The Snowball

by Alice Schroeder

  The questions droned on as Buffett and Munger listened, unwrapping Dilly Bars with much rustling. Shareholders began to voice complaints. They didn’t like the stock price.18 One said she was going to look into correspondence schools, since her Berkshire stock would no longer pay for college.19 Gaylord Hanson of Santa Barbara, California, stood at the microphone to harangue that he had bought BRK near its highs in 1998 because of Buffett’s track record and had come out okay only because the money he’d lost had been made up by four technology stocks.20 He urged Buffett to invest at least ten percent of Berkshire’s assets in technology, “the only game in town. Isn’t there enough left in your brain power to maybe pick a few?”

  The questions kept veering along these lines. What about famous money managers like Stanley Druckenmiller, who had given in and bought technology at Soros? Given Berkshire’s disappointing performance, couldn’t Buffett find something new to do? If not technology, couldn’t he make some international investments?

  It was worse than humiliating. Looking out into the audience, Buffett saw that, for the first time, some of them assumed that he was letting them down: the effort of nearly fifty years rolled backward, undone, his own shareholders turned against him. His age suddenly signified not experience but obsolescence. In the press, people now referred to him as an old man. It seemed that the world today did not want Berkshire Hathaway.

  Afterward, Buffett guzzled Cherry Coke while signing autographs, then donned a baseball uniform to throw out the first pitch at the Omaha Royals game. He made another round of parties with Astrid, still wearing his baseball uniform, Dilly Bars dripping in his wake. He held court at Gorat’s with the family on Sunday night, then oversaw the board meeting—another teaching exercise—on Monday morning. Afterward, he, Susie, and the kids and their families flew to New York. By the time he was catching up with friends, eating out and seeing shows with the family, and dutifully checking off his list the unloved annual chore of buying suits at Bergdorf’s, the bathtub memory had done its work. While in New York, he also taught a session of the modern version of the Ben Graham course at Columbia and met with half a dozen journalists attending Columbia’s business-journalism program.21

  Saturday morning he summoned three members of General Re’s management to his suite at the Plaza Hotel. Ron Ferguson brought a series of PowerPoint handouts and began to pace through General Re’s string of terrible results. Buffett listened for a few minutes, frowning and fidgeting. Finally he said, Why don’t we just jump to the end. Results had to improve. The lines of authority must be reinforced. Clients were dictating terms to General Re, not the other way around. This must end. Somebody had to be accountable.22

  He stopped short of telling Ferguson to retire, betrayed by his weakness for older managers. He sympathized with Ferguson, who’d suffered a subarachnoid hemorrhage in late 1999. Ferguson, who had seemed just slightly off-kilter for some time afterward, had offered to step down then. Buffett had told him no. He didn’t believe in putting people out to pasture; some of his best managers had been elderly, including Mrs. B, who had worked until age 103 and died a year later. He missed her caustic little soul, but felt great relief that she had not outwitted the terms of her noncompete. His own goal was to outlive Mrs. B, not by just a few years but by five years beyond forever, as he had once feared that she would outlast him. He bragged all the time about Berkshire’s geriatric crew, and his board of directors was beginning to resemble the elderly U.S. Supreme Court.

  Imagine, therefore, if Buffett’s genie had been watching over his shoulder a few weeks later, as he played bridge after dinner at Bill and Melinda Gates’s house. He was answering questions in the raspy voice that meant he hadn’t been sleeping, repeating that he was “just fine,” but clearly not enjoying himself. Sharon Osberg, who knew how to read the signs that meant Buffett was in real distress, conferred with the Gateses, who immediately summoned a doctor, over Buffett’s protests.23

  The doctor was surprised that Buffett had never had a colonoscopy. He gave him a painkiller to get him home in comfort. But, he said, you really should go in and have a complete examination and a colonoscopy when you get back to Omaha.

  The genie would have been less tactful. Howard Buffett had had colon cancer and died of complications from it. What was Buffett thinking, at age sixty-nine, never having had a colonoscopy? This was certainly not treating your body like the only car you’d ever own.

  A month later, BRK had recovered by nearly $5,000 a share to $60,000. Fortune magazine noticed that even though he “lost his heavenly touch” in 1999, Berkshire’s recent forty-seven percent recovery from its March low made him a “good revivalist.”24 He would need some reviving in other ways, however.

  Buffett had scheduled the dread procedure at last.25 So much medical attention at once—only a month after the kidney stone. But a colonoscopy could be considered “routine.” He distracted himself by talking on the phone and playing bridge. He played helicopter on the computer. When people asked him about the upcoming procedure, he said, “I’m not the least bit worried.”

  But he woke up from the colonoscopy to a nasty shock. A sizable benign polyp was nesting in his gut. The polyp had taken over so much real estate that removing it would require demolishing a good chunk of the surrounding neighborhood. It had a few small friends nearby as well. This was not something to trifle with. Buffett decided to have surgery in late July, after Sun Valley. “Oh, I’m not worried at all,” he said, making jokes and stressing the good results from his cardiology tests. “I never worry about my health. Unless you’d brought it up, I never would have even thought about it.”

  But Buffett now seemed cornered into issuing press releases about his health, this one blaring in embarrassing detail:

  Warren E. Buffett, Chairman of Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B), expects to enter an Omaha hospital in the next month to undergo surgery to remove several benign polyps in his colon. The polyps were discovered on Monday when Mr. Buffett underwent a routine physical examination, which otherwise found him to be in excellent health. The surgery is expected to keep Mr. Buffett in the hospital for several days, after which he expects to return quickly to work. Berkshire Hathaway is releasing these facts to forestall the kind of false rumors about Mr. Buffett’s health that disrupted the market for its stock earlier this year.26

  The surgery took several hours, during which fifteen inches of Buffett’s innards were removed, and left him marked with a seven-inch scar. He spent a week recovering at home. He also grew a beard for the first time in his life. Deprived of Berkshire Hathaway, he talked a lot on the phone. He sounded weak.

  “Oh, no, I’m not tired at all, I’m perfectly fine,” he said. “I’ve lost a few pounds I needed to lose. Astrid’s taking good care of me. The doctor says I can eat anything I want. By the way, did I tell you that I went into the hospital with a colon, but I came out with a semicolon?” Asked if he was concerned about a recurrence: “Oh, no, I’m not worried at all about that. I never worry about anything, you know. Incidentally, did I tell you that the anesthesiologist used to be my caddy at the country club? I told him before he put me under that I sure hope I tipped him well.”

  Berkshire Hathaway’s press release simply noted that the polyp was confirmed benign and no further treatment was required. Despite the announcement, rumors raced over the Internet and around Wall Street again. Some insisted that Buffett must have had cancer; polyps did not require surgery. But Warren was not sick and certainly did not feel old. He still felt like the “Firebolt.”

  Yet after tolerating cavalier treatment all his life, his health was beginning to set limits. Someday, his wrestling match with infinity would end; the questions he was avoiding must be faced. Since Berkshire and Buffett were interchangeable in his mind, everything in his nature rebelled against this task. Many of the questions hinged on Big Susie, who was going to outlive him. He told people that she would take care of everything.

  55

  The Last Kay P
arty

  Omaha • September 2000–July 2001

  By the time Buffett got his semicolon, the Internet boom had boomeranged. The dotcoms were dying at the pace of one a day: Arzoo.com, Boo.com, Dash.com, eToys.com, Flooz.com, FooDoo.com, Hookt.com, Lipstream.com, PaperFly.com, Pets.com, Wwwwrrrr.com, Xuma.com, Zing.com.1 The NASDAQ was trading at less than half the value of its peak; the old economy stocks were still swooning. The Federal Reserve had started to cut interest rates once again. Buffett’s reputation, however, began to revive.

  Berkshire dipped its soup ladle into a huge stockpot of capital for Buffett to buy private companies, bankrupt companies, under-the-radar companies as the window to invest began to open again. He bought U.S. Liability, an insurer of unusual risks; Ben Bridge, another jeweler;2 and Justin Industries, parent of Acme Brick and Tony Lama and Nocona Boots;3 Shaw, the world’s largest carpet maker;4 and Benjamin Moore Paint.5 He bought Johns Manville, a home-building-products maker,6 and Mitek, a high-tech steel component fabricator.7 Even so, by the end of 2000 Berkshire still had billions of unused capital: a baled-in-the-basement, batched-to-the-rafters, wadded-to-the-walls, stashed-up-the-chimney, thatched-to-the-rooftop mass of money that continued to pour out from the self-perpetuating cash-spinning machine.8

  Buffett’s foreboding prediction about the market in his 1999 Sun Valley speech had proven right so far. Now he sermonized in his letter—which had become a global media event, released on the Internet and awaited by so many thousands of people that the Berkshire Web site nearly crashed on the appointed Saturday morning—that the birth of the Internet was a chance for cynical financiers to “monetize the hopes” of the credulous. He alluded again to the Aesop’s fable he had invoked in his Sun Valley speech: Investing in the Internet is laying out the bird in the hand—money today—to get birds in the bush. The resulting “wealth transfer on a massive scale” was going to benefit only the very few.

  “By shamelessly merchandising birdless bushes, promoters have in recent years moved billions of dollars from the pockets of the public to their own purses (and to those of their friends and associates)…. Speculation is most dangerous when it looks easiest.”9 The audience listened, and at the 2001 shareholder meeting, the crowds started coming back.

  A small part of Berkshire’s good fortune came from a turnaround at Gillette, where Buffett had been instrumental in replacing its CEO, Mike Hawley, with Jim Kilts.10 Shortly before that, near the end of 2000, he had thrown off his torpor as a Coca-Cola board member once again when Doug Daft, the new CEO, tried to make a deal to buy Quaker Oats. Buffett was one of several board members whose lack of support spiked the deal. But it remained to be seen whether the changes at Coca-Cola would make a difference. Certainly replacing one ham sandwich with another had not helped the stock.

  Buffett’s return to Sun Valley in 2001 was another opportunity to table-thump. But as the Gulfstream jets glided their way down the mountain wave to Hailey, the corporate chiefs heading to the Sun Valley Lodge had deals on their mind and rumors were flying. Most of the rumors concerned AT&T fighting off an unfriendly offer for its cable assets from Comcast.

  For the first time, an archipelago of television news tents filled the lawn in front of the Sun Valley Inn. Equipped as though for a movie shoot with distracting lights, silver reflecting sheets, producers, cameramen, assistants, makeup people, and reporters, all waiting to wrestle CEOs into giving interviews, they fueled the rumor mill. TV cameras hovered around the Duck Pond; reporters pounced on the willing and unwilling after their speeches. They chased after people from companies that were supposedly involved in the deals.

  On Friday afternoon, after playing bridge, Katharine Graham, who was now left in relative peace at age eighty-four, rode back to her condo in the little golf cart she used to get around in Sun Valley. Tall and still on the slender side, she had had both hips replaced, and one worked better than the other. People noticed that she seemed worn out and “fading,” but she had been saying what a marvelous time she was having this year. The company that she and her son Don had created, with much help from Buffett’s advice, was now regarded almost as iconic for its financial and journalistic success at a time when newspaper profits were slipping badly. Graham took obvious pleasure in the way the Allen conference brought together so many of the people she enjoyed. She had been assigned an assistant to escort her everywhere, but she had the grit to resist handling, so for much of the conference she was seen on the arm of either Don or Barry Diller, chairman of USA Networks and a close friend. At the moment, however, she was alone.

  Susie Buffett Jr. and her mother, in their car, spotted Graham and drove into the employee parking lot where Graham could not see them, so that they could watch her climb the four steps to her condominium. She was taking the anticoagulant Coumadin, which greatly increased the risk of serious hemorrhage should she fall. She clung to the handrail and looked shaky but made it inside without incident.11

  Later, outside on the deck of the Wildflower condos, overlooking the golf course and mountains, where Graham often sat reading the Washington Post in the afternoons, fashion designer Diane von Furstenberg threw her annual women’s cocktail party for Kay, a Sun Valley tradition. Susie Buffett brought See’s lollipops, and they all gathered around Graham for a picture, with lollipops in their mouths.12 After a while, Don Keough, Diane’s husband Barry Diller, News Corporation CEO Rupert Murdoch, and several of the other men crashed the party and joined Don Graham.

  Saturday dawned. The audience settled into its chairs to hear Andy Grove, head of Intel, kick off the morning with “Internet Interrupted.” Then Diane Sawyer moderated a panel, asking Meg Whitman of eBay; Sir Howard Stringer, CEO of Sony; and AOL Time Warner’s Steve Case “Pulse of America: How Do You Find It?” Sun Valley frothed and bubbled like a junior high school cafeteria being filmed for a documentary, with reporters round-robining rumors that USA Networks, or AOL Time Warner, or Disney, or Charter Communications, or some combination of them, were going to hook up with AT&T Broadband.13 Many of those present wished the television tents would disappear.

  After Diane Sawyer, Buffett was once again the scheduled speaker. Since the market’s peak in March 2000, over four trillion dollars of stock-market value had evaporated.14 At least 112,000 dotcom employees had been fired.15 Meanwhile, the surviving Internet businesses were entering their adolescence. Surely, some reasoned, he would no longer think Internet stocks overvalued. The audience was hoping he would relent from his previous bearishness.

  Yet Buffett showed them a graph indicating that the value of the market was still one-third larger than the economy. That was far higher than the level at which Buffett said he would buy stocks. It was considerably higher than the market had ever stood in modern history—higher, even, than the peak of the Great Bubble of 1929. In fact, the graph suggested that the economy would have to nearly double, or the value of the market would have to fall by nearly half, before he would get really excited about it.16 He told them that despite two years of keelhauling, even with the NASDAQ down by more than half, he would still not buy. He expected the stock market (with dividends included) to grow at no better than about seven percent a year, on average, for possibly as long as the next twenty years.17 That was only about one percent higher than he had said two years before. It was a dispiriting message, most of all to Buffett himself—who was about to celebrate his seventy-first birthday—and to the track record he wanted to maintain.

  “That shouldn’t be the way markets work,” he said, “but that is the way markets work. And in the end, that’s what you should remember.” He put up a slide.

  ANYTHING THAT

  CAN’T GO ON FOREVER

  WILL END.

  —Herb Stein18

  Many in the audience were shocked and sobered—but impressed. “You basically have to listen to Warren,” said Jeff Bezos, CEO of Amazon.com. Amazon was trading at $17, down from $113 at its high. “Some things he said were quite painful, but, by God, the man is a genius and so
far seems to be right.”19

  Buffett enjoyed congratulations for his speech at lunch under a tent on the deck behind Herbert Allen’s condo, where a group of about a hundred people, including the Grahams, had gathered. He sat with President Vicente Fox of Mexico—whom he thought of as “an old Coca-Cola guy”—and kicked around the economy.20 Then he went off to play golf.

  Kay Graham rode over to the bridge room to play cards. After a while she said she was not feeling well and had decided to go back to her room. She called to alert her assistant, whom she had left waiting for her at Herbert Allen’s condo next door to her own, then walked out to her golf cart and drove back to her condo alone.

  The assistant had started to check out the window for her every couple of minutes. She looked and saw that Kay’s golf cart had already arrived, but it was empty. She sprinted outside and saw Kay lying at the top of the steps on the porch in front of her door. Running over, she bent and spoke to Graham, who didn’t respond. She started screaming for Herbert Allen to come out.21 By the time the emergency medical technicians arrived a few minutes later, Don Graham had rushed back from the golf course. He was going to need someone to help him make decisions, and asked Buffett whether he wanted to come along. But Buffett could not do it.22 Griffith Harsh, a prominent neurosurgeon who was married to eBay CEO Meg Whitman, went with Don to look at the CAT scan at St. Luke’s hospital in Ketchum, about ten minutes away.23

  Photo Insert Four

  Image 72

  Buffett and Federal Reserve Chairman Alan Greenspan appear at the Greater Omaha Chamber of Commerce, February 20, 2004.