The Snowball

by Alice Schroeder

  Warren—who would give his wife almost anything she asked for these days—let her expand and redecorate the Laguna house, which had never stopped looking like the rental it once was. Tom Newman, Rackie’s son, introduced Susie to Kathleen Cole, an interior designer who was also an exercise instructor and former nurse, and together they began to give it the bright-colored contemporary look that Susie favored. Cole also took over the job of buying gifts for Susie’s ever-expanding list.29 Susie and Warren continued to spar over money, but these spats had become almost scripted; Susie’s allowance expanded at an accelerating pace—although never at quite the rate she wanted. She could afford Cole’s services and those of a full-time secretary to manage her schedule, which freed her to extend herself further while also spending more time with the family. Howie remained the magnet who drew more of her support and energy than anyone else. She commuted back and forth to Nebraska to help with this and that and to lavish affection on Howie’s children, her adopted granddaughters Erin, Heather, Chelsea, and Megan, and grandson Howie B. When Susie Jr., who lived in Washington, D.C., became pregnant with her first child, Big Susie began making more trips to the East Coast.

  Susie and Allen needed to remodel their little Washington house, which was all staircases, had a kitchen the size of a baby blanket, and an inaccessible back garden. She had plans drawn up for a new kitchen big enough to accommodate a table for two, with a back door opening to the garden. It would cost $30,000. She considered how to pay for it, since she and Allen didn’t have the money; she knew better than to ask her billionaire father to give it to her. Fortunately, her pregnancy had activated the one loophole in her weight deal with her father. Buffett was not getting his $47,000 back. Nevertheless—despite her father’s belief that clothing holds its value better than jewelry—she and Allen could not hock her new wardrobe to pay for the kitchen. So she asked her father for a loan.

  “Why not go to the bank?” he asked, and turned her down. He explained that a football player on the Nebraska football team shouldn’t inherit the starting quarterback position from his father, a former star quarterback. Unearned position, inherited wealth drove Buffett crazy, offended his sense of justice, and disturbed his sense of the universe’s symmetry. But applying such strictly rational rules to his own children was a chilly way to look at the world. “He won’t give it to us on principle,” said Susie. “All my life, my father has been teaching us. Well, I feel I’ve learned the lesson. At a certain point, you can stop.”30

  Before long, her doctor confined Susie Jr. to bed rest for a tedious six months. She lay in a tiny bedroom watching a small black-and-white television set. An appalled Kay Graham brought over meals prepared by her chef and sat at Susie’s bedside, then shamed Buffett into buying his daughter a larger color TV. When Big Susie caught wind of what was happening, she dropped everything and flew in to care for her daughter, spending months in Washington. As soon as she saw the condition of the place, she turned it upside down and renovated it. “It’s just terrible that Warren won’t pay for this,” she complained. But everything she was spending had been dunned out of him. Their endless money game enhanced Warren’s reputation for thriftiness, and Susie’s reputation for generosity. Since they had both signed up for this arrangement, obviously they both wanted it this way.

  With the birth of Emily in September 1986, the Buffetts now had eight grandchildren and stepgrandchildren in three cities: San Francisco, Omaha, and Washington, D.C. As the Emerald Bay house renovation reached habitability, Susie slowed the pace to a steady tinkering and began to use it as a base to entertain friends and, especially, her grandchildren. In San Francisco, she hop-scotched into an apartment in Pacific Heights, close to Peter’s new home on Scott Street. This large condominium on Broadway sat at the top of four dizzying flights of stairs and had a glorious view over the bay from the Golden Gate Bridge to Alcatraz.

  Now she hired her decorator, Kathleen Cole, as a personal assistant to help manage her life. “You can just work part-time,” she told Cole, “and you’ll have all this time for your two kids.” The next thing Cole knew, she was working for the Buffett Foundation, planning Susie’s travel arrangements, overseeing entertainment, and hiring and managing a staff that included housekeepers, errand-runners, and friends employed partly as a favor. The gift-giving grew every year: Cole ordered catalogs, chose gifts, wrapped them, shipped them, kept track of what was coming in and going out, and maintained records so that nothing was ever duplicated.31 She found herself managing two houses, including the ongoing renovation of the Laguna house and the two-year renovation project that Susie had launched on her new place on Broadway. Cole’s husband, Jim, a fire-fighter, stepped in as a favor to work as Susie’s part-time handyman. Another friend, Ron Parks, a CPA whom Susie had met while traveling in Europe, managed the disbursements and taxes—out of kindness and without pay—for what he jokingly called “STB Enterprises,” or, as another friend put it, Susie’s “payroll and give-away roll.”32 Parks was the partner of Tom Newman, her friend Rackie’s son; Susie had become close friends with the couple. Newman, a chef, occasionally helped out with her parties, but mostly tried unsuccessfully to improve her nutritional style. By now, Susie’s paid and unpaid staff had far outgrown that at Berkshire Hathaway headquarters.

  While the renovation of Susie’s new Broadway apartment was under way, Billy Rogers, apparently drug-free, moved from Los Angeles to San Francisco and started collaborating with Susie on an album. One day when he was working on music at Peter’s studio, he borrowed twenty dollars from Peter and left around lunchtime. After a couple of days with no word from Rogers, Susie, Peter, and Mary Buffett decided to go to his rooming house and check on him. They found his door locked from inside. When he didn’t answer their knock, they were worried enough to go to the manager to ask her to let them in. As they waited in the hallway for her to return with the key, they could hear drifts of music from other apartments. “Oh, say that you’ll be true, and never leave me blue, Suzie Q,” came from one doorway. From another, “Que sera, sera,” floated through the air. Whatever will be, will be.

  Finally the manager arrived and unlocked the door. The three of them stepped in to see Billy sitting cross-legged on the floor with his back to the door. He was tied off and a needle stuck out from his forearm beneath the tourniquet. Nearby, an LP spun silently on a turntable. The last song on the album had finished playing two days before. Billy was stone dead. Susie covered her eyes and began to wail as Peter took off down the hallway to find a pay phone so he could call an ambulance.33 The autopsy revealed that Billy had died of “acute cocaine and morphine poisoning.”34

  “He was such a sweet guy,” says Buffett, “and he killed himself with drugs.” The shock of losing a family member in a sordid overdose at a rooming house would reverberate for years. When Rogers died, Doris says, “That was the worst sorrow that Susie ever went through.” She had not only lost the nephew she had loved like a son. After so many years, all her efforts to try to save him had come to naught. She had never suffered such a defeat.

  Warren admired his wife’s desire to rescue people and her skill in helping those in need. Billy Rogers was only one of many she had befriended through the years. Some of them had done damage to themselves through terrible choices, others were victims of bad luck—though few came to such a terrible end. As “Mama Susie,” she made it her mission to help people one at a time. Warren called her a “retailer.” The emotional opening-up of this one-on-one work was beyond him. Rather, he chose to leverage his brains and money to affect as many lives as possible; he considered himself a “wholesaler.” His way of connecting to people was through his role as a teacher. But he was no longer teaching his courses at the University of Omaha, and his most attentive students, Kay and Don Graham, had become thoroughly Buffettized. His most important seminar, the Buffett Group meetings, took place only in odd-numbered years. Buffett enjoyed teaching so much that he actually went looking for an audience.

  In 1980, he a
greed to testify in a major antitrust lawsuit against IBM, the most famous case of its era. Another witness, Arjay Miller, a fellow Post director, testified reluctantly; he found being grilled by lawyers, before a judge who impressed him as hating IBM, a miserable experience. Buffett, however, enjoyed showing his expertise; he relished putting it to the test before lawyers. He put his all into the testimony. “He’s a great testifier,” says Miller.35 Buffett was especially pleased that his testimony became part of the record in a landmark case in American business history.

  Buffett’s earliest teachings had been preserved in the letters he had written to his former partners in the 1960s, letters that were photocopied and passed hand to hand around Wall Street until the copies became blurry and hard to read. Ever since 1977, with the help of Carol Loomis, his unusual chairman’s letters to his shareholders in the Berkshire annual reports—carefully crafted, enlightening, eye-opening letters—had grown more personal and entertaining by the year; they amounted to a crash course in business, written in clear language that ranged from biblical quotations to references to Alice in Wonderland and princesses kissing toads. Much of their acreage was devoted to discussions of matters other than Berkshire Hathaway’s financial results—how to think about investing, the harm the dismal economy was doing to business, how businesses should measure results. These letters brought out both the preacher and the cop in Buffett, giving people a sense of him as a man. And the man was charming, he was attractive; his investors wanted more of him. So he gave it to them at the shareholder meetings.

  The earliest meetings had taken place in Seabury Stanton’s old loft above the New Bedford mill. Two or three people with Ben Graham connections came because of Buffett. One was Conrad Taff, who had taken Graham’s class. Buffett wanted his shareholder meetings to be open and democratic, as unlike the old Marshall-Wells meeting as possible. Taff peppered Buffett with questions, and Buffett enjoyed it, as if he were sitting in an armchair at a party with people gathered round listening to his wisdom.

  The meetings carried on like this for years, with only a sprinkling of people showing up to ask questions, even after the meetings moved to Nebraska and took place in the National Indemnity cafeteria. Buffett still enjoyed them, despite the sparse attendance. As recently as 1981, only twenty-two people attended. Jack Ringwalt actually had to recruit employees to stand in back of the National Indemnity cafeteria so as not to embarrass his boss with an empty room. When the meeting was adjourned after fifteen minutes of routine legalizing and half a dozen perfunctory questions, the stenographer whom Conrad Taff had flown in to take notes for him had written nothing down. She looked frantically at Verne McKenzie, who just shrugged.36

  Then in July 1983, coincident with the Blue Chip merger, a little crowd of people suddenly showed up at the cafeteria to hear Buffett talk. He answered as many questions as they asked in his plain-spoken, unpretentious style: He was teaching, and he came across as democratic, Midwestern, and refreshing, just as he did in his letters to the shareholders.

  Buffett spoke in metaphors the audience understood, using the emperor’s new clothes and the bird in the hand versus the two in the bush. He told plain-spoken truths that other businessmen would not acknowledge, and routinely burst the bubble of corporate double-speak. He developed a memorable way of fabulizing life and businesses into instructive tales that rang familiar—Rose Blumkin as the Cinderella of Berkshire Hathaway, or Ajit Jain as Buffett’s Rumpelstiltskin, who ran his reinsurance division by spinning straw into gold. His style was so engaging and his meaning so illuminating that word began to spread. The way he expressed himself made people see old problems in new ways. The meetings took on a quality associated with almost everything that Buffett touched. They began to snowball.

  In 1986, Buffett moved the meeting to the Witherspoon Auditorium of the Joslyn Art Museum. Four hundred people came, then five hundred the next year. Many of them worshipped Buffett, who had made them rich. In between questions, some people read poems of praise from the balcony.37

  Buffett’s anomalous success, and the fame it had brought him, was putting him on the road to becoming a brand just as surely as Skippy peanut butter. Inevitably, therefore, he became the target of a group of finance professors who were at that very moment attempting to prove that someone like Buffett was a mere accident who should not be paid attention, much less worshipped.

  These academics had started by positing the reasonable but not necessarily obvious truth that if a whole lot of people were trying to be better than average, they would become the average. Paul Samuelson, an MIT economist, revived and circulated the 1900 work of Louis Bachelier, who observed that the market is made up of speculators who cohere into a whole that operates according to a “random walk.”38 A professor from the University of Chicago, Eugene Fama, took Bachelier’s work and tested it empirically in the modern-day market, which he described as “efficient.” The scrabbling efforts of legions of investors to beat the market made those very efforts futile, he said. Yet an army of professionals had sprung up who charged everything from modest fees to the soon-to-be-legendary hedge-fund cut of “two-and-twenty”(two percent of assets and twenty percent of returns) for the privilege of managing an investor’s money and trying to predict the future behavior of stocks. Stockbrokers raked their cut from all the individuals who were encouraged by TV shows and magazines to pick the next hot stock and compete with the pros. Every year, the sum of all these people’s labors added up to exactly what the market did (less the fees).

  Charles Ellis, a consultant to professional money managers, blew the whistle on the market’s pickpockets in 1975 in “Winning the Loser’s Game,” an article that showed that professional money managers failed to beat the market ninety percent of the time.39 Ellis’s work also had disheartening implications for individual investors and the readers of books and attendees of seminars like “Invest Your Way to Millions.” He said the best way to make money in the market was to simply buy an index of the market itself without paying the high fees that the toll-takers charged. Over the long term, the market tended to outperform bonds, so investors would receive the payback from the entire economy’s growth. So far, so good.

  The professors who had discovered this efficient-market hypothesis (EMH) kept hacking away at their computers over the years, however, to turn these ideas into an even tighter version, one that had the purity and rigor of physics and mathematics, one to which there could be no exceptions. They concluded that nobody could beat the average, that the market was so efficient that the price of a stock at any time must reflect every piece of public information about a company. Thus, studying balance sheets, listening to scuttlebutt, digging in libraries, reading newspapers, studying a company’s competitors—all of it was futile. The price of a stock at any time was “right.” Anybody who beat the average was just lucky—or trading on inside information.

  Most people who actually worked on Wall Street could cite examples of stocks that had traded inefficiently.40 But it was certainly true that exceptions to the efficient market had grown rarer—and the people who exploited them generally had a steady pulse and deep knowledge based on long study, and the willingness to put in full-time concentrated effort. Yet the proponents of EMH denied all exceptions, and to them Buffett—the most visible exception of all—and his lengthening and increasingly acclaimed record became an inconvenient fact. They saw him as like a man who could sail blindfolded through a sea of icebergs: in theory impossible; it was only a matter of time before he would drown. The “random walkers”—Samuelson at MIT, Fama at the University of Chicago, Michael Jensen at the University of Rochester, William Sharpe at Stanford—kicked around the Buffett conundrum. Was he a one-off genius or a freak statistical event? A certain amount of derision was heaped on him, as if such an anomalous stunt were not worthy of study. Burton Malkiel, a Princeton economist, summed the whole thing up by saying that anyone who outperformed the stock market consistently was no different from a lucky monkey that had a winning str
eak at picking stocks by throwing darts at the Wall Street Journal stock listings.41

  Buffett loved the Wall Street Journal; he loved it so much that he had made a special deal with the local distributor of the paper. When the batches of Journals arrived in Omaha every night, a copy was pulled out and placed in his driveway before midnight. He sat up waiting to read tomorrow’s news before everybody else got to see it. It was what he did with the information the Wall Street Journal gave him, however, that made him a superior investor. If a monkey got the Wall Street Journal in its driveway every night just before midnight, the monkey still could not match Buffett’s investing record by throwing darts.

  Buffett made sport of the controversy by playing with a Wall Street Journal dartboard in his office. The efficient-market hypothesis invalidated him, however. Furthermore, it invalidated Ben Graham. That would not do. He and Munger saw these academics as holders of witch doctorates.42 Their theory peddled bafflemath, teaching a whole generation of students something disprovable. They offended Buffett’s reverence for rational thinking and for the profession of teaching.

  Columbia held a seminar in 1984 to celebrate the fiftieth anniversary of Security Analysis. Buffett was by then so identified as Ben Graham’s intellectual heir that Graham himself had asked him to revise and update The Intelligent Investor. The two were not able to agree on certain things—principally Buffett’s belief in concentration versus Graham’s devotion to diversification—and in the end Buffett wrote only the introduction. Nevertheless, Columbia invited Buffett to represent the Grahamian point of view at the seminar, which was actually more of a debate over EMH. Convening in the auditorium at Uris Hall, his opponent on the panel, Michael Jensen, stood up and said he felt like “a turkey must feel at the beginning of a turkey shoot.”43 His role in the morality play was to cast withering comments at the antediluvian views of the Grahamian value investors. Some people could do better than the market for long periods, he said. In effect, if enough people flip coins, a few of them will flip heads over and over. That was how randomness worked.