The Snowball

by Alice Schroeder

  Increasingly, the complexities and nuances of reproductive rights, civil rights, and population control had all gotten lost in the controversy over abortion. Buffett’s giving ultimately was based on what he called the Ovarian Lottery.56 He had passed the idea along to a group called Responsible Wealth. The idea had great resonance for Buffett.57

  “I’ve had it so good in this world, you know. The odds were fifty-to-one against me being born in the United States in 1930. I won the lottery the day I emerged from the womb by being in the United States instead of in some other country where my chances would have been way different.

  “Imagine there are two identical twins in the womb, both equally bright and energetic. And the genie says to them, ‘One of you is going to be born in the United States, and one of you is going to be born in Bangladesh. And if you wind up in Bangladesh, you will pay no taxes. What percentage of your income would you bid to be the one that is born in the United States?’ It says something about the fact that society has something to do with your fate and not just your innate qualities. The people who say, ‘I did it all myself,’ and think of themselves as Horatio Alger—believe me, they’d bid more to be in the United States than in Bangladesh. That’s the Ovarian Lottery.”

  The Ovarian Lottery had come to shape all of his opinions about politics and philanthropy; Buffett’s ideal was a world in which winners were free to strive, but narrowed the gap by helping the losers. In his lifetime he had seen the extremes of inequality; had grown up with the lynchings and beatings of the civil-rights years; and had heard over and over of the Court House Riot, authority shoved onto a scaffold with a noose around its neck, at a time and in a place when one group of people felt themselves more deserving than another. Perhaps without being aware of it, Buffett had many years ago abandoned the libertarian leanings of his father58 and spiritually circled back toward the democratic idealism of Nebraska’s William Jennings Bryan, who had written of “the class that the rest rested upon.”

  Buffett, one of the least peripatetic people imaginable in both philosophy and geography, could make the occasional tectonic shift if enough conviction piled up. Now, after he and Susie returned from Ireland, they met in Vancouver to embark on a seventeen-day trip to China, “Across Cathay.” Buffett’s motivation for this round-the-world jaunt was the Gateses. Bill and Melinda had gone to considerable trouble to make the trip enjoyable for him. Ahead of time, they sent him and the other guests a questionnaire asking what they liked to eat. Buffett was not taking any chances on an experience like the one he’d had at the Moritas’. “I don’t eat any Chinese food,” he responded. “If necessary, serve me rice and I’ll just move it around on my plate, and I’ll go back to my room afterward and eat peanuts. Please get me a Journal every day; it’s really hard if I don’t have my Journal.”59

  And so Buffett went to China.

  After checking in to Beijing’s grand old Palace Hotel on Goldfish Lane, the tour group met Dr. Robert Oxnam, president of the Asia Society, who was to be their lecturer for the trip.60 Following a talk on modern China, they ate a magnificent Sichuanese dinner in the hotel’s Emerald Room. Waiters placed course after course on the rotating platters: tea-smoked duck, twice-cooked pork with chili sauce, spicy chicken, and Sichuan hot pot. But the Gateses had arranged for the tour company, Abercrombie & Kent, to send people ahead to teach the chefs to make hamburgers and french fries for Buffett. To his delight he was served course after course of his french fries—even for dessert.

  The following morning, the group set off to tour the Forbidden City, Beijing University, and the National Palace Museum. At Fangshan restaurant, for lunch, and again that evening at the Diaoyutai State Guesthouse, an imperial family fishing ground and retreat, Buffett was served hamburgers and french fries while the rest of the group feasted on Chinese cuisine.

  In Beijing, the group met the Premier of China, and Gates arranged a Ping-Pong match between Buffett and a twelve-year-old champion. On the third day, Dr. Oxnam lectured on the history and folklore of the Great Wall. When they climbed to the top, the group found champagne awaiting them—and Cherry Coke for Buffett. Looking down at the world’s largest structure, which represented eleven centuries of innovative engineering, human labor, and Chinese history, everyone waited for Buffett to say something profound. Surely he would be moved by the sight.

  “Boy, I sure would have liked to have been the company that got the brick contract for this thing,” he quipped.

  The following morning, he skipped the martial-arts lesson in favor of a tour of the local Coca-Cola plant. The next day, the group boarded a Chinese military transport plane to fly to Ürümqi, a town in far northwestern China near Mongolia that was once an important stop on China’s Silk Road. There, they would board a train—no ordinary train, for the Gateses had arranged for the group to be the first Westerners to rent Chairman Mao’s personal train—for a journey across northwest China. The train followed the Old Silk Road route, making stops along the way so that the group could ride camels in the desert, visit ancient cities and caves, see the giant pandas in Xi’an, and tour the archaeological dig of the imperial Terra Cotta Warriors and Horses, believed to be the largest funerary site on earth. The trip allowed for hours and hours of conversation, during which Buffett and Gates continued their discussions of why some banks are better than other banks, why retailing is such a tough business, the value of Microsoft stock, and the like.61

  On the tenth day they visited the site of the Three Gorges Dam project, then boarded the M.S. East Queen, a huge, five-deck cruise ship, with a ballroom, a barbershop, a masseuse, and a musician on the deck in formal clothes who played “Turkey in the Straw.”

  The boat passed into the first of the three gorges, the Shennong Xi, where many of those onboard donned orange life vests and climbed into longboats that were poled and pulled by river trackers along an upstream tributary of the river. A group of ten men using ropes dragged each boat against the current, while young, supposedly virginal girls sang to encourage the men at their grueling work.

  Buffett cracked jokes about the virgins. But that night during the Cantonese dinner, his mind obviously flashing to the implications of the Ovarian Lottery, he said, “There could have been another Bill Gates among those men pulling our boat. They were born here, and they were destined to spend their lives tugging those boats the way they did ours. They didn’t have a chance. It was pure luck that we had a shot at the brass ring.”

  From Shennong Xi, the boat steamed on to Outang Gorge, passing villages where schoolchildren came out to bow at the strange Americans. Past a silk-reeling mill, between sheer, mist-shrouded peaks, alongside a traditional cobblestone village, the boat slowly wound its way down the Yangtze. Finally, they arrived in Guilin for a private Li River barge cruise through one of the most scenically beautiful spots on earth, a pristine river lined with thousands of limestone pinnacles covered in a mantle of green, “like jade hairpins,” according to the Tang poet Han Yu. Many of the Gates party bicycled along the riverbank to experience the long waterside parade of two-and three-hundred-foot-high untouched prehistoric stone shafts. Warren, Bill Sr., and Bill Jr. had obtained permission from their wives to have an hours-long bridge orgy on the boat as the barge floated through the magnificent pine-forested landscape.

  When they finally arrived in Hong Kong at the end of the trip, Buffett towed the Gateses straight to McDonald’s to buy hamburgers in the middle of the night. “And all the way back from Hong Kong to San Francisco and then on to Omaha, I just read newspapers.”

  But long after that journey through China, for years afterward in fact, Buffett’s mind kept returning over and over to one of its moments. It was not the scenery, which he had barely noticed, or the camel ride, memorialized in a photograph. It was not the endless meals of french fries during the Chinese banquets that everyone else had enjoyed. He was thinking about the Three Gorges Dam project and the longboats on the Shennong Xi. But it was not the singing virgins that had beguiled him. It
was the fate of the men who spent their lives ceaselessly dragging the longboats upstream that stayed with him, haunting his thoughts about individual destiny and fate.

  51

  To Hell with the Bear

  Omaha and Greenwich, Connecticut • 1994–1998

  Through the bridge, through the golf, through Ireland, through China, as late as 1994, Buffett devoured the Wall Street Journal every day looking for stock to buy for Berkshire Hathaway. But it was growing steadily more difficult to find a wonderful business at a fair price. He was still putting money into Coca-Cola, until he had spent a total of $1.3 billion on 100 million shares. He bought another shoe company, Dexter. Here he was a little outside his “circle of competence,” making a bet that demand for imported shoes would wane.1 A jeweler named Barnett Helzberg Jr., who knew about Borsheim’s, saw Buffett in New York in a conversation on Fifth Avenue, and sold him Helzberg Diamonds almost on the spot. Buffett was also buying American Express stock again.

  He wanted the rest of GEICO.

  Since October 1993, GEICO had been run by co-CEOs: its chief investment officer, Lou Simpson, and Tony Nicely, a soft-spoken, silver-haired teddy bear of a man who had worked there since he was eighteen years old and now ran the insurance operations. Nicely had put the pedal to the floor, and GEICO, after a period of dormancy, started adding half a million new customers a year. In August 1994, Buffett talked to Nicely, Simpson, and Sam Butler, the chairman of the board’s executive committee and the man who, many years before, had found Jack Byrne to rescue the company. Nicely, who did not enjoy dealing with Wall Street, had thought ever since he became co-CEO that GEICO should be privately owned.2 He would much rather work for Buffett than a bunch of analysts and money managers.

  Butler led the negotiation. He wanted stock and a price in the $70s. Buffett regarded that as outrageous. He wanted to pay cash and a price in the high $50s.3 For a year, they bargained. Buffett pulled out the Circular Saw. This was his technique to cut the floor out from under GEICO by trying to make Butler feel the company was weak and vulnerable. The market was getting out of hand, Buffett said. This high-tech Internet stuff is going crazy and it’s going to hurt the whole industry, including GEICO. You guys have a significant advantage selling over the telephone, but the Internet is going to narrow that quite a bit. It was apparent that by 1994, before the average person even had an e-mail address, Buffett, who supposedly knew nothing about computers, had already grasped how the Internet was going to affect the auto-insurance industry in the coming decades—better than the auto-insurance industry itself had.

  But Butler was a tough and experienced lawyer, and couldn’t be Buffetted. Berkshire’s stock price had doubled in two years. That April, with BRK trading at $22,000 a share, Money magazine cited the Overpriced Stock Service newsletter, which said the price of BRK “makes sense only if the company is run by God.” Butler refused to lower his number. He wanted as many Berkshire shares as he could get. The two reached an impasse. Finally, Buffett resorted to the ultimate weapon and brought in Charlie Munger as the Appointed Bad Guy. At Salomon, this had been predictably successful, but Sam Butler proved so tough that he couldn’t even be Mungered.

  After a year, it became clear that if Buffett wanted GEICO, he was going to have to meet Butler’s price. Buffett wanted GEICO so badly that he capitulated. In August 1995 he paid $2.3 billion dollars for fifty-two percent of GEICO, after having spent $46 million for the first forty-eight percent. And he paid with Berkshire stock, not cash. Despite having fought so hard, Buffett actually regarded the price as reasonable looked at as a whole, given the bargain he’d gotten on the first half of the stock.

  The GEICO deal marked a turning point. The stock market had been on a tear, with new offerings of hot stocks unexpectedly popular in 1994, coming on the heels of a big 1993.4 In February 1995, the Dow hit 4,000 for the first time. Microsoft brought out Windows 95 and sold $700 million worth the first day. Suddenly everyone who worked in an office had a computer on their desk. People bought computers for their kids to do homework after school. Mothers of kindergarteners got e-mail addresses to keep up with carpool news. Web-site designers couldn’t meet the demand from businesses. Computer hackers made front-page news.

  In August 1995, an Internet service provider named Netscape went public to raise money for its expansion. Many people were familiar with Netscape’s product, but the company had never earned a dime. So many calls to buy the stock came into banker Morgan Stanley that the company set up a toll-free number to handle them. Orders for 100 million shares poured in for a company that had originally wanted to sell 3.5 million shares.5

  Despite Buffett’s use of a computer to play bridge and the insights about the Internet that he had displayed in bargaining for GEICO, his knowledge of technology was spotty. He remained personally indifferent to computers, while the rest of the world couldn’t buy them fast enough. Bill Gates took this as a challenge. He brought Buffett and Munger to a gathering at Microsoft to talk about technology. The evening before, he and Melinda held a dinner at their house at which she seated Munger with Nathan Myhrvold, chief technology officer of Microsoft. The two soon fell into a lengthy conversation about naked mole rats. A naked mole rat looks like a boudin blanc—a French milk sausage—with teeth; it feels no pain when cut, scraped, or burned.*31 Munger, a science buff, had some tangential knowledge on this topic. Sandy Gottesman had once invested in laboratory mice, trying to make a quick buck on rising demand for experimental animals. But Gottesman’s investment hadn’t worked out, and he got stuck with a building full of mice under some bridge in New York City. The naked mole rat was a superior beast, not only insensitive to pain but parthenogenic: The queen of the colony fertilizes and gives birth without assistance from the males. Munger and Myhrvold held an animated conversation about the sex life of mole rats while the others sat listening in numb disbelief.6

  The next morning, Gates took Buffett and Munger over to Microsoft so that his number two, Steve Ballmer, and half a dozen engineers could interview them, almost as anthropologists, so strange did it seem to them that these two incredibly brilliant men were such latecomers to the world of computers. They were like a couple of cavemen savants discovered in the bush who had seen an airplane but wouldn’t take a ride. Despite his sense of the Internet’s importance, for example, it had not yet occurred to Buffett to tell GEICO to hurry up and exploit the Internet to sell insurance. To Buffett, computers were just tunnels that enabled him to reach other people who could play bridge.

  “That was quite interesting to Bill, because he saw how some guy who had no interest in the computer, per se, could be drawn in by an application. The computer itself was interesting to all the people around him—but to me, only the application was interesting. You sell the computer first to people who are interested in computers, and then you sell it to people like me who don’t give a damn about computers.”

  Buffett, who deemed computers outside his “circle of competence,” might still have been the richest man in America instead of Gates, had he bought stock in Microsoft and Intel. Instead, he was now number two. But he did not care. Or rather, he did care—he cared a lot; he would rather be number one, much rather—but he cared far more about avoiding excess risk. He didn’t know which company would turn into the next Microsoft or Intel and which would crash and burn. He would never give up his margin of safety. He knew that the life cycle of many technology businesses was as short as a naked mole rat’s.

  Even had he been of the temperament to do so, Buffett didn’t need to make risky bets. Decisions made years ago were still compounding for him. The hiring of Ajit Jain had meant that when Hurricane Andrew blew South Florida off the map in 1992, Buffett was able to start a new business, “catastrophe reinsurance,” which charged a premium price to stand by as insurer of the unthinkable. Then the Northridge earthquake hit. Almost no one else had the capital to put up billions on a risk like that. But Berkshire Hathaway did.

  Buffett’s relationship with th
e Blumkins brought him the chance to buy R. C. Willey, a Salt Lake City–based furniture chain. The old days of scouring the Moody’s Manuals for teensy companies were long gone; instead he played white knight once again to save FlightSafety from a corporate raider. This was a unique and profitable company that trained pilots and made the enormous flight simulators used for that training. He would go on to buy Star Furniture and International Dairy Queen. However, most of the ideas that were brought to him were what he called “cocker spaniels,” when he had asked for “collies.” In reply to these proposals, “If the phone don’t ring you’ll know it’s me,” he quipped in Berkshire’s annual report.

  Some may have thought, If he’ll buy Dexter Shoe, Buffett will buy anything. He was starting to regret that deal. Dexter was getting killed by foreign competition; people had not lost their interest in buying imported shoes. But the mistakes were few and the home runs many: Cap Cities/ABC negotiated a deal to sell itself to Disney for $19 billion, and Berkshire made $2 billion, almost four times its original investment. Tom Murphy went on the board of Disney, and Buffett became linked to Michael Eisner, the CEO of Disney, through Murphy. At Sun Valley, the Buffetts now mingled easily with a crowd that ranged from Coca-Cola executives to movie stars. He also went back on the board of the Washington Post, which was now being run by Don Graham, one of his favorite people, enabling him to rejoin his favorite company in his favorite milieu—newspapers.