26. Graham more tactfully called him a “delightful and mischievous goad” in Personal History.
27. In her book, Graham recalls that “someone” mentioned the amortization of intangibles and that Howard Simons, unprompted, then challenged her to define it. Possibly Graham did not perceive herself as “showing off” when writing what was, after all, her own memoir.
28. Interview with Don Graham.
29. Interview with Liz Hylton.
30. The Dumbarton Oaks Conference; the Dumbarton Oaks Research Library and Collection.
31. Wisner was the widow of Frank Wisner, and married columnist Clayton Fritchey in 1975, becoming Polly Fritchey.
Chapter 38
1. Wattles, confusingly, bore the same name as Gurdon W. Wattles, the “streetcar king” of Omaha, who was no relation.
2. Interviews with Ed Anderson, Marshall Weinberg.
3. Buffett bought American Manufacturing at 40% of what he thought it was worth. “How Omaha Beats Wall Street,” Forbes, November 1, 1969.
4. A couple of other people did what Wattles did—Thomas Mellon Evans and Jean Paul Getty. Buffett followed Evans, too, while another Columbia friend, Jack Alexander, and his partner, Buddy Fox, followed Getty, who pyramided oil companies and wrote a book, How to Be Rich (not how to get rich). Evans, a Pittsburgh businessman, discussed in “Heirloom Collector,” Time, May 11, 1959, operated through H. K. Porter and Crane Co. Wattles, who is virtually unknown today, was a director of Crane.
5. It didn’t make you huge money unless you picked the shareholders’ pockets, as some had done. An unscrupulous operator could milk the subsidiaries for money while saddling the shareholders of the parent company with an unsustainable amount of debt. John S. Tompkins, “Pyramid Devices of 20’s Revived,” New York Times, November 16, 1958.
6. “If I have seen further it is by standing on ye shoulders of giants.” Letter from Isaac Newton to Robert Hooke, February 5, 1676.
7. “Fighting the Tape,” Forbes, April 1, 1973. “I trust this man [Wattles] to do intelligent things,” Ruane said. Shareholders had sued over the values in the merger, however, illustrating the conflicts created by the Wattles model.
8. Interview with Charlie Munger.
9. Blue Chip made two purchases totaling 137,700 shares, or 6%, of Wesco on July 11 and July 14, 1972. Between July 1972 and January 1973, Blue Chip bought another 51,300 shares, or 2% of the stock, through open market purchases on twenty different days.
10. “Not Disappointed, Says Analyst As Wesco, FSB Call Off Merger,” California Business, March 15, 1973.
11. Wesco’s equivalent book value per share at the exchange ratio offered was $23, compared to Santa Barbara’s $8. Santa Barbara had zero unrestricted capital, whereas Wesco had $7 per equivalent share free net worth. Santa Barbara’s earnings per equivalent share after bad debt accruals and deferred taxes were 28.7% lower than Wesco’s.
12. This is Betty Casper Peters’s recollection of how Buffett related the story to her.
13. A letter from Charlie Munger to Louis Vincenti, February 8, 1973, makes the case that Home Savings’ (a California banking giant) cost structure was so low “because it is run like Wesco.”
14. Interview with Betty Casper Peters.
15. Charles T. Munger testimony, In the Matter of Blue Chip Stamps, Berkshire Hathaway Incorporated, HO-784, Wednesday, March 19, 1975, p. 53. Warren E. Buffett testimony, March 21, 1975, pp. 61–63.
16. Interview with Charlie Munger.
17. “It is awkward,” he wrote, “when we want to talk to you about alternatives to be provided by us for Wesco shareholders, to have you sort of prevented from considering anything unless and until released by FSB [Santa Barbara] or actions of ours…. I guess all we can do is have everyone act as best he can as the matter unfolds to an outcome now not entirely clear to us.” Charles T. Munger letter to Louis R. Vincenti, February 8, 1973.
18. Charles T. Munger testimony, In the Matter of Blue Chip Stamps, Berkshire Hathaway Incorporated, HO-784, Wednesday, March 19, 1975, page 84.
19. Interview with Betty Casper Peters.
20. Minutes of the Special Meeting of Board of Directors of Wesco Financial Corporation, February 13, 1973.
21. Interview with Betty Casper Peters.
22. All analyst commentary from “Not Disappointed, Says Analyst As Wesco, FSB Call Off Merger,” California Business.
23. Peters was grateful to them, writing to Don Koeppel two months later that the decision to kill the deal looked “heroic” because Santa Barbara’s stock price had fallen from over $33 to $15.50.
24. Interview with Charlie Munger.
25. Blue Chip applied to the Federal Savings and Loan Insurance Corporation to buy 50% of Wesco, thereby turning Blue Chip, and potentially its affiliates Berkshire, Diversified, and others, into a savings-and-loan holding company. In the application, the companies said that Diversified had never considered Blue Chip a subsidiary but Diversified and its affiliates might be deemed to control Blue Chip by view of Buffett’s ownership of the stocks of both as well as of Berkshire, which owned 17.1% of Blue Chip at the time.
26. Munger started looking at other California bank stocks and suggested that Wesco might buy a large block of Crocker National Bank.
27. “I have a personal, pronounced prejudice in favor of buying at a material discount from book value stock in extremely entrenched institutions which have earned between 11% and 13% on book value for a decade or more with a history of substantial and ever-increasing dividends. Moreover, I like the idea of diversifying the economic base at Wesco with something like a zero increase in overhead. I also like becoming the largest shareholder in substantial enterprises—on the theory that this adds a possible plus factor to investment performance.” Charles T. Munger letter to Lou Vincenti, April 3, 1973.
28. Buffett’s trading style that year suggested he might be pessimistic about the economy and was preparing for a downturn. He wrote straight covered-call options on Kennecott Copper and down-and-out options, a more sophisticated type of covered call that limits the downside and upside within a specified range, on several stocks such as Ford Motors, General Motors, and Black & Decker. Selling calls on the latter three economically sensitive stocks was not a market call, but does suggest that he was more pessimistic than optimistic about the economy. Letter from Warren Buffett to Jack Ringwalt, March 9, 1972.
29. At December 31, 1973, his Post stock was worth $7.9 million.
30. Catherine Elberfeld letter to Warren Buffett, May 1974.
31. Ben Graham wrote about this Eau Claire, Wisconsin, company in The Intelligent Investor.
32. “I’d have made a hell of a lot more money if I hadn’t sold it. I would have made a fortune out of the stock,” Buffett says. He says he got off quickly when he learned the CEO had different deals with every director about pay. Vornado was under different management and owned discount stores. Today it is a real estate investment trust managed by Steven Roth.
33. Interview with Bob Malott.
34. Buffett says he immediately told Malott that FMC should buy back its own stock, which was cheap. Although FMC considered the idea, it didn’t follow through.
35. Black enrollment had risen to one third and was projected to rise to nearly half in the fall. A desegregation suit was pending and the building did not conform to fire codes. Some white students had already transferred out of fears that Central and Tech High, the city’s toughest school, would be merged. Dana Parsons, “Central Parents Express Fears, Seek Changes,” Omaha World-Herald, May 9, 1974. The committee proposed changes that in effect created a magnet school oriented to college prep.
36. Mark Trustin, a neighbor, gave Hamilton to the Buffetts.
37. Interview with Susie Buffett Jr., who says she wasn’t planning to become a police officer.
38. Interview with Peter Buffett.
39. Interview with Dave Stryker.
40. In the Temptations’ world, men are the Daisy Maes: “Since
I Lost My Baby,” “The Way You Do the Things You Do,” “(I Know) I’m Losing You,” “I Can’t Get Next to You,” “Just My Imagination,” “Treat Her like a Lady,” and, of course, “Ain’t Too Proud to Beg.”
41. From several sources both close to Susie at the time and who knew her later.
42. Interview with Peter Buffett.
43. His dividends from Blue Chip were also about $160,000 per year before taxes.
44. By having Diversified buy insurance from (“reinsure”) National Indemnity through its new subsidiary. The cash was transferred by paying a premium to Diversified. Charles T. Munger testimony, In the Matter of Blue Chip Stamps, Berkshire Hathaway Incorporated, HO-784, Thursday, March 20, 1975, pp. 188–194.
45. By year-end 1973, Reinsurance Corp. of Nebraska (renamed Columbia Insurance) had amassed investments of $9 million, which is indicative of its cash flows.
46. Charles T. Munger testimony, In the Matter of Blue Chip Stamps, Berkshire Hathaway Incorporated, HO-784, Wednesday, March 19, 1975. Both had previously owned some stock. Munger had bought a block and Gottesman bought stock his partners sold.
47. Charles T. Munger testimony, In the Matter of Blue Chip Stamps, Berkshire Hathaway Incorporated, HO-784, Thursday, March 20, 1975, p. 193.
48. Charles T. Munger testimony, In the Matter of Blue Chip Stamps, Berkshire Hathaway Incorporated, HO-784, Thursday, March 20, 1975, p. 190.
49. They were reported at the end of the year in DRC’s annual report, but few people read it, and it took legwork and initiative to get more timely information from SEC Form 3s and 4s. DRC’s 11.2% position was disclosed in BRK’s 1973 annual report, as well as the fact that Warren and Susie owned 43% of DRC at the time too.
50. For $1.9 million.
51. Don Koeppel letter to Warren Buffett, June 15, 1973.
Chapter 39
1. From peak to trough in the Depression (September 3, 1929, to July 8, 1932), the Dow fell 89%. From peak to trough in the early 1970s (January 11, 1974, to December 6, 1974), the Dow fell 45%—the two worst bear markets of the century.
2. Robert Redford interview, cited by Graham in Personal History. New York: Alfred A. Knopf, 1997.
3. Katharine Graham, Personal History.
4. The television stations owned by both would have created a conflict.
5. Katharine Graham, Personal History.
6. Al Pagel, “What Makes Susie Sing?” Omaha World-Herald, April 17, 1977.
7. Interview with Gladys Kaiser.
8. From a letter that Graham wrote Buffett, reprinted in Personal History. Don Graham recalls his mother telling him that Susie cooked eggs for her, and Susie and Warren watched Kay eat them and did not eat any themselves.
9. Measured from its peak.
10. Interview with Charlie Munger.
11. “Fighting the Tape,” Forbes, April 1, 1973.
12. The seat would have sold for a quarter of what Ruane, Cunniff had paid for it.
13. The record was 1970: Sequoia 12.11% vs. S&P 20.6%; 1971: Sequoia 13.64% vs. S&P 14.29%; 1972: Sequoia 3.61% vs. S&P 18.98%; 1973: Sequoia (24.8%) vs. S&P (14.72%).
14. Marshall Weinberg as well as Buffett confirmed this in interviews. Malott says he does not recall it.
15. Loomis joined Sandy Gottesman at First Manhattan; Brandt went to work at Abraham & Co.
16. “Look at All Those Beautiful, Scantily Clad Girls Out There!” Forbes, November 1, 1974.
17. “Forbes didn’t use what I considered to be the most significant line,” said Buffett in a letter to Pat Ellebracht on October 24, 1974, repeating this quote.
18. Interview with Rod Rathbun; Omni arbitration files of the National Indemnity Company.
19. Compounded over thirty years at 20%, this was perhaps a $2.4 billion investment return forgone. Buffett and Munger have referred to it as the greatest missed opportunity in the history of Berkshire Hathaway. The details are arcane but the essence of the story is as portrayed here.
20. “Why the SEC’s Enforcer Is in Over His Head,” BusinessWeek, October 11, 1976.
21. Interview with Verne McKenzie.
22. Letter from Charlie Munger to Chuck Rickershauser “re: Diversified Retailing—Berkshire Hathaway Proposed Merger,” October 22, 1974.
23. Interview with Betty Casper Peters.
24. Interview with Verne McKenzie.
25. Robin Rickershauser, who has often heard this clever trope from her husband, did not realize he originated it until contacted by the author.
26. If true, investors would have been selling without required information about the buyer and his reasons.
27. Charles T. Munger testimony, In the Matter of Blue Chip Stamps, Berkshire Hathaway Incorporated, HO-784, Thursday, March 20, 1975, p. 112.
28. The increase in Santa Barbara’s price if the deal collapsed would only partially hedge this risk.
29. Charles T. Munger testimony, In the Matter of Blue Chip Stamps, Berkshire Hathaway Incorporated, HO-784, Thursday, March 20, 1975, pp. 112–13.
30. Interview with Judge Stanley Sporkin.
31. Ibid. This lawyer was so particularly ferocious that the author was asked not to mention his name.
32. A thick file of documents produced in response to the SEC’s February 1975 subpoena illustrates several points: 1) it contained no evidence that Buffett bought on inside information or expecting a takeover; 2) Buffett had become expert on water company regulation and ratemaking, and his interest and expertise in this narrow subject was prodigious; 3) this aspect of the investigation must have been intrusive and an embarrassing form of déjà vù, as it included production of his correspondence with Forbes that attempted to clear his name.
33. Partly because of state restrictions on how much stock any one insurance company could hold, the diagram was more complicated than it would have been otherwise. The version shown on pages 412–413 was created by Verne McKenzie and updated through 1977 (i.e., includes the Buffalo News). Berkshire was still negotiating with the SEC as late as 1978.
34. During Buffett’s testimony, In the Matter of Blue Chip Stamps, Berkshire Hathaway Incorporated, HO-784, Friday, March 21, 1975, p. 125, he acknowledged that he and Munger had been buying shares of Wesco in the open market during a tender offer and Rickershauser had advised him to stop, saying that they should use only tender offers to accumulate further shares (which they did). Rickershauser interjected, “I want the record to be clear that I did not tell them it was illegal to do what was done. I told them it would be hard to convince somebody that in hindsight they may not have intended to do what they did. You can swear me in if you want to on that one. I didn’t want to be right.”
35. Said to a colleague.
36. The SEC apparently considered Buffett, Munger, and Guerin’s interests and the companies a controlled group for purposes of tender offers. The combination of Warren (11%), Susie (2%), Munger and his partners (10%), Berkshire Hathaway (26%), and Diversified (16%) controlled 65% of Blue Chip’s stock. Warren and Susie owned 36% of Berkshire and 44% of DRC. Munger owned 10% of DRC. DRC owned 15% of BRK and 16% of BC. BC owned 64% of Wesco.
37. The “harm principle” was articulated by scholars such as John Locke, Wilhelm von Humboldt, and John Stuart Mill, who argued that the sole purpose of law was to prevent harm, and the individual’s liberty should not be encroached otherwise. The harm principle is the basis for certain portions of the U.S. Constitution.
38. Chuck Rickershauser Jr. letter to Stanley Sporkin, November 19, 1975.
39. Chuck Rickershauser Jr. letter to Stanley Sporkin, December 1, 1975.
40. Warren E. Buffett testimony, In the Matter of Blue Chip Stamps, Berkshire Hathaway Incorporated, HO-784, Friday, March 21, 1975, p. 157.
41. Charles T. Munger testimony, In the Matter of Blue Chip Stamps, Berkshire Hathaway Incorporated, HO-784, Thursday, March 20, 1975, p. 197.
42. Interview with Judge Stanley Sporkin. Sporkin served as general counsel to the CIA after leaving the SEC in 1981. He be
came Judge of the U.S. District Court for the District of Columbia in 1985 and served till his retirement in 2000.
43. Ibid. For more on Sporkin see Jack Willoughby, “Strictly Accountable,” Barron’s, April 7, 2003; Peter Brimelow, “Judge Stanley Sporkin? The Former SEC Activist Is Unfit for the Federal Branch,” Barron’s, November 4, 1985; Robert M. Bleiberg, “Sporkin’s Swan Song?” Barron’s, February 2, 1981; “Why the SEC’s Enforcer Is in Over His Head,” BusinessWeek, October 11, 1976.
44. “I bet on a good horse,” says Sporkin, “and the horse came in.”
45. After the deregulation of the S&L industry, Santa Barbara lost $80.9 million during fifteen straight quarters in the early 1980s. In June of 1984, Ivan Boesky was close to buying it and infusing it with a desperately needed $34 million, but that fell through. In 1990 it was seized by federal regulators, placed in conservatorship, and operated by the Resolution Trust Corp. until Bank of America bought it in 1991 for $41 million.
46. The company also paid a $115,000 fine. “Consent to Judgment for Permanent Injunction and Other Relief,” “Final Judgment for Permanent Injunction and for Other Relief and Mandatory Order and Consent with Respect Thereto,” and “Complaint for a Permanent Injunction and Other Relief,” In the Matter of Securities and Exchange Commission vs. Blue Chip Stamps, June 9, 1976.
47. The SEC Advisory Committee on Corporate Disclosure, July 30, 1976.
Chapter 40
1. Doug Smith, “Solid Buffett Voice Melts Debut Jitters,” Omaha World-Herald, May 9, 1975.
2. Interview with Charlie Munger.
3. Charles Munger letter to Katharine Graham, December 9, 1974. Munger wrote “dilly” when he apparently meant “silly.” For clarity, “silly” has been used in the text.
4. Interview with Fred Stanback.
5. Interviews with Roxanne Brandt, Walter Schloss. Brandt later jokingly admitted this was grounds for divorce.
6. New York Daily News, October 30, 1975.
7. As of December 2007, these shares would be worth $747 million.
8. That Buffett, who had never borrowed a significant amount of money in his life, thought it made sense for his sisters to buy Berkshire stock using borrowed money, with only 5% down, speaks volumes about how cheap he thought the stock was and how good its prospects were at the time.
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