The Snowball

by Alice Schroeder

  On a cool, cloudy Wednesday, the first day of December 1999, Buffett and Allen flew into Chicago. Ivester’s well-known obstreperousness kindled Buffett’s dread of confrontation. He lashed down his anxiety, turtling into his shell. Later, it was reported that he appeared cold. The three men got down to business without preamble.33 Impersonally, Buffett and Allen told Ivester that they appreciated his efforts on behalf of Coca-Cola, but he no longer had their confidence.

  Still, Ivester was not actually fired. Buffett and Allen lacked the authority to fire Ivester. “He might have won a board vote, and he knew that,” Buffett says.

  Ivester took the news stoically. He rushed back to Atlanta to call an emergency telephone board meeting for four days later, leaving the mystified board to wait in suspense.

  On Sunday, Ivester told the board members that he had concluded that he was not the right person to run the company. He would step down immediately. This was exactly as Buffett and Allen had hoped. But he also said there would be no transition; he was leaving as of that day. As the board listened in stunned silence, he described it as a voluntary decision, and that was true—in the sense that it is voluntary to avoid the firing squad by walking the plank.34

  Board members began asking what had happened. Was he sick? Was something terribly wrong at Coca-Cola? Why didn’t they have any warning? Must the transition be so sudden? Ivester never wavered from his script.35

  A while back the board had insisted, against some resistance, that Ivester put a name in an envelope that said who should succeed him if he were hit by a truck. The envelope was now opened to reveal the name of Doug Daft, head of Coca-Cola’s Middle and Far Eastern divisions. Daft was halfway out the door to retirement, but the board, among them Buffett and Allen, instantly made him Ivester’s successor, with apparently no serious discussion of any alternative.

  The recriminations began as the market took a hatchet to the stock.36 Investors had figured out that Ivester was walking the plank. In private conversations with a few board members, he let on what had happened. The board now realized with varying degrees of outrage how much their role had been usurped.

  With the media howling, it became clear that the company had better become more forthcoming. Fortune wrote an exclusive piece revealing details of the secret Chicago meeting.37 Ivester had negotiated a staggering $115 million consolation package, which angered both his detractors and his supporters; it gave the impression that he was either paid off or wronged. And observers now realized that an inner circle ruled the Coke board.

  “It was carried out badly, except that there wasn’t anything better that we could have carried out. It was almost a disaster the way we did it, but if we hadn’t, it would have been a disaster for sure. I don’t think we could have gotten the board to vote to make a change like that—bingo! I think the only way to have made a change fast is the way we did it. And it took both of us to get it done; if either of us had done it individually, it wouldn’t have happened.”

  But by year-end, Buffett’s reputation was suffering in an even more overt way, because the biggest, most profitable feat of stock selection that he had ever made, Coca-Cola, was down by one-third after Ivester’s departure. That Buffett had felt forced to intervene in a particularly graceless way, which had backfired in public on both the company and himself, left the impression not that he had ridden to the rescue—as with Salomon—but that what he and Herbert Allen had done was the meddling of a couple of old men.

  That impression compounded the worries raised when the biggest acquisition he had ever made, General Re, coughed up a nasty surprise within days after Berkshire closed the purchase. Ron Ferguson, the CEO, had called to say that the company had been duped out of $275 million in an enormous, elaborately designed fraud called Unicover. Investors had been surprised, to say the least, when the first report Buffett gave them about General Re was an apology for this foolish thing, as well as an expression of confidence in Ferguson and the prediction that affairs would be righted. Since there had been concerns from the beginning about whether Buffett had bought General Re only to dilute his large positions in stocks like Coca-Cola, decades of blissful confidence in his judgment about buying businesses suddenly began to waver.

  Even some of his most devoted believers were questioning his wisdom, as the stock market’s repudiation of Buffett’s Sun Valley manifesto grew even louder in the last few months of 1999. That December, he continued to look not just wrong about technology stocks but dead wrong and, at last, stubbornly blind to the obvious. The Dow closed the year up twenty-five percent. The NASDAQ blasted through 4,000 points, up an incredible eighty-six percent. The market valued Berkshire, with its burgeoning coffers of cash, at only $56,100 per share now, for a total market capitalization of $85 billion. That compared poorly to a little online media company called Yahoo!, which had quadrupled in the last year. Yahoo!, which captured the spirit of the times in its name, was now valued at $115 billion.

  As 1999 spun to a close, there was no doubt who was important and influential at the turn of the millennium, and even less doubt who was not. Time magazine crowned Amazon.com’s Jeff Bezos as its person of the year, comparing him in importance to Queen Elizabeth, Charles Lindbergh, and Martin Luther King Jr. Buffett’s personal ranking had dropped on the annual taking-stock lists, which multiplied a thousandfold that year with the millennial summings-up and retrospectives. He had just fallen from being the second-richest to the fourth-richest man in the world. Technophiles reveled in pointing out the great investor’s feet of clay, saying that “if Buffett headed a mutual fund, he’d be looking at a second career.”38 Barron’s, a weekly must-read on Wall Street, put him on its cover with the accompanying headline “Warren, What’s Wrong?” and the comment that Berkshire stock had “stumbled” badly.39 He might as well have had a bull’s-eye painted on his brow.

  In public, Buffett repeated constantly—in almost unvarying terms—the ideas that had made him famous: the margin of safety, the circle of competence, Mr. Market’s vagaries. He still maintained that a stock is a piece of a business, not a bunch of numbers on a screen. All through the market’s dizzy rise, he refrained from arguing or disputing any of the madness, except for making his now-famous speech at Sun Valley. People thought, from the way he disciplined every syllable that exited his mouth, that he was above the criticism. “Never,” he said, when asked if it bothered him when people called him a has-been. “Nothing bothers me like that. You can’t do well in investing unless you think independently. And the truth is, you are neither right nor wrong because people agree with you. You’re right because your facts and reasoning are right. In the end, that’s what counts.”40

  But these were separate issues. While he had no problem thinking independently, he was indeed miserable over being called a has-been. Asked around then if being in the public eye for decades helped keep the criticism in perspective, Buffett paused for a long while. “No. It never gets easier,” he said soberly. “It always hurts just as much as the first time.” But he could not do a thing about it.

  Buffett had spent his whole career competing in a contest that was impossible to win. No matter how much money he made and no matter how long he kept it up, sooner or later he would have a bad year or the momentum would slow down. He knew that. Over and over he had warned investors that trees don’t grow to the sky. But that had never stopped him from climbing as fast as he could. And he had loved the climb—but somewhat to his surprise, there was no blue ribbon waiting at the top.

  His life was fascinating, his business accomplishments important, the principles through which he had succeeded worthy of study. So far as could be determined, everyone who knew him personally liked the man. His kaleidoscope personality perpetually revealed new facets, yet remained faithful at its core to his Inner Scorecard. The one thing that he would always be the best at was being himself.

  As he did every year, Buffett spent the holidays with Susie and the family at their vacation home in Emerald Bay, the house garlan
ded with Christmas decorations from Susie’s huge collection.41 His work life may have been particularly challenging then, but Christmas of 1999 was a good one for his family. Warren was satisfied with the way his kids were maturing. Howie had settled down into life as a middle-aged farmer and successful businessman. Big Susie had gotten him interested in photography. Now he lived on an airplane half the time, photographing dangerous wild animals, his love of living on the edge channeled into getting bitten by a cheetah and chased by a polar bear.

  A full-time mother of two children and unpaid part-time assistant to her father, Susie Jr. had followed in her mother’s footsteps to become a major force in Omaha philanthropy, serving on the boards of the children’s theater, the children’s museum, and Girls Inc. Her ex-husband Allen ran the Buffett Foundation, and the two lived a few blocks apart and shared parenting.42

  After his divorce, Peter had married Jennifer Heil and was still living in Milwaukee and writing music. In the early 1990s, he had gotten the opportunity to move to Hollywood and work in the entertainment industry. But “I realized if I moved to L.A.,” he says, “I’d be one of thousands of me’s out there trying to get work. My father was always into the movie The Glenn Miller Story. Glenn Miller searched and searched to find his sound; my father used to always talk about ‘finding your sound.’” Peter stayed in Milwaukee rather than going to L.A., and felt that his father understood the resemblance to his choice to come back to Omaha to do things his way rather than staying in New York. Soon after, Peter was hired to compose and produce the soundtrack for an important PBS documentary, the eight-part 500 Nations. He had also written and produced a multimedia show as a benefit performance for Susie Jr. that became a PBS special, and toured with it for eleven weeks.43

  Howie had been working on Big Susie, convincing her that the kids were mature enough, saying, “Give us a chance, the money is there, give us the chance to do something with it.”44 That Christmas, Susie Jr., Howie, and Peter were shocked to receive five hundred shares of Berkshire stock in foundations that each could manage and give to any causes they chose. The kids were elated; Susie Jr. called it “gigantic.”45

  The family settled in for New Year’s Eve. You could follow the progress of the millennium’s arrival on television, starting in the Kiribati Islands. From Sydney to Beijing to London, millions of people celebrated on streets and beaches as a chain of fireworks shot around the globe. The Eiffel Tower’s millennium clock broke down. But as the hours ticked by, nothing disastrous happened anywhere, even at General Re and Coca-Cola. There was a mathematical neatness to the progression of time zones, locations, hours, that Buffett liked. After the stressful fall he had just spent, the change of millennium was not exciting to him—it was relaxing, and he needed that.

  PART SIX

  Claim Checks

  53

  The Genie

  Omaha • 1998

  Buffett was always wary of falling into what Munger called the Shoe Button Complex, pontificating on any and all subjects merely because he was an expert on business. But by the mid-1990s, both he and Munger were starting to receive—and answer—more and more questions about the business of life. He often treated the athletes and college students to whom he periodically spoke to the fable of the Genie.

  “When I was sixteen, I had just two things on my mind—girls and cars,” Buffett would say, taking a little poetic license here by leaving out the part about the money. “I wasn’t very good with girls. So I thought about cars. I thought about girls, too, but I had more luck with cars.

  “Let’s say that when I turned sixteen, a genie had appeared to me. And that genie said, ‘Warren, I’m going to give you the car of your choice. It’ll be here tomorrow morning with a big bow tied on it. Brand-new. And it’s all yours.’

  “Having heard all the genie stories, I would say, ‘What’s the catch?’ And the genie would answer, ‘There’s only one catch. This is the last car you’re ever going to get in your life. So it’s got to last a lifetime.’

  “If that had happened, I would have picked out that car. But, can you imagine, knowing it had to last a lifetime, what I would do with it?

  “I would read the manual about five times. I would always keep it garaged. If there was the least little dent or scratch, I’d have it fixed right away because I wouldn’t want it rusting. I would baby that car, because it would have to last a lifetime.

  “That’s exactly the position you are in concerning your mind and body. You only get one mind and one body. And it’s got to last a lifetime. Now, it’s very easy to let them ride for many years. But if you don’t take care of that mind and that body, they’ll be a wreck forty years later, just like the car would be.

  “It’s what you do right now, today, that determines how your mind and body will operate ten, twenty, and thirty years from now.”

  54

  Semicolon

  Omaha • January–August 2000

  Buffett began the first week of the millennium in his office. In its first edition of the year, the Sunday Times of London said, “ignoring technology seems to have made a chimp out of Buffett.”1 One of the first pieces of correspondence was an e-mail from Ron Ferguson, CEO of General Re.

  Buffett was already bracing himself. General Re had so far brought him nothing but deplorable news. A year ago, after the company had admitted being duped in the Unicover fraud mere weeks after Berkshire bought it, Ferguson had made a new confession. Movie producers and their lenders had talked General Re into guaranteeing ticket sales on Hollywood films. The company said it would pay if the box office fell short, without knowing what scripts would be filmed or who would star in them. Buffett had been incredulous when he found out. Within weeks, lawsuits began to unreel from the film-finance fiasco faster than the failed films’ credits unfurled. It could have gone without saying that his favorite manager, the brilliant Ajit Jain, would never have guaranteed any dumb movie deals. Although it did get said.

  Then Ferguson belabored him into a nitpicking match over how to underwrite an Internet lottery called Grab.com that Ajit was reinsuring. Buffett now realized that Ferguson had a sharply different philosophy from his. Buffett always liked to talk about how he would rather step over one-foot bars than look for seven-foot bars to hurdle. The Grab.com lottery deal offered an easy profit—a one-foot bar to step over.2 Ferguson didn’t want to do it because it was such a layup. General Re, he said, only did deals where it had an underwriting edge.

  Buffett roundhoused the match to an end, then decided that he needed a change in management. Yet he did not act, for nothing required him to do so. General Re had a wonderful track record. The business needed mending, not a purge. Firing Ferguson so soon after he bought the company would mean a brouhaha, a public hullabaloo. He hated firing people.

  Two months after the Grab.com deal, come the millennium, Ferguson was confessing that General Re had lost another $273 million from bad insurance pricing. It struck Buffett that he could no longer hope these were isolated mistakes, but an infestation; General Re seemed cursed since the day he’d announced he had bought the damn thing. In its first twelve months as part of Berkshire, General Re—formerly a paragon of discipline—had run straight into the ditch and had lost nearly $1.5 billion dollars from underwriting, the pricing and selection of risk. No company that Buffett had ever owned had lost money approaching a fraction of this magnitude. Buffett said little but recognized that he would have to do something soon.

  When the news was published, investors rapidly readjusted their thinking once again. Had paying $22 billion for General Re been a mistake? Buffett’s reputation took another hit.

  Meanwhile, at Coca-Cola, despite the change in management, all was not well.3 Its new CEO, Doug Daft, had laid off six thousand people in January as his opening act. Investors reacted with shock. Only a minority on Wall Street had been pointing out the sediment rising in Coke’s river of profits and investors were not yet convinced they were right. So Coca-Cola got socked, and along with it, BR
K, already cheap at $56,100 on January 1, started to plummet.

  Two weeks later, on February 9, in the early-morning sanctuary of his office, Buffett sat with half an eye fixed on CNBC, sorting through his reading. The hotline on the credenza behind his desk rang. Only Buffett answered this phone. He picked it up instantly. Jim Maguire, who traded BRK on the floor of the New York Stock Exchange, was on the other end. It was a short conversation.

  “Yep…Uh-huh. Mmm-hmm…Okay. Mmm-hmm…Not now. Okay. Mmm-hmm…Mmmmmm-hmmmmmmm…Okay. Thanks.” Click.

  Maguire was calling to tell him that sell orders were pouring in for BRK. While Buffett had been playing bridge online the previous evening, an Internet bulletin-board writer on Yahoo! who went by “zx1675” had posted, “Warren in Hospital—Critical.” Over the next few hours, the rumor spread virally from posters like “hyperpumperfulofcrap,” who said over and over “BUFFETT OLD AND WEAK, SELL,” and “SELL, SELL, SELL, SELL, SELL.” With the rumors filtering through Wall Street and convincing people that Buffett was in the hospital in critical condition, BRK was trading heavily and getting hammered.4

  Buffett’s personal phone line started ringing. It had been an unusually busy morning for calls. He answered it himself, as usual, lighting up with a big grinning “Oh, hiiiiii!” to show he was happy to hear from the caller.

  “How are you?” the caller inquired, with a slight tone of urgency.

  “Well…never better!”

  If a tornado were barreling straight toward Kiewit Plaza, Buffett would say that things were “never better” before mentioning the twister. People knew to read his tone of voice; today it sounded stressed. All morning, callers had wanted to know—how was he, really?

  I’m fine, Buffett explained, everything is fine. Really. But from the way BRK was trading, people were listening to hyperpumperfulofcrap. This was the power of new media. As BRK continued sliding on rumors of Buffett’s impending demise, shareholders were ringing their brokers, demanding to know whether Buffett was alive. People who knew people who knew Buffett grilled them: “Are you certain? Have you seen him? How can you know for sure?”