The Snowball

by Alice Schroeder

  18. Interview with Raquel “Rackie” Newman.

  19. Al Pagel, “Susie Sings for More Than Her Supper,” Omaha World-Herald, April 17, 1977.

  20. Interviews with Charlene Moscrey, Sue James Stewart, Marilyn Kaplan Weisberg.

  21. According to some high school classmates who asked not to be identified.

  22. Interviews with Donna Miller, Inga Swenson. Swenson, who went on to become a professional actress, played Cornelia Otis Skinner opposite Thompson’s Emily Kimbrough.

  23. A composite taken from interviews with Inga Swenson, Donna Miller, Roberta Buffett Bialek, and John Smith, whose brother Dick Smith took Susie dancing.

  24. Interviews with Sue James Stewart, Marilyn Kaplan Weisberg. Stewart, who was Sue Brownlee in high school, had access to a car and drove her best friend Susie to Council Bluffs for dates with Brown.

  25. Interviews with Roberta Buffett Bialek, Warren Buffett, Doris Buffett, Marilyn Kaplan Weisberg.

  26. “I don’t think anything as exciting has ever happened to me,” Bertie told the college newspaper. “This is what we sent her to Northwestern for?” wondered Howard.

  27. The Wildcat Council acted as guides for campus visitors and leaders during New Student Week. Members joined by petitioning the council for membership (Northwestern University Student Handbook, 1950–1951).

  28. Interview with Milton Brown, who says he would have depledged had the roles been reversed.

  29. Interview with Sue James Stewart. Susie, a self-described “personal theist,” flirted with Buddhism, a nontheistic religion, all her life and often referred to Zen or to herself as a “Zen person.” It is fair to say she used the terms “Zen” and “theist” loosely.

  30. Al Pagel, “Susie Sings…”

  31. Interview with Roberta Buffett Bialek.

  32. Interviews with Chuck Peterson, Doris Buffett.

  33. Interview with Charlie Munger.

  34. Interview with Milton Brown. In a minor footnote to the story, this was the only time Brown ever entered the Buffetts’ house.

  35. Interview with Sue James Stewart.

  36. “I can see her in those dresses now,” Buffett says, a poignant statement from a man who does not know the color of his own bedroom walls.

  37. “Debaters Win at Southwest Meet,” Gateway, December 14, 1951.

  38. “ASGD Plans Meet for New Members,” Gateway, October 19, 1951.

  39. Warren Buffett letter to Dorothy Stahl, October 6, 1951.

  40. Susan Thompson Buffett, as conveyed to Warren Buffett.

  41. Interview with Milton Brown.

  42. The United States airlifted food and supplies into West Berlin during 1948 and 1949 during a Soviet blockade in which the Soviet Union attempted to seize the entire city, which had been partitioned after World War II.

  43. Buffett recalls a literal three-hour lecture. A conversation of such length was almost certainly the result of him working himself up to ask the question while Doc Thompson carried on.

  Chapter 19

  1. The net gain on investments was $7,434. He also put $2,500 into the account that he’d saved from his pay working at Buffett-Falk.

  2. Delving a little further into Buffett’s reasoning about the valuation of an insurance business: “The stock was trading around forty dollars and therefore the whole company was selling for about seven million. I figured the company would be worth as much as the premium volume, roughly, because they would get the investment income on ‘float’ that was pretty close to dollar-for-dollar, maybe with the premium income. Plus, they’d have the book value. So I figured it would always be worth at least as much as the premium. Now, all I had to do was get to a billion dollars of premium income and I was going to be a millionaire.”

  3. This company later became ConAgra. Buffett-Falk had apparently managed a $100,000 preferred-stock offering for it as an investment banker—at the time not a trivial transaction.

  4. Interview with Margaret Landon, the secretary at Buffett-Falk.

  5. According to Walter Schloss in an interview, the Norman family, who were heirs of Julius Rosenwald of Sears, Roebuck, “received GEICO stock because they were big investors in Graham-Newman. When the Normans wanted to put more money with Graham-Newman, they gave Ben Graham the GEICO stock he had distributed to them instead of putting cash in. Warren is out in Omaha, and he’s buying GEICO. But Graham didn’t know he was selling to Warren, and Warren couldn’t figure out why Graham-Newman was selling it.” The distribution of GEICO stock by Graham-Newman is also described in Janet Lowe’s Benjamin Graham on Value Investing: Lessons from the Dean of Wall Street. Chicago: Dearborn Financial Publishing, 1994.

  6. Interview with Bob Soener, who called him “Buffie” in those days.

  7. As seen in a photograph taken in the classroom.

  8. Interview with Lee Seeman.

  9. People attended the class partly to get stock ideas. This was the only time he resembled Ben Graham in giving out ideas. He did so mainly because he had more ideas than money.

  10. Interview with Margaret Landon. Her memory of him is in this posture, reading.

  11. Office Memorandum, Cleveland Worsted Mills Company, Buffett-Falk Company, September 19, 1952.

  12. Interview with Fred Stanback.

  13. Buffett traded two stocks personally, Carpenter Paper and Fairmont Foods. While astute enough to set the firm up as a market maker and trade the stocks, he was immature (albeit witty) enough to refer to the CEO of Fairmont Foods, D. K. Howe, as “Don’t Know Howe.”

  14. Bill Rosenwald later founded the United Jewish Appeal of New York.

  15. Interviews with Doris Buffett, Roberta Buffett Bialek.

  16. Interview with Fred Stanback.

  17. Interview with Chuck Peterson.

  18. Brig. Gen. Warren Wood of the 34th National Guard Division.

  19. Interview with Byron Swanson.

  20. Interview with Fred Stanback.

  21. Susie told Sue Brownlee (Sue James Stewart) this the week after she returned from her honeymoon. Interview with Sue James Stewart.

  22. Wahoo is best known as the birthplace of movie mogul Darryl F. Zanuck.

  23. “Love Only Thing That Stops Guard,” Omaha World-Herald, April 20, 1952.

  24. Interview with Buffett. Also, Brian James Beerman, “Where in the Hell Is Omaha?” Americanmafia.com, March 21, 2004.

  Chapter 20

  1. General Douglas MacArthur made a halfhearted run for the nomination but was eclipsed by Taft. He and his former aide Eisenhower were bitter enemies.

  2. Interview with Roberta Buffett Bialek.

  3. David L. Dodd, Associate Dean, Columbia University, letter to Warren Buffett, May 20, 1952.

  4. This was the same Robert Taft who had cosponsored the Taft-Hartley Act, much favored among businessmen but despised by broad swaths of Americans. In short, Taft represented the extreme end of the party, which made him less likely to capture moderate voters.

  5. Ironically, many in this faction promoted tariffs, government farm supports, and tough labor laws desired by their small-business and farm constituents, even though this may have seemed inconsistent with their other views on government. Another famous member of this group was popular Nebraska Senator Ken Wherry, the “merry mortician,” famous for malapropisms such as calling Indochina “Indigo China,” addressing the chairman as “Mr. Paragraph,” and offering his “unanimous opinion.” Time, June 25, 1951. Wherry died shortly before the election.

  6. The leaders of this wing of the party were Henry Cabot Lodge and Nelson Rockefeller, despised by Howard Buffett and like-minded Republicans as rich East Coast Ivy League elitists who abandoned core Republican principles to join forces with Democrats whenever it furthered their own pragmatic interests and those of “big business.”

  7. “Top GOP Rift Closed But Not the Democrats’,” New York Times, September 14, 1952; Elie Abel, “Taft Rallies Aid for GOP Ticket,” New York Times, October 5, 1952.

  8. Howard Buffet
t wrote to former president Hoover, October 23, 1952: “I have no enthusiasm for Eisenhower, but your decision to support his election is good enough for me.” He apparently changed his mind after this letter was written.

  9. Interview with Roberta Buffett Bialek.

  10. Interview with Katie Buffett, who recalled this conversation and found it amusing. “Warren’s probably forgotten he told me that one,” she said.

  11. Susan Goodwillie Stedman, recalling personal interview with Susan Thompson Buffett conducted November 2001, courtesy of Susan Goodwillie Stedman and Elizabeth Wheeler.

  12. Interview with Susan T. Buffett.

  13. Interviews with Mary and Dick Holland, Warren Buffett.

  14. Interviews with Racquel Newman, Astrid Buffett.

  15. The IQ story is a family tale, but since Dr. Thompson was in charge of IQ testing for the whole school system, it has at least some credence. Within the family, Dr. Thompson often tested his daughters and grandchildren while he was creating new psychology and intelligence tests. Whatever her IQ, Dottie was considered no dummy.

  16. This story is related in Leila Buffett’s diary. Also, Gabe Parks, “Court Has Nomination Vote Vacancy,” Omaha World-Herald, July 4, 1954.

  17. “Buffett May Join Faculty at UNO,” Omaha World-Herald, April 30, 1952; Buffett-Falk and Company announcement, Omaha-World Herald, January 9, 1953; “Talks on Government Scheduled at Midland,” Omaha World-Herald, February 6, 1955; “Buffett Midland Lecturer in 1956,” Omaha World-Herald, February 15, 1955.

  18. Warren Buffett letter to “Pop” Howard Buffett, dated “Wednesday,” presumed August 4, 1954. “Scarsdale G.I. Suicide, Army Reports the Death of Pvt. Newton Graham in France,” New York Times, August 3, 1954. The entire text of the item read: “Frankfurt, Germany, Aug. 2 (Reuters)—Pvt. Newton Graham of Scarsdale, N.Y., committed suicide at La Rochelle, France, the United States Army announced today.” Newton—named after Sir Isaac Newton—was the second of Graham’s sons to be named Isaac Newton; the first had died of meningitis at age nine. Noting Newton’s increasing mental instability, which he labeled “highly neurotic, even probably schizophrenic,” Graham had written letters trying to get him discharged from the army, but failed. (Benjamin Graham, The Memoirs of the Dean of Wall Street. New York: McGraw-Hill, 1996.)

  19. Susie Buffett Jr. says she had a crib.

  20. Using the term “pay” loosely, since all of the earnings are not actually paid out as a dividend. This distinction was once the subject of heavy academic debate as to the discount that should be imputed to a stock’s valuation for earnings that were not paid out. The premium assigned to companies that pay dividends has waned for a number of reasons. See also the reference to “The Frozen Corporation” in Chapter 46, “Rubicon.”

  21. Interview with Fred Stanback.

  22. His personal investment return that year was 144.8%, compared to 50.1% for the DJIA.

  23. Union Underwear was the predecessor to Fruit of the Loom.

  24. Buffett recalled this classic story in an interview.

  25. Interview with Sue James Stewart.

  26. Interview with Elizabeth Trumble.

  27. Interview with Roxanne Brandt.

  28. I Love Lucy, Season 1, Episode 6, November 11, 1951.

  29. Buffett’s exact quote was “I can see her pulsing and moaning as she said, ‘Tell me more…’”

  Chapter 21

  1. Berkshire Hathaway chairman’s letter, 1988.

  2. The tax code exemption applied to LIFO inventory liquidations. For tax purposes Rockwood used LIFO accounting, which let it calculate profits using the most recent cocoa-bean prices, which minimized taxes. Correspondingly, cocoa beans were carried in inventory at old prices. A large taxable profit would therefore occur if it sold the inventory.

  3. Pritzker created a business conglomerate through his investing activities, but is best known as founder of the Hyatt hotel chain.

  4. At the onset of the exchange period, Accra cocoa beans, which made up half of Rockwood’s 13-million-pound pile, were trading at $0.52 a pound. The price dropped to $0.44 per pound by the conclusion of the exchange period. The price of these beans had hit a high of $0.73 per pound in August 1954, causing candy companies to shrink the size of their 5¢ candy bars. George Auerbach, “Nickel Candy Bar Wins a Reprieve,” New York Times, March 26, 1955; “Commodity Cash Prices,” New York Times, October 4 and 20, 1954.

  5. Letter to Stockholders of Rockwood & Co., September 28, 1954.

  6. From the 1988 chairman’s letter in the Berkshire annual report to shareholders, which contains a brief description of the Rockwood transaction.

  7. The speculator’s return on the contract also reflects his funding cost. For example, if the speculator broke even on a three-month contract—net of his fee—the contract would actually be unprofitable, considering the speculator’s funding cost.

  8. In the futures market, the difference between a speculator and a hedger (or “insured”) is essentially whether an underlying position in the commodity exists to be hedged.

  9. Interviews with Tom Knapp and Walter Schloss, as well as Buffett.

  10. Warren Buffett letter to David Elliott, February 5, 1955.

  11. Based on its profile in Moody’s Industrial Manual, Rockwood traded between $14.75 and $85 in 1954 and between $76 and $105 in 1955. Buffett held on to the shares through 1956. Profit on the trade is estimated. Rockwood traded above $80 a share during early 1956, based on the Graham-Newman annual report.

  12. In the letter to David Elliott noted above (February 5, 1955), Buffett explains that Rockwood is his second-largest position (after Philadelphia & Reading, which he did not disclose) and writes that Pritzker “has operated quite fast in the past. He bought the Colson Corp. a couple years ago and after selling the bicycle division to Evans Products sold the balance to F. L. Jacobs. He bought Hiller & Hart about a year ago and immediately discontinued the pork-slaughtering business and changed it into a more or less real estate company.” Pritzker, he writes, “has about half the stock of Rockwood, which represents about $3 million in cocoa value. I am quite sure he is not happy about sitting with this kind of money in inventory of this type and will be looking for a merger of some sort promptly.” He had studied not just the numbers but Jay Pritzker.

  13. Initially he had bought the stock from Graham-Newman when he was a stockbroker, after a minor mistake on an order from them caused them to DK (“don’t know,” or repudiate) the order. Warren kept the stock.

  14. Before 2000, investors and analysts routinely sought and received nonpublic information that would be an advantage to them in trading stocks. This gradual flow of information, which benefited some investors at the expense of others, was considered part of the efficient workings of the capital markets and a reward for diligent research. Warren Buffett and his network of investor friends profited significantly from the old state of affairs. Ben Graham was questioned extensively about this practice before Congress in 1955. He commented that “a good deal of information from day to day and month to month naturally comes to the attention of directors and officers. It is not at all feasible to publish every day a report on the progress of the company…on the other hand, as a practical matter, there is no oath of secrecy imposed upon the officers or directors so that they cannot say anything about information that may come to their attention from week to week. The basic point involved is that where there is a matter of major importance it is generally felt that prompt disclosure should be made to all the stockholders so that nobody would get a substantial advantage in knowing that. But there are all degrees of importance, and it is very difficult to determine exactly what kind of information should or must be published and what kind should just go the usual grapevine route.” He added that all investors may not be aware of the grapevine, but, “I think that the average experienced person would assume that some people are bound to know more about the company [whose stock they are trading] than he would, and possibly trade on the additional kno
wledge.” Until 2000 that was, in effect, the state of the law.

  While a full discussion of insider trading is beyond the scope of this book, the theory of insider trading was promulgated with SEC Rule 10b-5 in 1942, but “so firmly entrenched was the Wall Street tradition of taking advantage of the investing public,” as John Brooks puts it in The Go-Go Years, that the rule was not enforced until 1959, and it was not until the 1980s that anyone seriously questioned the duties of people other than insiders under insider-trading laws. Even then, the Supreme Court affirmed, in Dirks v. SEC, 463 U.S. 646 (1983), analysts could legitimately tell their clients this type of information, and the Supreme Court also noted in Chiarella v. United States, 445 U.S. 222 (1980), that “informational disparity is inevitable in the securities markets.” To some extent, there was understood to be some benefit to the market of a gradual leakage of inside information; in fact, how else was the information to get out? The practice of business public relations and conference calls had not developed.

  In these 1980s cases, however, the Supreme Court defined a new “misappropriation” theory of insider trading, in which inside information that was misappropriated by a fiduciary could lead to liability if acted upon. Then, largely in response to the Bubble-era proliferation of “meeting and beating consensus” earnings and the “whisper numbers” that companies began to suggest to favored analysts that they were going to earn, in 2000, through Regulation FD (Fair Disclosure), the SEC broadened the misappropriation theory to include analysts who selectively receive and disseminate material nonpublic information from a company’s management. With the advent of Reg. FD, the “grapevine” largely ended, and a new era of carefully orchestrated disclosure practices began.

  15. At the end of 1956, after the dividend was paid, Warren owned 576 shares trading at $20, worth $11,520.

  16. He registered the securities in his own name, rather than his brokers’, so the checks came straight to his home.

  17. Interviews with George Gillespie, Elizabeth Trumble, who heard this story from Madeline. Warren heard it for the first time at his fiftieth birthday party, from Gillespie. Apparently Susie had never mentioned it to him.