The Snowball

by Alice Schroeder

  CNBC broadcast the rumors about Buffett’s possible demise, flambéing the story with word of his reassurances. Skepticism grew. If he was saying he was fine, he must not be. A second rumor began to circulate that he was taking advantage of the situation to buy Berkshire’s own stock cheap. That hit him on the tender spot where his reputation for personal integrity collided with his reputation for ruthless rapacity.

  For two days the siege continued while BRK traded down more than five percent. By presuming his indispensability, the rumor paid Buffett a sort of inverted compliment. But he was outraged that anyone would think he would cheat his own shareholders by buying back stock at their expense under false pretenses. And he hated being blackmailed by some jerk who manipulated the stock price through the Internet. He couldn’t stand being a dog on anyone’s leash. He was appalled at the thought that responding to manipulation would reward and encourage more rumors—and thereby set a precedent.

  Eventually, he reasoned, the rumors would die under their own demonstrated falsity. But “eventually” could take a long time. A new reality had dawned: In the age of the Internet time was compressed, and he had less and less control over public perception of him. Finally, he capitulated and issued an extraordinary press release.

  Recently certain rumors have surfaced on the Internet regarding share repurchases and Mr. Buffett’s health. While it has been a long-standing Berkshire policy to not comment on rumors, we are making an exception with respect to these recent rumors. All rumors regarding share repurchases and Mr. Buffett’s health are “100 percent false.”5

  The announcement was useless. BRK plunged eleven percent that week and didn’t recover.

  On March 9, Newsday hit the stands quoting Harry Newton, publisher of Technology Investor Magazine: “I’ll tell you what Warren Buffett should say when he releases his statement to shareholders: ‘I’m sorry!’ that’s what.” The next day, BRK hit a low of $41,300 per share, trading at scarcely more than the value at which its pieces were carried on its books. The legendary “Buffett premium”—the high price the stock supposedly traded at just because of Buffett—was gone. The day before, the NASDAQ index had bounded up the Andes to reach 5,000. Since January 1999 it had doubled, its component stocks increasing more than $3 trillion in value.

  The contrast was too sharp to leave alone. A money manager wrote that investors like Buffett were “fallen angels, disgraced with poor rankings…made obsolete in 1999 by mavericks who say the old laws of investing have been repealed and backed up their theories with eye-popping numbers.”6

  Buffett was miserable about the bad publicity, though he never considered changing his investment strategy. Owners of BRK apparently would have been better off investing in an index of the market over the past five years—the most prolonged drought in Berkshire’s history. His Coke investment, once valued at a frothy $17.5 billion, would now fetch only $8.75 billion. His determination not to give up his margin of safety meant that Berkshire had piled up billions in unused capital, which was loafing in low-yielding bonds. Buffett understood the basics of computers perfectly well. But he would not consider buying a technology stock at any price. “When it comes to Microsoft and Intel,” he said, “I don’t know what that world will look like ten years from now. And I don’t want to play in a game where the other guy has an advantage…. The software business is not within my circle of competence…. We understand Dilly Bars and not software.”7

  In February 2000, the SEC had denied Berkshire Hathaway’s request to keep some of its stockholdings confidential. It weighed the various interests of investors in a stable market versus the right to know, and ruled in favor of the right to know. Instead of accumulating a huge block of stock like American Express or Coca-Cola, he would only have time to tweezer up stocks in little bits before people could ride his coattails. Although he would continue to fight back, the SEC had turned him into Ben Graham, who opened up his books for the whole world to see. From now on, acquiring entire businesses—which had always been his favorite way to use capital, anyway—would be the main use of money at Berkshire. It was going to become much harder to put large amounts of money to work in stocks. That stung at a time when the media referred to Buffett as “formerly the world’s greatest investor.”8

  On March 10, the day after Harry Newton said that Buffett should apologize, the Wall Street Journal wrote that almost everyone was making money in tech except the stubborn, curmudgeonly Buffett, whose stock was down forty-eight percent from its high.9 The Journal compared his performance to a retired AT&T employee whose portfolio was up thirty-five percent, saying that this technology-stock dabbler “isn’t exactly Warren Buffett—thank goodness.”10

  Never in Buffett’s career had resolution and clear thinking been put to the kind of test that he had endured for the past three years. Every indication in the market said that he was wrong. Because of his determined clinging to a set of moldy ideas, the public, the media, and even some of his own shareholders thought he was corked. He had only his inner conviction to steer him straight. And this was the needy man who over the years had grown habituated to a stream of accolades as steady as his daily dose of Cherry Coke; who was so sensitive to public criticism that he ran from anything that would expose him to it; who had sculpted his life around managing his reputation; and who fought like a tiger against anything that could sully it.

  Yet, even under siege to his reputation, this time, Buffett never fought back. He neither wrote editorials, nor testified before Congress about the dangers of the market, nor dueled in the press, nor gave television interviews to defend himself, nor arranged that his proxies do so on his behalf. He and Munger carried on their regular dialogue with Berkshire’s shareholders, saying that while the market was overvalued, they could not predict how long it would last. Finally, not for the record but as a warning and a way of teaching, Buffett explained his views once and for all and predicted that the market would fall far short of investors’ hopes for two decades in a tour de force of a speech to the elite at Sun Valley that he shortly afterward turned into a Fortune article for Joe and Jane Investor on the street.

  It had taken one great surge of courage to burst past his fears and beg for help from Nick Brady to save Salomon. But to show such restraint, then commit himself to such a forecast in the face of years of criticism and ridicule, took a different kind of courage, making the Internet bubble one of the greatest personal challenges of his career.

  On March 11, twenty-four hours after the Wall Street Journal said thank goodness the retired AT&T employee was a better investor than Warren Buffett, Berkshire Hathaway issued its annual report, and Buffett graded himself a “D” for failing to invest Berkshire’s capital. He did not say, however, that he considered avoiding technology stocks to have been a mistake. He simply reframed investors’ expectations, writing that, because of its enormous size, Berkshire was now likely to grow in value only “modestly” better than the market. This, he knew, would set off debates about what “modestly” meant. But he felt it had to be said.

  Separately, Buffett announced that BRK was so cheap that Berkshire would now entertain offers from investors to buy its own stock. To do so—to give money back to shareholders to whom he hadn’t paid a dividend in decades; to even contemplate it—was as if Buffett, a glutton for capital all his life, had suddenly turned ascetic.

  And for the second time, Buffett was publicly announcing what he wanted to buy in advance. Not since the Great Unwinding of the partnership in 1970 had he said, “I will buy Berkshire Hathaway.” Once again, investors had to ask themselves which side to play. This time, many people understood the message. His willingness to put up money for Berkshire stock made such a statement that, before he could buy a single share, BRK rose twenty-four percent.

  The following week, the NASDAQ, full of technology stocks, sent up a warning plume of ash.11 By late April, it had cratered thirty-one percent, among the largest losses in historic terms.

  By Easter, Buffett did not care; he
was doubled over in pain. He could not believe it. Right before his all-important shareholder meeting, the critical performance of his year, the rumors about his health had come true. Susie Jr. rushed him to the hospital at three o’clock in the morning, where he spent the next several days trying to pass a kidney stone. The nurses kept wandering in and out, addressing him as Bill. Although he was in such agony that he never asked, he wondered what the hell was going on. He phoned Big Susie repeatedly in panic. She was away in Grand Lake, Colorado, with her group of “hen” friends from high school; there was nothing she could do.12 Finally, he felt somewhat better, so his doctor sent him home. When his daughter picked him up, she explained that the nurses had been calling him “Bill” because he’d been registered under Doc Thompson’s name.

  Almost immediately, however, Buffett had to rush back to the hospital, still trying to pass the damn kidney stone. Once again he sat up all night drinking tumblers of water until, finally, the water torture worked. But from then on he had to worry about a part of his anatomy that had not previously concerned him, because kidney stones recur. “The plumbing thing—I hate it. Basically that’s what goes wrong as you get older,” he said.

  He took inventory of his problems. The stock was in such disrepute that only his offer to buy it himself had saved it. General Re, his largest deal, seemed cursed. Coca-Cola was nagging at his thoughts. How could so much damage have happened so quickly in a business with such a bulletproof brand? Could it really all be poor old Ivester’s fault? And now a problem with his health had reared up to stare him in the face.

  The fact of mortality dwelled beneath the surface of Buffett’s bathtub memory, periodically sliding its way back up into the tub.13 He had still never come to terms with his father’s death. He had never decided on a suitable memorial to Howard. He had moved the large portrait of Howard so that it hung on the wall behind his desk, floating above his own head. Howard’s papers sat in the basement of his house, untouched. Warren could not bring himself to go through them. He teared up if he even thought about it, obviously terrified to let the emotions that had been held back all these thirty-five years erupt.

  He’d warned that trees don’t grow to the sky; someday everything must end. Yet he himself couldn’t face the day he would have to draw the line under his career and say: “This is it. I’m done. The Sistine Chapel is finished. No further brushstroke will improve it—any further effort will produce an ordinary result.”

  He was sixty-nine years old. He couldn’t believe that he was sixty-nine years old; he still felt like a young man. He comforted himself with the knowledge that decades remained until he reached the age at which his mother had died. General Re would be fixed, and Coca-Cola, as he knew, could be run by a ham sandwich. The kidney stone…Whoosh! The bathtub memory went to work. He returned to preparing for his shareholder meeting, which had become the happiest week of his year.

  For several days at the end of April, the town grew more crowded, the airport grew busier than usual, a rivulet, then a stream of people arrived in the hotel lobbies to check in, and tables in the outdoor cafes of restaurants downtown started to fill. The rental car companies ran out of cars. The bar at the Marriott Regency—at the time a sort of unofficial headquarters for meeting “insiders”—was packed. People wearing Berkshire Hathaway meeting credentials strolled through Omaha as if identifying themselves as members of a club. In Buffett’s office, the phone rang with urgent last-minute requests for press credentials, meeting passes, and requests from guests to bring their own guests to the most exclusive event of the year in Omaha—Buffett’s private Sunday brunch. With outward patience but increasing irritation at the more brazen requests, Buffett’s secretary, Debbie Bosanek, unsnarled the bottleneck and told people no.

  On Friday night, Buffett made the rounds from public events to private parties. Some of his disciples, dressed in gigantic yellow foam cowboy-style hats like members of a cult, mingled with longtime shareholders and big-time money managers at the Borsheim’s cocktail party, where much of Omaha joined the out-of-town shareholders to scarf down free drinks and food. Susan Jacques of Borsheim’s staged this event, which Buffett supported because it increased turnover, despite his suspicions that a lot of freeloaders showed up.

  Over at the Civic Auditorium, the shareholder meeting itself—which had multiplied to include thousands of staff, vendors, and volunteer employees; acres of exhibits, flowers, and displays; truckloads of turkey sandwiches, hot dogs, and Coke; signage, exhibits, security, media, sound, video, lighting, and private parties for the vendors and helpers—was designed, choreographed, and overseen by just one employee, Kelly Muchemore, whom Buffett called the “Flo Ziegfeld” of Berkshire Hathaway. Kelly did not even have a secretary. Technically, she was a secretary. It would take four people to replace Kelly, Buffett pointed out with pride. One side effect of this kind of praise was that it sometimes caused people to wonder whether they were getting paid a quarter of what they were worth.14 Buffett, however, was skilled at paying people with more praise than cash. Those who sat closest to the sun, Muchemore, Bosanek, and the receptionist, Deb Ray, were the most Carnegized of all Buffett’s employees; every shareholder had heard all about how wonderful they were. The Carnegizing seemed to work like a sort of sunscreen helping protect them from Rickershauser’s Law of Thermodynamics. Thus, they threw themselves into the fray, while keeping their boss sheltered in his private cocoon down at the end of the hallway, separate from everybody else. In the weeks leading up to the meeting, they all pulled double duty. On meeting day, Deb and Debbie handled the most important VIPs and the press room, while Muchemore ran around with a walkie-talkie, field-marshaling.

  By four o’clock in the morning on Saturday, several hundred restless people wearing laminated meeting credentials on lanyards around their necks lined up outside the Civic Auditorium, waiting for the doors to open. Three hours later, people stampeded past the guards who checked their credentials to claim the prime seats on the floor. After hanging their jackets and sweaters over the backs of their chairs to save seats, they made their way to the concession stands for the free breakfast of sugary sweet rolls, juice, and coffee. By eight o’clock it became clear that they needn’t have bothered to show up before dawn. Half the seats in the house were empty. Thirty minutes later, the auditorium held nine thousand people.15 While most CEOs would be thrilled (or horrified) at such a turnout, it didn’t compare to the fifteen thousand who had come the year before. Attendance was down by forty percent.

  On schedule, the auditorium darkened and the film rolled for the premeeting movie, which had been growing longer with each year. It opened with a cartoon featuring Warren as a superhero, with Charlie in a supporting role, shilling for Berkshire products. Next, Judge Judy adjudicated a mock dispute over a two-dollar bet between Buffett and Bill Gates. Comedy videos and commercials for Berkshire products followed; finally Susie Buffett sang a Berkshire-ized version of the Coca-Cola theme song, “What the world wants today…is Berkshire Hathaway.”

  Around nine-thirty Buffett and Munger walked onto the stage in suits and ties and looked out over the shrunken crowd of the faithful, clad in everything from business garb to shorts. Yellow foam hats bobbed here and there in the audience. After a five-minute business meeting, the question-and-answer session opened as usual, with shareholders lined up at microphones positioned around the auditorium, lobbing questions on how to value stocks. Somebody asked about technology stocks. “I don’t want to speculate about high-tech,” Buffett said. “Anytime there have been real bursts of speculation, it eventually gets corrected.” He compared the market to the phony riches of chain letters and Ponzi schemes. “Investors may feel richer, but they’re not.” Pause. “Charlie?”

  Munger opened his mouth. The audience perked up slightly. Munger often said, “Nothing to add.” But whenever Buffett handed the microphone to him, the auditorium hummed with the subtlest sensation of danger. It was like watching an experienced lion tamer working with a chair and a
whip.

  “The reason we use the phrase ‘wretched excess,’” Munger said, “is because it produces wretched consequences. It’s irrational. If you mix raisins with turds, they’re still turds.”

  The crowd gasped. Did he say turds? Did Charlie just compare Internet stocks to turds in front of children who had come with their parents, not to mention in front of the press? He said turds! It took some time for the meeting to settle back into its normal rhythm.

  Somebody asked “the silver question.” Around then, people started heading down into the basement to shop for shoes and Ginsu knives and See’s Candies. An annual question about Buffett’s silver position had become a tedious ritual. In 1997, he had announced he’d bought almost a third of the world’s silver supply. Instead of bringing up recollections of Blue Eagle stamps, this announcement had sent metals enthusiasts into a frenzy over the Oracle’s sudden liking for their niche.16 More attention was paid to this single transaction than any in Berkshire’s history. Buffett was not a metals bug; he followed metals as a business, based on their supply and demand, not to speculate on them or use them as a hedge against inflation. He thought stocks of companies that could raise prices were the better hedge, even though inflation eroded their gains. He had bought the silver as a good investment, but what he really wanted was to go and visit the silver. He pictured himself in the secret London vault, smiling as he counted the gleaming bars.17 The silver question sent Buffett’s and Munger’s eyes rolling heavenward a fraction of an inch, although Buffett responded politely that owning the silver had been a dull ride. He refrained from mentioning that a visit to the silver would have livened up the ride considerably.