before. At the bottom it says ‘black tie.’ Well, I didn’t have that, needless to say. So here’s this pathetic guy from Nebraska, and he shows up with a business suit. He’s going to a black-tie dinner in his honor and he’s going to be the only one without black tie. So I called her secretary, panicked.
“Her secretary is a very nice gal. She says, well, let’s put on our thinking cap. While I’m trying to cross the street to find a store that was open to rent me something, and nothing was open,” Graham’s assistant, Liz Hylton, called another local store, however, and found something suitable.29
The Buffetts left the Madison Hotel and were driven past mansion after mansion on Embassy Row. The taxi turned onto Q Street, past the historic Oak Hill Cemetery where Phil Graham was buried. Around the corner, they passed a row of historic nineteenth-century town houses with tiny manicured gardens. It was early November; the leaves glowed with traces of russet, amber, and gold. The taxi’s passage into Georgetown was like crossing a border into a Colonial-era town. Tucked into the corner of the cemetery and sprawling down its tree-swagged hill stood Dumbarton Oaks, the ten-acre Federal estate where the conference at which the United Nations had been planned took place.30
The taxi swiveled left at the corner, between a pair of stone gateposts. The sight ahead was breathtaking. As the taxi began to crunch its way up the wide sweep of white pebbled drive, the Buffetts saw in the distance a dignified three-story cream-colored Georgian mansion with a green mansard roof. The broad lawns that surrounded it lapped all the way to the top of Georgetown’s Rock of Dumbarton, so that the house looked down on the cemetery. To the right, down the hill past a deep colonnade of trees, were the neighborhoods leading to the old Buffett house in Spring Valley not far away, and just beyond that, Tenleytown, where Warren had delivered papers at The Westchester and stolen golf balls from Sears.
The Buffetts were ushered through Graham’s front door to join the other guests, who were having cocktails in the living room. Asian art from her mother’s collection hung everywhere on eggshell-white walls swagged with blue velvet curtains, along with a Renoir painting and Albrecht Dürer engravings. Graham began to introduce the Buffetts to her other guests. “She told them nice things about me,” Buffett says. “Kay was doing everything in the world to make me comfortable. [Yet] I was so uncomfortable.”
He had never attended a gathering of such formality or grandeur. When the cocktail hour ended, crossing the hallway to the huge dining room where Graham held her famous parties, its paneled walls lit by the glow of tapered candles in bronze sconces, did nothing to make Buffett feel more at home. This setting intimidated even more than the living room. Crystal candlesticks and armorial porcelain gleamed on the round walnut dining tables, although the guests whom Graham had invited outshone the splendor of the surroundings. The room at any given time could be filled with a selection of U.S. Presidents, foreign leaders, diplomats, administration officials, Congressional members of both parties, senior lawyers in town, and people chosen from her group of perennial friends—Ed Williams, Scotty Reston, Polly Wisner,31 Roy Evans, Evangeline Bruce, Joseph Alsop, along with people like the Buffetts who, for one reason or another, suited the occasion or were interesting to her.
Buffett found himself seated next to Edmund Muskie’s wife, Jane, an obvious dinner partner, since the Buffetts had entertained her husband in Omaha. On his other side was Barbara Bush, whose husband was the U.S. Ambassador to the United Nations but would soon become the Chief of the U.S. Liaison Office in Peking, with the important role of steering the United States through the delicate process of renewing its diplomatic ties with China. Graham pressed a button to signal the kitchen, and waiters began to move around the antique Georgian tables and serve. Warren tried not to gape at the protocol. “Susie’s over there sitting next to some senator. And he’s trying to make out with her, he’s got his hand on her leg and all these things. But me, I’m dying, because I don’t know what to talk to these people about. Barbara Bush could not have been nicer. She could see how ill at ease I was.”
The waiters began to follow an American version of service à la russe, serving the first course followed by a fish course, then the main course, all borne on trays from which the diners served themselves. On and on the courses went as wine was poured to the sound of Washington chatter. The waiters added and removed unfamiliar sterling implements like fish knives. As they offered him food that he would never eat and wines that he would never drink, he found the meal increasingly more complex and intimidating. Graham’s other guests were relaxed and comfortable, but by the time dessert was served, Buffett was thoroughly cowed. Then came coffee he did not drink. His discomfort increased to terror when, as at the end of every evening, Graham stood up and read an articulate, witty, polished, personal, and original toast to her guest of honor that she had obviously put considerable thought into writing, however lacking in confidence her delivery. The guest of honor was supposed to stand and toast his hostess in kind.
“I didn’t have the nerve to stand up and offer a toast, which you’re supposed to do. I blew it totally. I was so uncomfortable. I even thought I might throw up, actually. I could not stand up there in front of half the cabinet and talk. I wasn’t up to it.” All he wanted to do was escape. Afterward, as he and Susie made their goodbyes, they had the feeling that the hicks from Nebraska would be the talk of Georgetown long after they left.
“This Senator was still trying to score with Susie as we were leaving and was so concentrating on explaining how she should come down to the Senate and see his offices as we were leaving that he opened the door to a closet and walked in. That was my introduction to Washington.”
Yet while it was true that the formal, glittering society that surrounded the powerful Mrs. Graham may have unnerved Buffett and made him ill at ease, he had never been one to hide his enthusiasms. And so it must have soon become obvious to Susie Buffett that her husband wanted more of this world.
38
Spaghetti Western
Omaha • 1973–1974
By the time he dined with Katharine Graham in 1973, Buffett was no longer just an investor who was buying newspaper stocks. He was becoming a business mogul on a small scale. Berkshire Hathaway and Diversified were his bailiwick. Charlie Munger was the czar of Blue Chip Stamps.
The interlocking ownership of these three companies had tightened the business relationship between Buffett and Munger, and resembled the embryo of an empire built by another investor whom Buffett in particular admired, Gurdon W. Wattles.1 His company, American Manufacturing, was like a Russian doll; open it and inside was another company and another and another: Mergenthaler Linotype, Crane Co., Electric Auto-Lite. These stocks were all publicly traded, because though Wattles controlled them, he did not own one hundred percent of any of them. From early in his investing career, Buffett admired the Wattles model. He considered how best to profit from the same stocks Wattles was buying. He talked about Wattles all the time to his friends. “The only way to go is coattail-riding,” he would say.2
“Wattle
s had this little closed-end investment company called Century Investors, which had to report to the SEC. He did this chain thing where he would be buying stock in a company at a discount, which would be buying stock in another company at a discount, which would be buying stock in another company at a discount. The big company at the end of the thing was Mergenthaler Linotype, which was two-thirds owned by American Manufacturing. In those days, you didn’t have to file with the SEC to publicly reveal that you were buying, so nobody knew and he just would keep buying until he got control. He bought control of Electric Auto-Lite, partly through Mergenthaler, and he was doing the same thing with Crane Co., not the stationery but the plumbing supply. Somewhere in the chain was Webster Tobacco. They were all cheap statistically. Everything sold at a discount, and you could just keep buying all of them and make more money every time you made a purchase. Usually I would buy some of all of them. I owned Mergenthaler, I owned Electric Auto-Lite, I owned American Manufacturing.3 What would cause the value to come out, that was always the question. But you just had a feeling you were with a smart guy and eventually it would.”
Early on, he went to see Wattles at his office at White, Weld & Co. in Boston.4
“I was a little apprehensive and said something like, ‘Mr. Wattles, I hope I can ask you some questions.’ And he said, ‘Shoot.’ Right away, I had to start thinking of questions. He was very good with me. For ten or fifteen years I followed him. He was very Graham-like. Very Graham-like. Nobody paid any attention to him except me. He was sort of my model as to what I hoped to do for a while. It was so understandable and so obvious and such a sure way of making money. Although it didn’t make you huge money necessarily, you knew you were going to make money.”5 What interested Warren about the Wattles model: the way one company could legitimately buy cheap stock in another. “You don’t have to think of everything, you know. It was Isaac Newton who said I’ve seen a little more of the world than others because I stand on the shoulders of giants. There’s nothing wrong with standing on other people’s shoulders.”6
Eventually Wattles had merged his empire into one company, Eltra Corporation, created through the merger of Mergenthaler Linotype and Electric Auto-Lite. This stock was now a favorite of Bill Ruane’s, because the company’s earnings were compounding at fifteen percent a year.7
The Buffett-Munger companies were beginning to look a little like Eltra before its combination: Berkshire Hathaway was Diversified’s largest shareholder and also owned Blue Chip stock. Each of them also acted as a holding company for businesses that were not traded publicly. Most notably, Blue Chip owned See’s Candies, which was so profitable that it more than offset the losses from the rapidly shrinking trading-stamp business. Munger now followed up by buying twenty percent of a near-defunct investment firm, Source Capital, for Blue Chip. “We bought it at a discount from its asset value,” says Munger. “And there were two assholes who were the sellers. We had a no-asshole rule very early. Our basic rule has always been that we won’t deal with assholes. And so Warren, when he heard about Source Capital, said, ‘Now I understand the two-asshole exception to the no-asshole rule.’”8
Twenty percent is influence, not control. Munger went on the board of Source Capital with a new set of talented managers who were not assholes, Jim Gipson and George Michaelis, and started straightening out its portfolio.
Source Capital, however, was small change. Buffett and Munger were both always on the lookout for anything new they could acquire, especially something bigger that would give Blue Chip the kind of boost that See’s Candies had. They had found a sleepy West Coast savings-and-loan company, Wesco Financial. When a broker called Buffett offering some cheap Wesco stock, after a brief conversation with Munger, they grabbed it—and bought the shares for Blue Chip Stamps.9 Then Wesco announced that it was going to merge with Financial Corporation of Santa Barbara. Santa Barbara was a hot stock, with an aggressive approach that Wall Street liked. Analysts thought Santa Barbara was paying too much for Wesco.10 Yet Buffett and Munger saw the opposite. They thought Santa Barbara’s stock was overpriced, and Wesco was handing over its stock too cheap.11 Buffett went nuts. He read the terms and couldn’t believe them. “Have they lost their minds?” he asked.12
Founded by the Casper family, Wesco was located in Pasadena, Munger’s hometown. It owned Mutual Savings, a savings and loan that had prospered when the GIs came home from the Asian theater during the post-WWII building boom. Even so, Wesco had never exploited its opportunities for growth. But it was extremely profitable because it kept its costs so low.13
Betty Casper Peters, the only member of the founding family both interested and able to serve on the board, felt that Wesco’s managers condescended to her and dismissed her suggestions that they could grow the company. Instead, they used her family’s legacy as a ticket to ride at the head of the Rose Bowl parade.14 Peters, an elegantly dressed, high-cheekboned former art history student, had school-age kids, no business background, and spent much of her time tending the family vineyard in Napa. Now she drove back and forth to Pasadena on Wednesdays to attend board meetings. Running a savings and loan, she found, was hardly a black art. She subscribed to everything relevant she could get her hands on and sat down and read and figured it out.
As Peters’s frustration grew, she pushed for a merger. She knew the Santa Barbara offer wasn’t great, but all of the company’s executives were in their mid-forties and they were bright and aggressive. Although they hung around the country club too much for her taste, they were vigorous, acquiring branches and doing things that she thought should be done.
Blue Chip already owned eight percent of Wesco when the merger was announced. Munger thought that if it kept buying Wesco, it could accumulate enough stock to defeat the Santa Barbara deal. But then he discovered that it would take fifty percent of the stock, a much higher obstacle. Munger had a greater incentive than Buffett to keep going, since Blue Chip was his partnership’s most important investment. He urged going ahead; Buffett thought fifty percent was too high a threshold and held back. 15
Soon thereafter, Munger went to see Wesco’s CEO, Louis Vincenti, and tried to persuade him to abandon the Santa Barbara deal.16 And Vincenti brushed Munger off like a flake of dandruff—not an easy thing to do.
Munger and Buffett had no intention of launching a competing hostile bid, however. Further, Munger could not imagine that such a thing might be necessary. He wrote Vincenti, appealing to his higher values.17 Surely his superior reasoning could bring Vincenti around. It was wrong that Wesco should sell itself too cheap; Vincenti should simply see that. So Munger told Vincenti that he liked Wesco’s management and that Vincenti was Buffett and Munger’s sort of fellow. He told Vincenti something like, “You’re engaged to this other girl, so we can’t talk to you, but if you were free, you’re the kind of man we would like.”18
Munger’s old-fashioned, Ben Franklinesque sense of ethics and his noblesse oblige notion that gentlemen in business should agree upon the right conduct among themselves must have sounded like Sanskrit to Vincenti. But at least Vincenti did let slip that Betty Peters was the shareholder pushing for the merger.
Munger sent Don Koeppel, CEO of Blue Chip, down to see Peters. She viewed him as a minion and sent him back empty-handed.19 So it was time for the big gun. Within ten minutes of Koeppel’s departure, Buffett called her. Peters had just finished reading the chapter on him in Jerry Goodman’s Supermoney, which her husband had given her for Christmas. “Are you the same Warren Buffett that’s in Supermoney?” she asked. Buffett admitted that he was the man who, according to Jerry Goodman, represented the triumph of straight thinking and high standards over flapdoodle, folly, and flimflam. Peters willingly agreed to meet Buffett with her three children at the TWA Ambassador Lounge at the San Francisco airport twenty-four hours later.
At the meeting, Buffett, with Pepsi in hand, underplayed his talent and record while asking questions in a warm, unthreatening manner. They talked for three hours, mostly about
Omaha, where Peters’s mother had grown up. They talked about politics. Peters, a lifelong Democrat, was pleased by Buffett’s views. Finally he said, with considerable understatement, “Betty, I think I can do better with Wesco than this merger. Inasmuch as you’re giving up the company, why don’t we give it a try?”
Peters was taken with Buffett and thought he might be right about doing better than the fast young men from Santa Barbara. In fact, her concern now became that something might happen to Buffett if she swung her vote to him. He told her he had a partner, however, someone who would be in charge of Berkshire and the Buffett family’s stockholdings if the proverbial truck mowed him down.
On her next trip to Pasadena, Peters sat down to breakfast with Buffett and Munger at the grand old Huntington Hotel so that she could get to know this mysterious partner. The two of them asked for a meeting with the Wesco board. Peters then did something brave, allowing herself to look capricious in front of the board rather than let the company make a serious mistake. She went to the next board meeting and asked the board to reverse course and meet with Buffett and Munger. The board waved her off, however, and voted at a special meeting to “use every effort to complete the merger with Financial Corporation of Santa Barbara.”20
Forgetting who actually owned the company was their mistake. Peters now took Munger and Buffett to meet her brothers to secure their votes. By the time the board met again a week later and reaffirmed their position, Peters had made a decision and, behind the scenes, brought her whole family around to voting against the Santa Barbara deal.
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