As Buffett and Munger left the office, Munger walked past publisher Henry Urban, who was “waiting for at least a small accolade,” said Ron Olson. Munger was famous for getting into cabs while people were talking to him as if he did not hear them and for disappearing through doors the second he finished talking without waiting for a response. Nonetheless Urban stood open-mouthed. Buffett followed along right after Munger without looking at anyone. Nobody said thanks. Olson, following in their wake, moved around the room shaking hands in an effort to make up for it.46
A year later, with higher ad rates and soaring circulation, the News was earning $19 million pretax, more than all the previous years’ losses combined. About half of that went straight to Buffett. And as the excitement ended, his attention waned. While he still spoke well of the Buffalo News in his annual report, his interests had moved on to the next new thing.
PART FIVE
The King of Wall Street
43
Pharaoh
Omaha • 1980–1986
Five hundred of the grateful rich, wearing black tie and ball gowns, walked up the red carpet and into New York’s swanky Metropolitan Club for Buffett’s fiftieth birthday party. With Berkshire Hathaway trading at $375 a share, the Buffetts’ net worth had more than doubled in the past year and a half. They could easily afford to rent the place.1 Dotted among the Buffett Group members were semi-demi-celebrities like the actor Gary Cooper’s daughter. Susie had ordered a cake shaped like a six-pack of Warren’s beloved Pepsi-Cola. He had asked his old pinball partner Don Danly to bring him the balance sheet for Wilson’s Coin-Operated Machine Company.2 Buffett was beginning to gather materials from his early business efforts—treating these objects like totems and showing them to people with a slight tinge of reverence. They seemed like tangible evidence of himself, reassuring artifacts.
Susie brought her band from San Francisco and took center stage to sing a version of “Shuffle Off to Buffalo” to her husband:
Warren got fed up with candy
With stamps he wasn’t handy….
The song continued for verse after verse on the theme of Buffett’s latest caper: packing up his duffel and shuffling off to Buffalo to buy an undervalued paper.
Susie’s star turn, corny but sweet, was the beginning of a new tendency. Buffett’s family and friends had started to recount—in his presence—the list of the companies and investments he had collected like the beads on a rosary. The man himself, with eyebrows sprouting like ivy tendrils over the frames of his glasses, now looked less awkward in black tie. The modern Berkshire Hathaway that he had created churned out new beads for the rosary almost like a clockwork. Buffett’s hunt for things to buy had become more ambitious, free of the cigar butts and lawsuits of the decades before. The great engine of compounding worked as a servant on his behalf, at exponential speed and under the gathering approval of a public gaze. The method was the same: estimate an investment’s intrinsic value, handicap its risk, buy using margin of safety, concentrate, stay in the circle of competence, let it roll as compounding did the work. Anyone could understand these simple ideas, but few could execute them. Even though Buffett made the process look effortless, the technique and discipline underlying it actually did involve an enormous amount of work for him and his employees. As his business empire had expanded from coast to coast, from the shores of Lake Erie to the suburbs of Los Angeles, Kiewit Plaza remained at the center—a quiet but endlessly busy temple of commerce, furnished with dinged, scuffed steel-frame furniture and linoleum floors. With every new investment, there was more to do; but the number of people at headquarters barely changed. Buffett still remained behind closed doors, guarded by Gladys. The very rich Bill Scott now worked part-time and spent the rest of his days playing with his polka band. A new manager, Mike Goldberg, now augmented the headquarters staff. Verne McKenzie managed the finances. The employees rarely left their tiny offices except for the occasional conclave in the conference room, which seated only four people. No chats took place around the watercooler. As for a period of ease following the scuffle at the Buffalo Evening News, McKenzie put it this way: “There was never such a time.”3 Those who tested Rickershauser’s Law of Thermodynamics found that the sun was indeed nice and warm, but Buffett was so focused and his mind worked at such speed that extended conversations with him left them sunburned. “My mind was so tired,” said one friend. “I had to recuperate from seeing him,” said another. “It was like being pounded on the head all day long,” said a onetime employee.
Buffett had the energy and enthusiasm of a restless teenager; he seemed to remember every fact and figure he had ever read; he finagled people into volunteering for tough jobs, then assumed they could accomplish miracles; and while remarkably tolerant of others’ quirks and flaws, was less so of quirks and flaws that cost him money. So eager for results was he, so confident of others’ skills, so unaware of how far short of his own they fell, that he chronically underestimated people’s workloads. Buffett, the sun around whom everyone revolved, was impervious to the effects of Rickershauser’s Law of Thermodynamics himself.
“People tell me I put pressure on them. I never intend to. Some people like to apply pressure. I never do. It’s actually the last thing I like to do. I don’t think I’m ever doing it, but I’ve had enough people tell me that I do it that it must be true.”
The managers out in the hinterlands who ran the businesses that Berkshire and Blue Chip owned were lucky because Buffett largely left them alone, his trick of management being to find obsessed perfectionists like himself who worked incessantly; then ignore them except for a “Carnegizing”—attention, admiration, and Dale Carnegie’s other techniques—every now and then. Most would not have had it any other way.
The decisions Buffett had made about stocks in the 1970s were defiant bets against pessimism in the great bear market, plagued by rampant unemployment and consumer prices that rose at an intolerable fifteen percent a year. Now that bet suddenly paid off, thanks to a desperate President Carter, who had appointed a new Federal Reserve Chairman, Paul Volcker, in 1979. Volcker ratcheted up the central bank discount rate to fourteen percent to get inflation under control. In 1981, new President Ronald Reagan began to cut taxes sharply, started deregulating business—and supported Volcker despite the howls of pain his policies were causing. The economy and markets had been going through a seizure for two and a half years. Then, in late 1982, the bull market of the 1980s began its stampede as the prices of stocks started catching up with the growth in corporate earnings.4
Much of the money used for Buffett’s late seventies spending spree came from a bonanza of float from insurance and trading stamps. While National Indemnity prospered, at Blue Chip stamp sales continued to shrink, but investments made from the slowly dwindling pool of float from prepaid stamps paid handsomely.5
The turnaround of the Buffalo Evening News meant that Buffett and Munger no longer had to debate whether Blue Chip’s largest asset was worth more dead than alive. The News would live; it now threw off a steady stream of profits. In 1983, they finally agreed on a value for Blue Chip, and Berkshire swallowed it whole—the last step of the great untangling.6 Buffett and Munger were now full partners for the first time—although Munger was the junior partner by miles.
Buffett made Munger, who now owned two percent of Berkshire, the company’s vice chairman. Munger also now took over as president and chairman of Wesco, a wee thing compared to the now-swollen Berkshire, but Munger’s own. It dangled like a tiny strand of spaghetti from the corner of Berkshire Hathaway’s mouth, the only morsel that Buffett had yet failed to swallow. Wesco’s shareholders eventually figured out that he would get to it someday, and inevitably they began to value Wesco’s stock at a forbidding price.
Munger’s influence on Buffett’s thinking had always far outweighed his financial clout. They thought so much alike that the main difference between their behavior in business was that Munger on occasion would veto deals that the more easily e
nraptured Buffett might have struck. Their attitude toward their shareholders was identical. With the merger done, in the 1983 annual report the two men spelled out to Berkshire’s shareholders a set of principles from which they would operate. They called them the “owner-oriented principles.” No other management told its company’s owners these things.
“Although our form is corporate, our attitude is partnership,” they wrote. “We do not view the company as the ultimate owner of our business assets, but, instead, view the company as a conduit through which our shareholders own the assets.”7
This statement—deceptively simple—amounted to a throwback to a former generation of corporate governance. The modern-day corporate chief viewed the shareholders as a nuisance, a noisy or quiet group to be appeased or ignored. They were certainly not his partners or his boss.
We don’t play accounting games, Buffett and Munger said. We don’t like a lot of debt. We run the business to achieve the best long-term results. All of these sounded like simple truisms—except that so few managements could honestly make all of these statements.
Incidentally, Buffett also wrote that year, “[r]egardless of price, we have no interest at all in selling any good businesses that Berkshire owns, and are very reluctant to sell sub-par businesses”—even if that hurt performance—“as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations.”8 That was a warning in the guise of a hint to Gary Morrison, who took over from Ken Chace at Berkshire in 1982 after the exhausted Chace retired. By then, Buffett had shut down the Manchester mill and cut back on production in New Bedford by one-third.
“The textile business would make money for about ten minutes each year. We made half the men’s suit linings in the country, but nobody ever went to a tailor and said, ‘I’d like a pin-striped gray suit with a Hathaway lining.’ A square yard of cloth that came out of our mill cost more than a square yard from somewhere else, and capitalism’s frugal that way. We’d get awards from Sears, Roebuck as supplier of the year, and we took them fishing, and supplied them during World War II, and I was personal friends with the chairman of Sears, and they’d say, Your products are wonderful. And we’d say, How about another half a cent a yard? And they’d say, You’re out of your mind. So it was a terrible business.”
Instead of “generating cash,” Morrison begged Buffett to give him cash so that he could upgrade the mills. Buffett said no.
And yet he clung to the beleaguered mills. Thus, it had been even harder, like having a root canal without novocaine, for him to sell one of the company’s most profitable businesses, the Rockford Bank. But he had had to do it; the Bank Holding Company Act required it in order for Berkshire to carry on its nonbanking interests (especially in insurance).9 Even so, he still carried money with Gene Abegg’s picture on it in his wallet afterward.
He was equally loath to lose Ben Rosner, who had finally retired from Associated Cotton Shops. Rosner’s underlings had made fun of his toilet-paper-pickin’ ways. Sure enough, as soon as they took charge, Associated fell into the tank. For months, Verne McKenzie slogged back and forth to New York’s garment district, peddling its soggy carcass.10 Finally, he found some buyer willing to pay half a million dollars to haul away the remains of a business that only recently had earned Berkshire as much as $2 million a year.
A few of the Berkshire companies were so self-steering that it was hard to tell the difference between a well-run business and one guided by the wind alone. At Wesco, Lou Vincenti, who resisted being managed, succeeded in concealing his Alzheimer’s from Buffett and Munger for several years.
“We didn’t see him that often,” says Buffett, “and he would sort of get himself psyched up to try and get past that. Plus, we didn’t want to see it. Charlie and I loved him so much we didn’t want to face it.”
“Lou Vincenti was decisive, he was intelligent, and he was honest and shrewd,” says Munger. “And he ran the last savings and loan in California to go to a computer-run system for depositor’s accounts, because it was still cheaper to do it manually with community-college students working as part-time employees. You can see how that would turn Warren and me on. He was cranky and independent and a very good human being. And we loved him so much that even after we found out, we kept him in his job until the week that he went off to the Alzheimer’s home. He liked coming in, and he wasn’t doing us any harm.”11
Buffett and Munger turned this story into a jokey parable, saying that they wanted more businesses that could be run successfully by a manager with Alzheimer’s.
Buffett was sensitive to the subject of Alzheimer’s. He took great pride in his powerful memory; now his mother grew forgetful. Her state of mind could be obscured by the way that Leila had always tended to live in the past, and to create her own ideal reality—her version of Buffett’s bathtub memory, in which—whoosh—the plug popped up, and bad memories drained away. Now in her late seventies, her son’s glory was her major joy, but Warren still trembled if he had to spend time with her. It was no wonder, since the old rages still flared up occasionally. By now, virtually every member of the family had had the experience of picking up the phone and hearing her wrath come scorching over the line. Her victims all ran for comfort to Susie, who said, “You have to understand that this just happens sometimes, to other people and not just you. Warren and Doris went through it for years. So just don’t focus on what she said, because it’s not true.”12
Peter was one grandchild whom Leila had always left alone. She sometimes commented that he looked like Howard and had a way of walking like Howard, so possibly that was why. The resemblance was only in appearance, however. Peter had dropped out of Stanford not long before graduation and married Mary Lullo, a recently divorced woman six years his senior who had four-year-old twin girls, Nicole and Erica. Peter treated them as his own daughters, they began using the name Buffett, and they became great favorites of Big Susie’s. Warren had been trying to interest Peter in Berkshire for some time and eventually sent his protégé, Susie’s former tennis buddy, Dan Grossman, to talk to him about working in the business, but Peter had no interest; his future lay in music.13 He cashed in $30,000 of his Berkshire stock to finance a recording and music production company, Independent Sound, scoring commercials out of his apartment in San Francisco with Mary as his business manager and promoter.14
Susie stayed close to Peter through his music, while she continued to toy with the idea of reviving her career, working with a pair of producers, Marvin Laird and Joel Paley. She took them to Omaha and toured them around the Old Market jazz clubs. They felt like they were writing an act for “their favorite English teacher.” Susie displayed no signs of wealth, but since they had heard something about a newspaper and See’s, they thought, “Maybe she’ll pay us in candy.”
At last they settled on an act that Susie would perform at Delmonico’s in New York at a benefit for New York University. The act she wanted them to create would reflect her personality—a bohemian, gypsy soul and a wicked, sly sense of humor. In the end, however, she sang a conventional medley, replacing the soulful, passionate songs of 1977 with standards: “String of Pearls,” “I’ll Be Seeing You,” “The Way You Look Tonight,” “Satin Doll,” “Take the A Train,” “Seems Like Old Times.”
At the benefit, Warren beamed as he watched his wife work the audience. Laird and Paley realized that showing off his talented, beautiful wife made Buffett proud and happy. It seemed to them that, unlike most show-business people, Susie’s performance wasn’t about her ego. Performing was a way of connecting with the audience, and giving something to her husband.15
Laird and Paley, who referred to themselves jokingly as “musical gigolos,” became part of Susie’s singing life, meeting Peter and going down to the Laguna house to work with her for the next few years on her music as she considered whether she could make a viable career out of it. They never met Susie Jr., who had moved to Washington, where Katharine Graham took an inter
est and arranged for her to work as an editorial assistant, first at the New Republic and then at U.S. News & World Report. In November 1983, in a huge wedding at New York’s Metropolitan Club, she married again, this time to Allen Greenberg, a public-interest lawyer for Ralph Nader. Greenberg had her father’s cool analytical bent and looked like someone who lived in a library. Both Susie’s parents took to their new son-in-law immediately, and people remarked on how much Allen resembled Susie’s father—rational, dispassionate, good at saying no. The newlyweds moved into a Washington town house but rented most of it out to other tenants and lived in a tiny apartment. By this time Susie Jr. had sold all her Berkshire stock—when it was trading for less than $1,000 per share.
Howie’s first marriage, like his sister’s, had not lasted. Despondent, he spoke to his father, who had told him a change of geography would do him good and suggested that he work at one of Berkshire’s businesses. Attracted to California, Howie took a job at See’s Candies in Los Angeles. Big Susie sent him to live with Dan Grossman, whom Buffett had installed at one of Berkshire’s little insurers in Los Angeles when it ran into trouble. Howie started mopping floors and doing maintenance and worked his way up to ordering boxes, while getting into adrenaline-charged scrapes of various types. Buffett told him he had to stay at See’s for two years. Howie prepared to wait it out in resignation, but he didn’t last at Grossman’s. He moved into the house at Laguna, where he felt more at home.16
By chance, Howie was partnered in doubles tennis at Emerald Bay with Devon Morse, a sweet, unhappily married blonde with four daughters. To impress her, he shimmied up a post to change the time on a clock by the tennis court, fell off, and broke his foot. She helped him get home, then showed up at the house with some food. They started to talk and he learned she was trying to leave her rich husband. The marriage that had eventually resulted from their relationship followed a series of Howie-type adventures; the couple removed the children from the home of Devon’s husband, a gun collector whose house was filled with hundreds of weapons. In 1982, Howie had convinced Devon that it would be best to relocate to Nebraska, where they were married by a judge, with Buffett and Gladys Kaiser as witnesses.17
The Snowball Page 62