The Snowball

by Alice Schroeder

  “Why?” asked Furth.

  Buffett looked at the judge, to whom he was trying to teach economics. “Because you have laid out the capital costs. You build the bridge in old dollars, and when there is inflation, you don’t have to keep replacing it—a bridge you build only once.”

  “And you used the term ‘unregulated’ so that you can raise prices; is that right?”

  “That is true.”26

  Buffett now hung twisting in a net of his own weaving. A toll bridge, the Douglas Street Bridge over the Missouri River, was, in fact, a prominent feature of his youth.27 During Buffett’s childhood, Omaha had been torn for more than a decade over how to liberate the only route to Iowa from the toll-taker’s grasp. He and Munger later tried to buy the Detroit International Bridge Company, which owned the bridge that connected Detroit and Windsor, Ontario, but wound up with only twenty-four percent of the company.28

  “It was one hell of a bridge. A thousand square feet, and it made more money…I was terribly disappointed when we didn’t get it. Charlie kept telling me how well off we were that we didn’t get it. Because, he said, what could be worse for your image than a guy who raised the prices on a toll bridge?”

  Indeed.

  “The judge didn’t like me. For one reason or another, he just didn’t like me. He didn’t like our lawyers either. Most people like Ron Olson, but the judge did not like Ron.”

  Judge Brieant’s ruling on a preliminary injunction, which was issued in November 1977, said that the Evening News was perfectly within its rights to start a Sunday paper and it was in the public interest that it should do so. But Brieant, apparently taken with Furth’s exploitation of the toll-bridge theme, took off with it on a flight to the land of metaphor, lamenting that the “readers and advertisers of Greater Buffalo [might] conclude that they can get along with only one newspaper as their unregulated toll bridge to the events of the outside world.”29 He deemed the News’s plan predatory and enjoined it against promoting, marketing, or distributing its new Sunday edition except under severe restrictions. The judge hamstrung the News’s ability to offer free papers, discount pricing, and guarantees to advertisers, among other restrictions. The most problematic rule he imposed required subscribers to fill out a form each and every week to order that Sunday’s paper. The Courier-Express fired a prepared publishing barrage crowing about its victory over an out-of-town bully that was trying to drive a small-fry local business into the ground. The Evening News could say nothing in response.

  “Now we were going to lose or win, and we had a judge who didn’t like us, and we were operating with our hands tied and under threat of contempt.”

  Courier-Express employees began to police the minutiae of the order, and proved that the News had delivered some Sunday papers to people who had not filled out the proper forms. Judge Brieant held the News in contempt.

  Five weeks later, advertisers had rallied behind the Courier-Express, and the new Sunday edition of the News could boast of only a quarter of the Courier-Express’s ad lineage.30 The Evening News swung from a modest profit to a whopping $1.4 million loss.31 Buffett was chilled by the news. No business he had ever owned had lost so much money so fast.

  On a miserable, rain-driven day the week before Christmas 1977, Judge Brieant called the court into session for the beginning of a trial that would determine the terms of a final injunction. Buffett had spent the latter part of the fall sleepless and in tears, trying to digest what it meant that Susie was gone and yet not really leaving him. His idea of a distraction from his personal woes had been to cling like a junebug to Carol Loomis, Astrid, and Kay Graham in turn as he flew back and forth between New York, Omaha, and Washington. Certainly he had not wanted a distraction like this. The trial went into recess as he flew to Emerald Bay for the annual holiday family gathering, the first under the new arrangement with Susie, during which she would continue to reassure him that their lives would go on much as before. As soon as the Buffetts’ New Year’s Day party was over, Warren and Susie went their separate ways, Judge Brieant reconvened the litigants, and Olson and Munger began calling Buffett with updates on the trial as he returned to work in Omaha.

  In July 1978, he was with Carol and George Gillespie. “We were playing bridge in Kay’s apartment in New York with Charlie, and Judge Brieant’s decision came in. I gave it to Charlie, and he read it, and he said, ‘Well, this is pretty well-written.’ I was so damned mad. I didn’t give a damn whether it was well-written or not, I was living with all these restrictions. I was not about to admire his prose.”

  Judge Brieant’s final opinion, a masterpiece of judicial unrestraint carrying the subtitle “Mr. Buffett Comes to Buffalo,” kept in place restrictions against the Evening News. Munger and Olson planned to appeal. Characteristically, Buffett did not want to lengthen the fight with the judge. Munger had always kidded Buffett that his management technique was to take out all the cash from a company and raise prices. If that failed, Buffett didn’t have any more arrows in his quiver. This technique wouldn’t solve the problems of the Evening News. Buffett was so beaten down and wanted so badly not to get into a confrontation with the judge that he was willing to let $35.5 million go down the drain. A remnant of his last big legal battle was only now ending: The SEC had finally, at long last, approved the merger of Berkshire and Diversified. Buffett wanted desperately to be done with lawyers, depositions, subpoenas, and fighting. “I didn’t want to appeal. I just felt it would take so damned long, it would irritate the judge, and that we had more to lose by irritating him as he enforced this injunction and as the Courier came up with all these furious attacks, and he could just keep extending it. I declared, We’re not going to appeal because in a year or year and a half we’ll be dead anyway. And Ron and Charlie told me I was wrong, and I was wrong.”

  In the end, he decided to go along with them. “We had to appeal. I wasn’t going to give in to a set of conditions which were going to make us noncompetitive. So basically I had no choice. We don’t bluff. It’s not my style, anyway. Over a lifetime, you’ll get a reputation for either bluffing or not bluffing. And therefore, I want it to be understood that I don’t do it.”

  The Buffalo Evening News was Buffett’s single largest investment, and by a wide margin. It was tying up a third of Blue Chip’s capital, losing money under Judge Brieant’s restrictions, and vulnerable to any strike that would weaken it further at a time when the stock market was falling and Buffett needed it to produce cash to buy stocks at the bargain-basement prices he always favored. The potential failure of the Buffalo Evening News risked more than setting him and Munger back their $35 million; for the man who begrudged spending $31,500 on a house because that money could ultimately turn into a million, the lost compounding potential of their investment in the newspaper made the situation much graver than it appeared superficially. So Buffett not only decided to appeal the decision, but he Tom Sawyered Stan Lipsey, who was thinking of moving to San Francisco, into trying to turn the paper around. “What would you think about going up to Buffalo?” Buffett asked. “My heart sank,” Lipsey says, “but I couldn’t turn Warren down on anything.”

  Lipsey went to Buffalo to provide some temporary help and arrived in the aftermath of Buffalo’s worst blizzard in years, banks of snow plowed as high as the rooftops of buildings. He stayed in the hotel that Buffett recommended and ate at Buffett’s favorite steak house—and was baffled at how Buffett could stand either one of them. The next morning when he arrived at the office of the Evening News, he quickly saw why Buffett had sent him. The news product was excellent, but the business management was sloppy. He sat down at a secretarial desk and worked from a manual typewriter. A manager appeared at his side and asked, “What kind of liquor do you want?” Lipsey asked what he meant. Well, said the man, as a manager you’re entitled to two cases of booze.32

  Lipsey started spending one week a month in Buffalo. On one of his weeks in Omaha, he joined Warren and Astrid to take the temperature of Buffett’s current
life. Warren was clearly relaxed in his new relationship. He let Astrid take them all to a drag show.33

  By 1979, Lipsey had straightened out the paper’s management, and victory was approaching in the battle of the legal briefs with the Courier-Express. In April 1979, nearly a year and a half after Brieant’s preliminary injunction, the Second Circuit Court of Appeals unanimously reversed him, saying his opinion was “infected with legal and factual error.” There was “simply no evidence that Mr. Buffett acquired the News with the idea of putting the Courier out of business…. All that the record supports is a finding that Mr. Buffett intended to do as well as he could with the News and was not lying awake thinking what the effect of its competition on the Courier would be…. Courts must be on guard against efforts of plaintiffs to use the antitrust laws to insulate themselves from the impact of competition.”34

  But the reversal of Judge Brieant’s order was a victory that came almost too late. The Courier-Express immediately appealed the ruling, seeking to reinstate the injunction. The News’s lawyers wearily took up their swords to continue the ludicrous fight. Meanwhile, despite tighter management controls imposed by Lipsey, the battle had cost so much in legal fees and lost advertising lineage while the News operated under all the judge’s restrictions for the better part of two years that it was losing millions—a $5 million operating loss before tax in 1979—multiples more than Buffett or Munger had ever experienced in any of their businesses. It was going to take heroic work to make the money back.

  “How about moving to Buffalo?” Buffett asked Lipsey. “I don’t really want to do that,” Lipsey replied. Buffett said nothing, and Lipsey continued commuting.

  By mid-1979, the stock market was sunk in gloom, and orders for stocks, Buffett said, were placed “with an eyedropper.”35 The Dow had languished for a decade, bucking and stalling in snorts and gasps, like a beat-up car with a faulty carburetor. Its latest stall-out took it back down to the familiar territory of the mid-800s. Gerald Ford’s replacement in Washington, Jimmy Carter, wore Mister Rogers sweaters to promote energy conservation; it backfired, and he seemed to embody the United States’ impotence in dealing with Iran, where the Ayatollah Khomeini had deposed the Shah. The empress would no longer waltz around the dance floor at the Iranian Embassy. A partial meltdown at the Three Mile Island nuclear plant released radioactive material into the atmosphere; inflation galloped at double digits; and lines formed at the gas pumps. BusinessWeek declared “The Death of Equities,” as if no one would ever buy stocks again. A mood of deep pessimism settled on the country.

  Investors piled into gold, diamonds, platinum, art, real estate, rare coins, mining stocks, feedlot cattle, and oil; “cash is trash” was the watchword of the day. High school girls wore necklaces made of Krugerrand coins. A brash new trustee at Grinnell, Steve Jobs, protégé of the esteemed Bob Noyce, tried to talk the investment committee into selling all the stocks and buying gold.36 An engineer in his mid-twenties, Jobs was obviously a very smart guy, but the investment committee demurred, and Grinnell did not buy gold.

  In Forbes, Buffett wrote the opposite: It was time for investors to buy stocks. “The future is never clear,” he wrote; “you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”37 He was the buyer of long-term values—except that he had no cash. Periodically, cash had showered on Buffett since the beginning of the decade—$16 million from distributing the partnership assets, then millions more from the sale of Data Documents stock, a private investment. But he had poured it all into Berkshire Hathaway. Buffett wanted money to invest. He had always paid himself only $50,000 a year, a number that he now raised to a still-modest $100,000. He borrowed some money from banks and started to invest again.

  And finally, Stan Lipsey made the move Warren had been hoping for. One day in 1980 Lipsey showed up at Warren’s unlocked back door in Omaha to say that his wife, Jeannie, wanted a divorce and that her lawyer was, from Stan’s perspective, raising hell. Buffett reminded Lipsey of something Tom Murphy had taught him. “You can always tell them to go to hell tomorrow, Stan,” he said. He invited the sparring lawyers to his office and helped mediate the end of a marriage between his friends—the second time he had done so. Not long before, Buffett had brokered peace between his friend Ed Anderson and his wife, Shirley Smith Anderson, an old friend of Warren and Susie’s who had been Doris’s “sorority mother.” He was experienced at easing his friends through difficult transitions. He began talking to Lipsey about the need to make changes in his life. Maybe it’s time, Stan thought. As the conversation progressed, Buffett helped Lipsey talk himself into moving to Buffalo. “It was typical Warren. He wanted me to come up here in the worst way,” but in the end, just as with people investing in the partnership, it had to be Lipsey’s idea.

  Lipsey went to Buffalo, and stayed. Every Friday night, he called and gave Buffett the latest “horrible numbers,” and each time, no matter how bad the news, Buffett remained encouraging and upbeat, thanking him for calling. “It was sort of mind-blowing,” Lipsey says.38 By the end of 1980, the losses had mounted to $10 million. Munger’s 1980 Blue Chip annual report warned about the dire condition of the paper, and also complained darkly about the “leapfrogging of benefits” for the unions, repeating a warning Munger had first given in the 1978 report: “If any extended strike shuts down the Buffalo Evening News, it will probably be forced to cease operations and liquidate.”39

  Munger’s viewpoint as he wrote these words and steered Blue Chip through the legal maze of the Buffalo Evening News could not have been helped by the dire and dark condition of his health. For several years he had stoically tolerated growing cataracts, until they reached the point at which his eyesight was seriously impaired. When he had cataract surgery on his left eye, it resulted in an extremely rare complication called an epithelial downgrowth: A specialized type of primary body tissue from outside the eye (probably corneal cells) got inside his eye and started growing like a cancer. The pressure and destruction of the optic nerve caused severe, disabling pain.40 When he could no longer tolerate the agony of his slowly exploding eye, Munger arranged to have it eviscerated and replaced with a glass eye. But afterward, “I was like a wounded animal for several days.”41 He could not stand up to be bathed by the nurses because he was so nauseated from the pain. He told Buffett that he wanted to die. Terrified of going through another such ordeal and facing the possibility of blindness, he decided to have the remaining cataract in his right eye scraped off without replacing the lens. Instead, he wore old-fashioned cataract glasses, thick as a jellyfish, over his “good” eye.

  During Munger’s ordeal, the Buffalo Evening News’s drivers’ union—perhaps emboldened after three years with new management running the place under duress—demanded overtime for work not performed. The Evening News had been paying this in a temporary capitulation; now the union wanted it as part of its permanent contract. Munger and Buffett said not a chance. Then in December 1980, the Teamsters, figuring that Buffett couldn’t take a strike while the battle with the Courier-Express dragged on, walked out at six a.m. after an all-night mediation attempt failed. Working with other unions, who crossed the picket line, Lipsey, Henry Urban, and Murray Light worked feverishly to get out the evening paper. Then, at the last minute, the pressmen walked off the job, pulling the page plates off the presses as they went.

  Buffett figured he was sunk. From his decades of background in newspaper circulation, he knew that, even more than the pressmen, the tiny drivers’ union—all of thirty-eight employees—had the power to shut the paper down. Other unions and volunteers could run the presses, but without the drivers to distribute the newspapers, the paper was dead. Buffett would not use nonunion replacements, concerned for their safety. “I was not going to send our people out in December, in the dark, dropping papers in some rural area where some guy can hit them with a tire iron. I was sitting there in Omaha, and that’s not a decision I was going to
make for a bunch of people who were going to have the hell beat out of them.”

  The Evening News closed its doors.

  Buffett told the union that the paper “has a limited amount of ‘blood,’ and if it bleeds too much, it will not live anymore…. We’re going to reopen only if there is a reasonable prospect of a viable operation.”42 That tipping point could quickly be reached.43

  This time, the unions blinked. Within forty-eight hours, the Evening News was back on the streets. By then, the News, though still trailing on Sundays, had gained some ground on the Courier-Express and was crawling slowly toward the lead while maintaining its weekday advantage.44 By the end of 1981, Lipsey and Buffett had cut the losses to $1.5 million a year, half of what the Courier-Express was suffering.45 In a war of “survival of the fattest,” it was almost certain to win—albeit at a staggering price. The Courier-Express had never given up the lawsuit trying to reinstate Judge Brieant’s injunction, but its owners saw another judge, the judge of the marketplace, heading with the blue ribbon toward the Buffalo Evening News. The Courier-Express now tried to sell itself to press lord Rupert Murdoch, but the unions wouldn’t cave in to Murdoch’s demand that they give up seniority. And with that, the Courier-Express laid down its last card in September 1982. Its next move was to fold.

  The Buffalo Evening News immediately rolled out a morning edition and changed its name to the Buffalo News. With victory in hand, Buffett and Munger went to a meeting of employees at the Statler Hilton downtown. Somebody asked about profit sharing. “There is nothing that anybody on the third floor”—where the newsroom sat—“can do that affects profits,” Buffett said. Capital took the risk and reaped the rewards. He and Munger had staked $35 million on a series of decisions. They might have lost every dime; to them went all the profits that followed. The workers got a paycheck for the time and effort they put in—no more, no less. A deal’s a deal. But after everything they had all been through, the staff was stunned at his lack of empathy.