The Snowball

by Alice Schroeder

  26. Interviews with Susie Buffett Jr. and Peter Buffett, who both said they found it comforting to have their mother with them in the plane.

  27. Interview with Howie Buffett.

  28. Interview with Sharon Osberg.

  29. Interview with Susie Buffett Jr.

  30. Interview with Devon Spurgeon, whom Susie Jr. called on her honeymoon in Italy. The author was also supposed to make this trip; Buffett’s wish for emotional support from women was probably at an all-time high during this period.

  Chapter 62

  1. She left significant amounts of money to Kathleen Cole and Ron Parks, her longtime trusted caretakers and friends. She left her grandchildren and other people modest amounts, from $10,000 to $100,000.

  2. Interview with Tom Newman.

  3. Interview with Howie Buffett.

  4. Interview with Peter Buffett.

  5. A. D. Amorosi, “In ‘Spirit,’ Tradition Is Besieged by Modern Life,” Philadelphia Inquirer, May 23, 2005.

  6. Interview with Susie Buffett Jr.

  7. Interview with Peter Buffett.

  8. Interview with Sharon Osberg.

  9. Interview with Charlie Munger.

  10. Berkshire Hathaway annual letter to shareholders, 2005.

  11. Charles R. Morris, The Trillion Dollar Meltdown. New York: Public Affairs, 2008.

  12. Carol Loomis, “Warren Buffett Gives It Away,” Fortune, July 10, 2006.

  13. Ibid.

  14. Buffett could not resist: The note that accompanied Bertie’s letter containing this comment said, “She’s still smarting about that a little bit.”

  15. Interview with Doris Buffett.

  16. In installments beginning in 2006, as long as either Bill or Melinda Gates is active in the foundation.

  17. The first installment of 602,500 shares declined 5% a year in terms of shares thereafter. Buffett expected, as was reasonable, that the price of Berkshire’s stock would increase by at least 5% a year (through modest growth and inflation). Thus, the dollar value of the gifts was likely to remain level or even increase from year to year. During the year between the first gift and the second, Berkshire’s stock price went up 17%. The first 602,500-B-share distribution was worth $1.8 billion, compared to the second 572,375-B-share distribution worth $2 billion. In June 2006, BRK was trading at $91,500 (B shares at $3,043).

  18. As quoted in “The Life Well Spent: An Evening with Warren Buffett,” November 2007.

  19. Bill Gates used the term “convenors.” This approach differs, for example, from annually funding a vaccine program, which requires a continuing investment without a permanent cure.

  20. “The New Powers of Giving,” Economist, July 6, 2006; Karen DeYoung, “Gates, Rockefeller Charities Join to Fight African Hunger,” Washington Post, September 13, 2006; Han Wilhelm, “Big Changes at the Rockefeller Foundation,” Chronicle of Philanthropy, September 8, 2006; Andrew Jack, “Manna from Omaha: A Year of ‘Giving While Living’ Transforms Philanthropy,” Financial Times, December 27, 2006.

  21. Interview with Doris Buffett. See Sally Beaty, “The Wealth Report: The Other Buffett,” Wall Street Journal, August 3, 2007.

  22. Former President Jimmy Carter letter to Warren Buffett, October 18, 2006.

  23. The guinea worm enters the body through the drinking of tainted water, then grows up to three feet long and the width of a paper clip. The worm burns its way out through the skin by emitting an excruciatingly painful acid, emerging a few inches a day as sufferers wind it around a twig. They often seek relief by plunging into water, where the erupting worm releases a cloud of larvae to begin the cycle anew. The Carter Center and other nongovernmental organizations are tantalizingly close to wiping out the guinea worm.

  24. Interview with Astrid Buffett.

  25. After Susie’s death, both of her apartments in San Francisco’s Pacific Heights were sold, as was the Buffetts’ second house, “the dormitory,” in Emerald Bay. Buffett kept the original house in Emerald Bay, which continues to be used by his children and grandchildren. He never goes there.

  26. On December 12, 2007, major central banks began to provide funding at terms longer than overnight, and began to auction funding against a broader range of collateral and with a broader set of counterparties. The Federal Reserve activated swap lines to help the other central banks provide liquidity in dollars to their markets.

  27. Using the return on capital figure he achieved for shareholders through 2007 as a proxy, the author estimates that Buffett (not including Susie’s shares) would have been worth between $71 and $111 billion by the end of 2007 had he continued to charge his “partners” fees. Susie’s stake would have been worth another $3.7–$5 billion. The difference between the high and low range is the fee structure (Buffett’s former 25% plus 6% interest on capital to all partners—the high number—vs. the 2%/20% structure of most hedge funds today—the low number). The calculation assumes that Buffett took out the equivalent of his 6% a year for living expenses, as he typically did while running the partnership. That amounts to $1 million per year by 2007. His and Susie’s (really Susie’s) living expenses exceeded this by a wide margin; however, Buffett’s personal investments—not part of Berkshire—also compounded at an astonishing rate and could (and did) fund Susie’s lifestyle without further withdrawals from Berkshire.

  28. Interview with Charlie Munger.

  Afterword

  1. Michael Santoli, “They’ve Got Class,” Barron’s, September 10, 2007.

  2. E. S. Browning, “Stocks Tarnished by ‘Lost Decade,’” Wall Street Journal, March 26, 2008.

  3. Warren Buffett letter to Nicole Buffett, August 10, 2006.

  4. Richard Johnson with Paula Froelich, Chris Wilson, and Bill Hoffmann, “Buffett to Kin: You’re Fired!,” New York Post, September 7, 2006.

  5. This excludes approximately $180 million of imputed investment income on the $5.5 billion of General Re’s cash that Buffett had transferred to National Indemnity and Columbia Insurance through intercompany reinsurance agreements. General Re estimated the effect on its return on equity at 150 basis points in each of 2005, 2006, and 2007.

  6. The combination of underwriting profits and higher float produced a 20% return on average equity in 2006 compared to losses in earlier years. Gen Re grew its book value at an average of 12.8% since 2001, bringing its capital to more than $11 billion, compared to $8.6 billion when it was acquired. General Re made a $526 million profit from underwriting on premiums of about $6 billion—compared to earlier losses of between $1 and $3 billion (depending on the year) on premiums of just under $9 billion. Float had risen from about $15 billion to $23 billion on a 32% decline in premiums.

  7. Joseph P. Brandon letter to Warren Buffett, January 25, 2008.

  8. Berkshire Hathway 2007 letter to shareholders.

  9. HIH Royal Commission, The Failure of HIH Insurance. Australia: National Capital Printing, Canberra Publishing and Printing, April 2003.

  10. Doug Simpson, “Search for Deep Pockets Widens in Reciprocal of America Case,” Unintended Consequences blog (dougsimpson.com/blog), March 3, 2005; Timothy L. O’Brien, “Investigation of Insurance Puts Buffett in Spotlight,” New York Times, March 28, 2005; Timothy L. O’Brien and Joseph B. Treaster, “The Insurance Scandal Shakes Main Street,” New York Times, April 17, 2005; Marisa Taylor, “U.S. Dropped Enron-Like Fraud Probe,” McClatchy Newspapers, July 23, 2007; Scott Horton, “Corporate Corruption and the Bush Justice Department,” Harper’s Magazine, July 24, 2007.

  A Personal Note About Research

  To write The Snowball, I spent more than five years interviewing Warren Buffett, both in person and on the phone. For weeks on end I sat in his office or traveled with him observing him work. Some of my most valuable insights came from my own experiences with him. I also interviewed his family, friends, former classmates, business associates, and others—250 people in all. Some of these interviews continued for days and I interviewed many people several times.

  Warr
en gave me virtually unlimited time, and let me roam with surprising freedom among the files and correspondence in his exhaustive collection; it was especially fortunate that he and many of his friends and family members were letter-writers. Berkshire Hathaway’s files contained material that helped establish a timeline and flesh out details. I also relied on my own growing understanding of Warren, and at times on my direct knowledge of events. Certain disagreements among sources are aired in the endnotes.

  Quotes appear throughout the book to illuminate the narrative. Most quotes are from recorded interviews, and have been edited only for clarity and length. Sources were cited unless the interviewee asked not to be named.

  During their interviews, many people recalled remarks from past conversations. Sometimes the events they were describing had taken place decades earlier. It would be naive to assume that all of these quotes are verbatim recollections of every word spoken. Nevertheless, I found them very helpful in conveying the substance of an incident or conversation. Their sources can be found in the endnotes.

  In the end, my own extensive experience with Warren and the thousands of jigsaw puzzle pieces given me by so many sources came together in this portrait of a fascinating and deeply complex man.

  Photo Credits and Permissions:

  Alpha Sigma Phi Fraternity National Archives:Image 22

  Bryson Photo: Image 65 © 2007, Bryson Photo

  Buffalo News: Part 3 and Part 4, Image 36, Image 75

  Doris Buffett: Image 5, Image 7, Image 84

  Howard Buffett: Image 80

  Susie Buffett Jr.: Image 1, Image 6, Image 3, Image 9, Image 13 Image 15, Image 17, Image 23, Image 28, Image 29, Image 33, Image 34, Image 38, Image 39, and Image 41, Image 64, Image 88

  Warren Buffett: Image 8, Image 2, and Image 4, Image 10, Image 11, Image 14, Image 16, Image 19, Image 25, and Image 26, Image 30, Image 40, Image 43, Image 45, Image 46, Image 49, Image 55, Image 58, Image 63, Image 90

  Capp Enterprises, Inc.: Image 18: © Capp Enterprises, Inc. Used by permission

  C. Taylor Crothers: Image 91

  Lauren Esposito: Image 92

  Katharine Graham Collection: Image 42

  Greater Omaha Chamber of Commerce: Image 72: Greater Omaha Chamber of Commerce and A Better Exposure; the Chamber Annual Meeting on Feb. 20, 2004

  Lynette Huffman Johnson: Image 67

  Arthur K. Langlie: Image 52

  Magic Photography, Sun Valley: Part 5, Image 59, Image 62

  Jack L. Mayfield: Image 77: Photo by Jack L. Mayfield

  Munger family: Image 35, Image 76: courtesy of the Munger family

  Charles Munger Jr.: Image 50

  Museum of American Finance/Graham-Newman Collection: Image 31

  The Nebraska Society of Washington, D.C.: Image 27

  Omaha World-Herald: Part 1, Image 44, Image 47, Image 60: Reprinted with permission from The Omaha World-Herald

  Sharon Osberg: Part 6, Image 51, Image 53, Image 81, Image 82, Image 83, Image 87

  REUTERS/Peter MacDiarmid: Image 85

  Ruane, Lili: Image 56

  Stark Center for Physical Culture and Sports: Image 24: The image of Pudgy Stockton on the cover of Strength and Health magazine was provided by the Stark Center for Physical Culture and Sports at the University of Texas in Austin—where the Pudgy and Les Stockton collection is housed.

  M. Christine Torrington: Image 78,

  www.asamathat.com: Image 86

  Acknowledgments

  Without the help of many people this book would never have come into being. If I’ve succeeded, it’s mainly thanks to the generosity of others. First among them, of course, is Warren Buffett. The generosity he showed by giving me so much access to his time, his family, his friends, and his files, and the courage he showed by refraining from meddling with the book for more than five years—right up until the day it went to the printer—are remarkable. His conviction that a smart person can do anything and his gentle but persistent Carnegizing lifted my aspirations as a writer and as a person, and changed my life. His influence on me cannot be described in a paragraph or a couple of pages—but for everything, Warren, I am grateful.

  My literary agent, the peerless David Black, gave impeccable guidance. I trust him implicitly—above all to tell me important things that I don’t want to hear—the most valuable quality you can have in a friend. He also stunned Warren into a moment of silence at his negotiating skill, not a small achievement.

  My great good fortune was that the book was sold to the perceptive Irwyn Applebaum, the president and publisher of Bantam Dell, whose support and wisdom have inspired me throughout. Helping me was Ann Harris, my editor, who elevated The Snowball through her encouragement to write the story of a man’s life seen in whole, and her editing with a meticulous eye for tone, context, and nuance. Later in the process, Beth Rashbaum unsheathed her red pencil, relentlessly pruning material this first-time author couldn’t bear to cut herself, to the immeasurable improvement of the book. The Snowball owes much to them and I am grateful to have worked with two such talented editors. Any flaws, of course, are mine alone.

  At Bantam I also thank Loren Noveck, who as the book’s title administrator oversaw the multiple processes involved in producing a complex book; Virginia Norey, its designer; Ann’s assistant Angela Polidoro; and the several others who collaborated in making The Snowball happen: deputy publisher Nita Taublib; publishing director Gina Wachtel; attorney Matthew Martin; production experts Tom Leddy, Maggie Hart, and Margaret Benton; creative marketing director Betsy Hulsebosch and her team; sales marketing director Cynthia Lasky; and publicity director Barb Burg.

  I wrote this book while associated with Morgan Stanley as an advisory director, and appreciate my friends’ and colleagues’ and the firm’s support. Throughout, Lisa Edwards, my friend and assistant, organized the material, scheduled interviews, planned my annual Berkshire Hathaway dinner, handled innumerable other matters, and generally kept my life together. Lauren Esposito, my researcher, who also came from Morgan Stanley, brought with her a set of financial skills that added immensely to the book, and became adept at locating critical research material. To watch an artist like Marion Ettlinger at work inspired me near the end of the writing, and I thank her for the result.

  Doris Buffett, Roberta Buffett Bialek, and Warren Buffett’s children Susan, Howard, and Peter, Charlie Munger, Bill Gates, and Don Graham were especially generous with their time and insight, and I am grateful to them for their important contributions.

  People trusted by both me and Warren—Sharon Osberg, Vinay Saqi, and Devon Spurgeon—provided various types of assistance throughout, from financial commentary to calming frayed nerves. The love and support of my sister, Elizabeth Davey, and my father, Ken Davey, helped bring the book into being. David Moyer came into my life just in time to learn what it means to live with a writer who is finishing a book on deadline, and kiddingly referred to himself as my “fiancé in exile” while providing a shoulder to lean on, advice, laughter, love, and romance. He, along with Sharon Osberg and Justin Bennett, served as early readers, and The Snowball would be far poorer without their comments and advice.

  I am indebted to many other people and organizations who helped with research and granted permission to use photographs and copyrighted material, as well as those who gave special help with the project directly or indirectly in various ways. My thanks go to Carol Allen, Herbert Allen, Ed Anderson and Joan Parsons, Jan and Brian Babiak, the Blumkin family, Hal Borthwick, Debbie Bosanek, Betsy Bowen, Joe Brandon, Phil Brooks, Kelly Broz, Jan and John Cleary, Carlon Colker, Robert Conte, Gerald Corrigan, Michael Daly, Leigh Ann Elisio, Stuart Erickson, Paul Fishman, Cynthia George, George Gillespie, Rick Guerin, Marc Hamburg, Carol Hayes, Liz Hylton, Mark Jankowski, Mr. and Mrs. Howard Jessen, Gladys Kaiser, Don Keough, Tom and Virginia Knapp, Margaret Landon, Arthur K. Langlie, David Larabell, Stanford Lipsey, Jack Mayfield, John Macfarlane, Michael McGivney, Verne McKenzie, Charles T. Munger Jr., Molly Munger, Wendy Munger,
Tony Nicely, Dorothe Obert, Ron Olson, Chuck Peterson, Susan Raihofer, Rod Rathbun, Deb Ray, Eric Rosenfeld, Neil Rosini, Fred Reinhardt, Mick Rood, Gary Rosenberg, Edith Rubinstein, Michael Ruddell, Richard Santulli, Walter Schloss, Lou Simpson, Carol Sklenicka, Judge Stanley Sporkin, Mary Stanton Plowden-Wardlaw, Chris Stavrou, Bob Sullivan, Jeffrey Vitale, Marshall Weinberg, Sheila Weitzel, Bruce Whitman, Jackie Wilson, Al Zanner, and those who asked not to be named.

  I would also like to express appreciation to the following organizations: the Douglas County Historical Society, GEICO, General Re, Greenwich Emergency Medical Service, Greif Inc., Harvard Business School, Harvard Law School, the Merrick Library, the Martin Luther King Jr. Public Library Washingtoniana Collection, Morgan Stanley, the National Archives, National Indemnity Corporation, the Nebraska Furniture Mart, the New Bedford Free Public Library, the New Bedford Whaling Museum, the New York Public Library, NetJets Inc., the Omaha Press Club, the Omaha World-Herald, Outstanding Investor Digest, the Rolls-Royce Foundation, Rosehill School, Ruane Cunniff & Goldfarb Co., The Securities and Exchange Commission, and The Westchester apartments.

  FOOTNOTES

  *1 A widely quoted U.S. stock measure.

  Return to text.

  *2Fortune magazine ranks the largest 500 companies based on sales and refers to them as the “Fortune 500.” This group of companies can be used as a rough proxy for U.S.-based business.

  Return to text.

  *3A short-seller borrows a stock and sells it, betting it will go down. If so, the “short-seller” profits from buying the stock back cheaper. He loses if the price rises. Short-selling is normally risky: you are betting against the long-term trend of the market.

  Return to text.

  *4Member of the Disciples of Christ Protestant denomination. This familiar term is used by the Buffett family.

  Return to text.

  *5In those days, the amount of gold held by government treasuries fixed the amount of dollars in circulation. The “gold standard” stopped the government from provoking inflation simply by printing money.