Buffett: The Biography

Key Takeaways

Under Consideration — to be added.

Interconnections

Under Consideration — to be added.

Highlights

• Beneath the jargon of Wall Street, he seemed to unearth a street from small-town America.
• Buffett’s genius was largely a genius of character—of patience, discipline, and rationality. These were common enough virtues, but they were rare in the heat of financial passions, and indispensable to anyone who would test his mettle in the stock market.
• As an investor, Buffett eschewed the use of leverage, futures, dynamic hedging, modern portfolio analysis, and all of the esoteric strategies developed by academics. Unlike the modern portfolio manager, whose mind-set is that of a trader, Buffett risked his capital on the long-term growth of a few select businesses.
• His talent sprang from his unrivaled independence of mind and ability to focus on his work and shut out the world, yet those same qualities exacted a toll.
• Buffett’s one concession to modernity is a private jet. Otherwise, he derives little pleasure from spending his fabulous wealth. He has no art collection or snazzy car, and he has never lost his taste for hamburgers. He lives in a commonplace house on a tree-lined block, on the same street where he works. His consuming passion—and pleasure—is his work, or, as he calls it, his canvas. It is there that he revealed the secrets of his trade, and left a self-portrait.
• Howard Buffett was determined that Warren would never repeat his own experience of hardship. Also, he resolved that as a parent, he would never follow the example of Ernest and demean his son. He unfailingly expressed confidence in Warren and supported him in whatever he did. And though Warren had his mother’s high spirits, his universe revolved around his father.
• Howard would recite a favorite maxim from Emerson: The great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.
• He was fond of telling them, “You are not required to carry the whole burden—nor are you permitted to put down your share.”
• And when Warren talked, his friends perked up their ears. He didn’t persuade the other boys to join him so much as he attracted them—a fireball, as his father said, drawing moths.
• By his senior year, he was planning on a career not just in business, but specifically in investing. Sitting in the breakfast nook at home, at an age when other boys didn’t get past the sports pages, he was already studying the stock tables. And word of his supposed expertise had followed him to school, where his teachers tried to pick his brain about the market.
• Warren usually did not have a date, but—of importance for a future investor—he was comfortable without being part of the crowd.
• Ben Graham opened the door, and in a way that spoke to Buffett personally. He gave Buffett the tools to explore the market’s manifold possibilities, and also an approach that fit his student’s temper. Armed with Graham’s techniques, Buffett could dismisss the oracles and make use of his native talents. And steeled by the example of Graham’s character, Buffett would be able to work with his trademark self-reliance—with the “sweetness” of Emersonian independence of which Buffett had heard from his father.
• For stock speculation is largely a matter of A trying to decide what B, C and D are likely to think—with B, C and D trying to do the same.
• Every stockpicker worth his salt eventually comes to such a crossroads. It is extremely difficult to commit one’s capital in the face of ridicule—and this is why Graham was invaluable. He liked to say, “You are neither right nor wrong because the crowd disagrees with you.”38 Picking a stock depended not on the whim of the crowd, but on the facts.
• What was most unusual about the young salesman was his appetite for research. Searching for ideas, he read the heavy purple-bound Moody’s manuals page for page with the zest of a small boy reading comics.
• You try to be greedy when others are fearful and you try to be very fearful when others are greedy.§
• He regarded the majority of tips as a waste, which is why brokers passed them along. But good ideas—his ideas—he treated as intensely private. He regarded them as his creation—as a tiny bit sacred.
• Because of his conservatism, he refused to analyze companies subjectively, preferring to stick to his mathematical guidelines. According to Irving Kahn, an assistant to Graham, when anyone tried to talk to Graham about a company’s products, “Ben would look out the window and get bored.”
• By now, Buffett was familiar with virtually every stock and bond in existence. Line for line, he had soaked up the financial pages and the Moody’s books; day after day, he had built up a mental portrait of Wall Street. He could measure each stone against the skyline, and there was no one else whose analysis he trusted better than his own.
• Then he offered the terms. The Davises, as limited partners, would get all of the profits that Buffett could earn up to 4 percent. They would share any remaining profits—75 percent to the Davises and 25 percent to Buffett.5 Thus, Buffett was not asking the Davises to gamble alone; Buffett’s money would be on the same horse. If his results were mediocre or worse, Buffett would get zilch—no salary, no fee, nada.
• Buffett insisted on not disclosing his stocks because he was afraid that someone would copy him—thus making it more expensive if he wanted to buy more. He wouldn’t talk to anyone—he maintained that he was afraid to talk in bed because his wife might hear.
• When Buffett insisted on secrecy, it was not merely to prevent leaks, but also to prevent intrusions, and to maintain that sweet independence. He wanted no amateur tipsters or second-guessers. For a stock to merit investment, Buffett had to persuade himself of it, and if he did, what was the use of other opinions?
• But Buffett couldn’t get a handle on Dempster. It needed an overhaul, but working with the gritty details was not his forte. It was like cleaning the fruit bins at the Buffett store; he preferred the numerical abstractions to the business itself.16 Each month, Buffett would entreat the managers to cut their overhead and trim the inventory, and they would give it lip service and wait for him to go back to Omaha.17 Promptly, Buffett put the company up for sale.18
• Virtually every other stock man in the country chatted up ideas with nary a second thought. Over lunch, at golf courses, on the telephone-tens of thousands of times every day—investment people inhaled and exhaled the name of a favored stock. And most of their tips were forgotten days, if not moments, later, to be supplanted by a new hot stock. But Buffett was different. He was possessive about stocks, like an artist with an unfinished canvas. He liked to tell stories of his coups in the market—but only when they were wrapped up. And only of stocks that were on his agenda to talk about.
• Buffett was a talker more than a conversationalist.
• Buffett spent the day reading annual reports and business publications and talking on the telephone. With more and more reports to read and stocks to analyze, he was ever in good humor. But it was rather solitary. He often lunched alone, sending out for a cheeseburger and french fries. His tiny staff knew nothing more of his stock picks than his wife did.
• Bottle was doing—and doing well—the dirty work that Buffett couldn’t do. He was squeezing cash from Dempster’s underperforming factories, which cash Buffett was funneling into stocks and bonds. From Harry Bottle’s clay, Buffett was sculpting a wholly different enterprise—one with a diversified (and steadily rising) portfolio of securities. This was the sort of alchemy that was very much within Buffett’s range.
• “If we’d kept them the company would have gone bankrupt,” he said. “I’ve kept close tabs and most of them are better off.” Though this has the ring of rationalization, Buffett hated being called a liquidator and vowed that he would “never” lay people off again.41
• Three things had made it work: the initial bargain price, Buffett’s patience in holding on, and his and Bottle’s turnaround.
• Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.
• What was not so apparent was that Buffett was also beginning to think differently—that is, to think in qualitative terms, as well as in the merely numerical terms that had appealed to Graham. When Buffett looked at a stock, he was beginning to see not just a frozen snapshot of assets, but a live, ongoing business with a unique set of dynamics and potential.
• The “main qualification is a bargain price,” he wrote; but he also would pay “considerable attention” to qualitative factors.
• His serious point was that even trifling sums should be invested with the utmost care. To Buffett, blowing $30,000 represented the loss not of $30,000 but of the potential for $2 trillion.
• What is one really trying to do in the investment world? Not pay the least taxes, although that may be a factor to be considered in achieving the end. Means and end should not be confused, however, and the end is to come away with the largest after-tax rate of compound.
• “Ultimately,” he reasoned, there were only three ways to avoid a tax: (1) to give the asset away, (2) to lose back the gain, and (3) to die with the asset—“and that’s a little too ultimate for me—even the zealots would have to view this ‘cure’ with mixed emotions.”
• I believe in establishing yardsticks prior to the act; retrospectively, almost anything can be made to look good in relation to something or other.
• He ridiculed the fund managers who took the opposite tack—which is to say, most of those working on Wall Street. Diversification had become an article of faith; fund managers were commonly stuffing their portfolios with hundreds of different stocks. Paraphrasing Billy Rose, Buffett doubted that they could intelligently select so many securities any more than a sheik could get to “know” a harem of one hundred girls.
• Owning so many stocks was an admission that one could not pick the winners.
• Buffett scarcely thought about spending his wealth on material comforts. That wasn’t why he wanted it. The money was a proof: a score-card for his favorite game.
• Buffett acknowledged his contrasting sentiments, quite comically, one summer when the family was touring San Simeon, the William Randolph Hearst mansion in California. The guide was giving a blow-by-blow account of how much Hearst had paid for every item—the drapes, carpets, antiques, and so on. Bored to tears, Buffett protested, “Don’t tell us how he spent it. Tell us how he made it!”
• Discrimination collided with his belief in merit and his faith in neutral yardsticks, which lay at the heart of his investing. In the same vein, he thought it was wrong that rich kids got a big head start over everyone else.
• Most people—high-powered executives perhaps especially—tend to compartmentalize their lives. They may be tigers at the office and kittens at home. But Buffett was all of a remarkably consistent piece. To young Peter, his father ran on an inner clock whose springs and gears never ceased to turn. Day to day, Buffett was in his own solar system.
• Susie tolerated him perhaps because Warren, in his absentminded way, was unfailingly good-natured.
• Buffett, it should be understood, was not abandoning the Graham credo of hunting for securities that were well below “intrinsic value.” But his definition of value was changing, or rather, broadening.
• Buffett doesn’t dodge questions … but sometimes he’s a trifle oblique.
• With each successful vault, the bar of expectations climbed. The brighter his star, the darker was the shadow of a looming burnout. Buffett had been saying all along that it could not go on forever. On Wall Street, nothing does.
• Stocks were going up. This had hardly bothered Buffett when his fund was small. But as his capital swelled, he grew increasingly antsy. The combination of more cash to invest and fewer bargains had him trapped. He complained of being pressed for ideas and, bit by bit, of a strain.
• Let me again suggest [that] the future has never been clear to me (give us a call when the next few months are obvious to you—or, for that matter, the next few hours).
• Buffett avoided trying to forecast the stock market, and most assuredly avoided buying or selling stocks based on people’s opinions of it. Rather, he tried to analyze the long-term business prospects of individual companies. This owed to his bias for logical reasoning. One could “predict” the market trend, as one could predict which way a bird would fly when it left the tree. But that was guesswork—not analysis. If he ever sold stocks “just because some astrologer thinks the quotations may go lower,” he warned, they would all be in trouble.
• It seemed that the dizzier Go-Go’s success, the greater was Buffett’s urge to apply the brakes. Indeed, he kept a newspaper clipping of the 1929 crash in plain view on his wall, just as a reminder.
• But both companies were cheap, and Buffett thought he could make a profit as an operator.
• (Buffett, in contrast, took a share of the profits, but nothing up-front and no management fee.)
• The stock market is a crowd, consisting of whoever is following prices at any given moment. This amorphous assemblage revalues prices every day, even every hour. Yet the outlook for a given business—say, a Walt Disney—changes far more slowly. The public’s ardor for Mary Poppins is unlikely to change from a Tuesday to a Wednesday, or even over a month or two. Most of the fluctuations in Disney’s shares, therefore, derive from changes not in the business but in the way that the business is perceived.
• Buffett illustrated this with an allegory about an oil prospector, who arrived at heaven’s gate only to hear the distressing news that the “compound” reserved for oilmen was full. Given permission by Saint Peter to say a few words, the prospector shouted, “Oil discovered in hell!”—whereupon every oilman in heaven departed for the nether reaches. Impressed, Saint Peter told him there was now plenty of room. Quoting Buffett: The prospector paused. “No,” he said, “I think I’ll go along with the rest of the boys. There might be some truth to that rumor after all.”
• One wonders how such silk-stocking paragons could be so gullible. The answer is, they were afraid to be left behind. The choice was to buy the popular stocks, which, after all, were rising, or to risk momentarily lagging the pack. And those who lagged, even for a quarter or two, could not raise new capital. For a money manager in the Go-Go days there were no second acts.
• Buffett had nothing but doubts. The partnership had $65 million, but where would he put it? The bargains were gone, and the game had changed. Wall Street was putting more and more chips on ever briefer spins of the wheel. It was true, Buffett told his partners, that this self-fulfilling merry-go-round had been quite profitable. It was also true that the fashionable stocks might continue to go up. Nonetheless, Buffett was “sure” that he, personally, would not do well with them. Nor did he wish to try. He could offer no proof that prices were silly, only conviction.
• In Munger’s view, it was better to pay a fair price for a good business than a cut rate for a stinker. The cheap business, too often, was so full of problems as to turn out to be no “bargain.”
• Indeed, Buffett was starting to feel that managing a portfolio was a bit of a rat race. One puffed on a cigar butt and then tossed it out; the ephemeral quality was unsatisfying.
• When I am dealing with people I like, in businesses I find stimulating (what business isn’t?), and achieving worthwhile overall returns on capital employed (say, 10–12%), it seems foolish to rush from situation to situation to earn a few more percentage points.
• But what about the famed access of New Yorkers to “inside information?” Buffett replied, “With enough inside information and a million dollars you can go broke in a year.”
• Buffett reminded partners of a seemingly lost distinction: “Price is what you pay, value is what you get.”
• My approach to bonds is pretty much like my approach to stocks. If I can’t understand something, I tend to forget it.69
• Rosner stayed for twenty years. Toward the end of his tenure, he told Buffett: “I’ll tell you why it worked. You forgot you bought this business. And I forgot I sold it.”
• According to economic theory, when a company is so mismanaged, sooner or later an investor will decide that he can do more with its assets and take it over.
• Warren asked questions like crazy. About the marketing, the machinery, about what I thought should be done, where I thought the company was going, the technical end of it, what kind of products were we selling, who we were selling to. He wanted to know everything.
• Buffett told Jack about his own career, recounting his rise as an investor. Jack asked, “How do you do it?” Buffett said he read “a couple of thousand” financial statements a year.
• Chace now made ready to hear the new owner’s plans for the mill. But Buffett said anything to do with warps and looms would be up to Chace. Buffett would watch the money.
• Then Buffett explained to Chace the basic theory of return on investment. He didn’t particularly care how much yarn Chace produced, or even how much he sold. Nor was Buffett interested in the total profit as an isolated number. What counted was the profit as a percentage of the capital invested.
• Buffett also followed through with his promise of autonomy. He told Chace not to bother with quarterly projections and other time-wasters. He merely wanted Chace to send him a monthly financial report and to warn him of any unpleasant surprises.
• Chace’s freedom had one boundary. Only Buffett could allocate capital. And as most of the previous capital that Seabury had poured into textiles had gone for naught, Buffett was extremely reluctant to put in more.
• Ringwalt stated his philosophy in simple terms: “There is no such thing as a bad risk. There are only bad rates.”32 This was an insight worth its weight in gold.
• The apparent riddle was why a New Bedford fabric mill would want to acquire an Omaha insurance company. But Buffett did not think of Berkshire as necessarily a textile company, but as a corporation whose capital ought to be deployed in the greenest possible pastures.
• Most older entrepreneurs such as Abegg are eager to retire when they sell out, and the new owners (while praising their storied careers) usually are anxious to show them the door. Buffett was different. Running a bank, a claims office, or a retail chain was out of his arc, and he had no desire to try. Indeed, he felt, if he didn’t like the way the business was run, why buy it? He looked for a type: the self-starter with a proven record. What is interesting is that they stuck with him. Abegg, who was seventy-one when he sold to Buffett, continued to manage under Buffett’s ownership—as did Jack Ringwalt at National Indemnity and Ben Rosner at Diversified. (Abegg would run the bank until he was eighty.) None of these multimillionaires needed to work, but Buffett understood that most people, regardless of what they say, are looking for appreciation as much as they are for money. He made it clear that he was depending on them, and he underlined this by showing admiration for their work and by trusting them to run their own operations.
• Moreover, in measuring investments, Buffett was absolutely unwilling to relax his standards. Many a portfolio manager has been known to explain, “This doesn’t look so hot, so we’re only investing a little.” Buffett refused to make such compromises, and he could be brutally honest about shooting down a prospect.
• This says a lot about Buffett’s effect on people. Though he wouldn’t loosen his wallet, he was uncanny as a motivator.
• Like his father, he hated free riders (e.g., his disdain for stock options), but he saw more of them within the country clubs and boardrooms than without. Once, at a formal dinner, when a guest complained about the cost of welfare programs for the poor, Buffett replied tartly, “I’m a lot more concerned about welfare for the rich.”5
• Despite his ideals, Buffett was suspicious of the liberal impulse to simply spend money.
• Partly, Buffett was just tight, but he genuinely did not think people or organizations (or his kids) benefited from easy cash. He measured social projects through the same lens as business ventures: he wanted a return. Good works required that one proceed on the basis of trial and error, even on faith. Buffett was incapable of such a leap. Indeed, the very discipline that made him a good investor crippled what could have been a powerful inclination to work for societal changes. He needed a yardstick. “In investment you can measure results,” he admitted to a reporter. “With some of this other stuff, you don’t know in the end whether you’ve won or lost.”
• Buffett complained to Rosenfield, “They talk about open government but they don’t send statements.”
• Though he was proud of the Pulitzer, he wanted a profit. And the Sun was a poor business. When it raised its rates, its circulation dropped, rather sharply. “Warren didn’t anticipate that,” Lipsey noted. The experience seems to have jolted him. Buffett suddenly wanted to learn all there was to know about newspapers. He began to study the economics of newspapers, and of other media properties, in great detail. As once, after discovering GEICO, he had immersed himself in insurance, now he wouldn’t sleep until he knew the newspaper business from the bottom up. And the more he learned, the more he knew that the Sun, as a secondary paper, was hopeless.
• But it had registered on Buffett that it would be “wonderful” indeed to own a dominant newspaper. Such a paper, he would tell his pals, would be like the only bridge in a small town.18 Anyone who had to get across would have to pay the toll. An advertiser in a one-paper city was in the same boat. A department store in Omaha had to advertise in the Omaha World-Herald, the monopoly daily—which meant that the paper had relative freedom to raise its rates.
• High stock prices had been a problem for Buffett all around.
• But little by little, he began to creep back into the game. Once again, the catalyst for his metamorphosis was Wall Street. Fund managers, who had been stunned by the collapse of Go-Go, had retreated into a shell. Their funds were now clustered in a group of big, well-known growth stocks, such as Xerox, Kodak, Polaroid, Avon, and Texas Instruments, which were dubbed the nifty fifty. In the prevailing view, these companies, unlike the small high-fliers of the Go-Go era, would grow forever. They were thus said to be “safe”—indeed, safe at any price.
• The funds had converged on “safer” stocks, but risk is never wedded to one stock or another; it is present wherever investors mindlessly imitate one another.
• In the evenings, Buffett would go to Cris Drugstore, on 50th Street, for the late edition of the World-Herald, which carried the closing stock prices. Then he would go home and read a stack of annual reports. For anyone else it would have been work. For Buffett it was a night on the town. He did not merely do this nine-to-five. If he was awake, the wheels were turning. He would offer to help Peter with his homework, but Peter knew it wasn’t what his father really wanted to do.
• His immersion in stocks was terribly difficult for his wife, in manifold ways. According to what Susie told her confidantes, she yearned for more of the usual sort of sharing that one would have with a spouse. When—as occurred periodically—Howie, their middle child, had some problems, Susie had to turn to her own father, the psychologist, for guidance. Her spellbound hubby was in a dream chamber. It was not that Warren was uncaring about the family. He was never mean—they knew he wouldn’t knowingly hurt a flea. As Peter said, he had blinders on.
• Buffett’s decision to sell notes was based on a Buffett rule of thumb: get the money when it is cheap. (If you wait to borrow until you need a loan, it is likely to be when others are also borrowing, when—perforce—rates will be higher.)
• It’s a lot different going out to Kalamazoo and telling whoever owns the television station out there that because the Dow is down 20 points that day he ought to sell the station to you a lot cheaper. You get into the real world when you deal with a business. But in stocks everyone is thinking about relative price. When we bought 8 percent or 9 percent of the Washington Post in one month not one person who was selling to us was thinking that he was selling us $400 million [worth] for $80 million. They were selling to us because communication stocks were going down, or other people were selling, or whatever reason. They had nonsensical reasons.
• The trick in such markets was to have the cash to exploit the moment—as Buffett put it, “to have your check clear.”
• Buffett’s rare ability to separate his emotions from the Dow Jones Industrial Average was a big part of his success. In the sixties, when he had been making tons of money, he had been full of fearful prophecies. But now, with his portfolio underwater, he was salivating.
• Buffett was as fearful of inflation as anyone. His response was to hunt for stocks, such as newspapers, that would be able to raise rates in step. Similarly, he avoided companies with big capital costs. (In an inflationary world, capital-intensive firms need more dollars to replenish equipment and inventory.) What Buffett did not do was buy or sell stocks on the basis of macroeconomic predictions.
• He could not size up how the country’s problems would influence the shares of the Washington Post. His genius was in not trying. Civilization is too variegated, its dynamics far too rich, for one to foresee its tides, let alone the waves and wavelets that affect securities prices. Wars would be won and lost; prosperity would be hailed as everlasting and bemoaned as ne’er recurring, as would politics, hemlines, and the weather enjoy their seasons. Analyzing them was Wall Street’s great game—and its great distraction. In its floating salon, everything was interesting and nothing was certain—the President, the economy, the effect of OPEC on sales of Pepsi-Cola.
• I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.
• Investors often assume that book value approximates, or at least is suggestive of, what a company is “worth.” In fact, the two express quite different concepts. Book value is equal to the capital that has gone into a business, plus whatever profits have been retained. An investor is concerned with how much can be taken out in the future; that is what determines a company’s “worth” (or its “intrinsic value,” as Buffett would say).
• When Peters insisted that something had to be done to reinvigorate Wesco, Buffett said he’d like to try it himself. He talked some about his relationship with other companies, which he described as being one of partnership. He talked some about himself. He was calmly reassuring, pushing the right buttons.
• As Buffett explained to the SEC, Berkshire was something he intended never to sell. I just like it. Berkshire is something that I would be in the rest of my life. It is public, but it is almost like the family business now.
• He didn’t tell her what to do. He advised, he counseled. The secret to his seduction was his patience. It seemed to exert a magnetic pull on her. And the more she got to know him, the more she liked his ideas.
• He often commented that he had been unhappy until he had met Susie, or that he wouldn’t have turned out well without her.27 As a couple, they did not fit a normal pattern. Though their interests, and increasingly their schedules, were separate, Buffett remained extremely attached to her. Even now, she would nestle next to him and take his hand in public as though they were teenagers. Knowing that she was his muse, she seemed incapable of saying no to him.
• If Buffett couldn’t see a business, he wasn’t comfortable with it. It wasn’t enough for him to get an expert’s assurance on a new project, which is what the typical executive relies on. If he didn’t understand a venture—he, personally—he felt that he’d be speculating. And Buffett wouldn’t do that.
• He insistently reminded them—as he had Ken Chace, so many years earlier, outside the textile mill—that size was not the goal; the return to shareholders was.
• On this evening, Buffett wanted to take the measure of Byrne personally. And Byrne impressed him. He spoke like an owner as distinct from a manager or bureaucrat. He was decisive and energetic, as the crisis required. Perhaps he was too volatile to lead the troops in peace. But as a wartime general, Buffett thought him a brilliant choice.
• Over the next few years, Berkshire doubled its stake, making Buffett the controlling investor. GEICO seemed to go through a Buffett mold—Buffett had that effect on companies.
• One time, Buffett said an investor should approach the stock market as if he had a lifetime punch card. Every time he bought a stock he punched a hole. When the card had twenty holes he was done—no more investing for life. Obviously, the investor would filter out every idea but the best. Lou Simpson, who was managing GEICO’s portfolio, said this parable had a profound impact on him.
• In an era when managers were increasingly under the gun to raise their stock or face a takeover, Buffett wanted Byrne to manage for the long term, and emphasized that he wouldn’t sell him out.
• No doubt, Buffett wanted Byrne to know that he trusted him. And he must have guessed that if he showed his faith, Byrne would not want to let him down. One could say that Buffett was lucky, except that he got lucky too often.
• Quite obviously, Buffett evolved. He was influenced by Charlie Munger and by the writer-investor Philip Fisher, each of whom stressed good, well-managed companies as distinct from statistically cheap ones.54 And he was influenced by his own experience.
• Some years later, Buffett admitted that the stocks he was buying were entirely different from those that Graham would buy. What he had retained from Graham was “the proper temperamental set”—that is, the principle of buying value, the conservatism embedded in Graham’s margin of safety principle, and the attitude of detachment from the daily market gyrations.56
• “The best thing I did was to choose the right heroes. It all comes from Graham.”
• But the Evening News was a big step for him. It was not a stock-market investment but a business owned in entire. Buffett would not have Kay Graham to take the punches for him; he would be personally on the line. Even before the sale closed, Buffett seemed to have a strategy in mind for the paper.
• Buffett was on one of his highs, helping to design a newspaper, getting involved with ad rates, promotional schemes, pricing. He dashed off a note to a certain publisher friend: “Kay, I’m having so much fun with this it is sinful.”
• Perhaps it is necessary to add that the typical businessman does not spend $32.5 million without commissioning a study, often several of them. They provide him with a sense of security—the blessing of supposed experts—even if it is a false security. Ultimately, someone has to evaluate the facts. The someone ought to be the CEO, though it takes a rarely self-assured one to appear before a board without a prop. Buffett’s instinct was to remove the layers between the decision and himself. Yet as one who dispensed with the normal props, he could be made to seem suspect.
• In the newsroom, people had a sense that this owner would be different. As one veteran put it, “Warren seemed to take a real interest.” He occasionally sent a note commending a story, and he showed up at a staff picnic wearing, of all things, a T-shirt. The reporters, a cynical bunch, loved his skepticism. Rather than pontificate on the redeeming value of capitalism, he tipped the paper to a story on a topic that concerned him much more—namely, how greedy and perhaps unethical he considered his fellow tycoons to be.
• In 1980, Lipsey moved to Buffalo full-time.† Buffett hadn’t asked him to do it, but Lipsey knew that Buffett, in his none too casual way, wanted him there—badly. And Lipsey had gotten hooked on the battle with the Courier-Express.
• “What about profit-sharing for people in the newsroom?” Buffett was asked. On its face, this seemed reasonable. The newsroom had certainly done its bit.
• Buffett replied coldly, “There is nothing anybody on the third floor [the newsroom] can do that affects profits.” The staff was shocked, though Buffett was merely living up to his brutal-but-principled capitalist credo. The owners of the Buffalo Evening News had run very great risks. Employees had not come forward during the dark years to share in the losses. Nor, now, would they share in the gains.
• A decade after its war with the Courier-Express, the News reached three-fourths of the households in Buffalo—the highest such ratio of any metropolitan paper in the country.51 But Buffalo was the poorer for having one newspaper instead of two, and total newspaper readership in the city was much less than when the Courier-Express had been alive.
• “I have a picture of Mom and the French Café people coming over,” Peter said. “Dad was like the dad. He was upstairs reading. Mom and her friends were like the kids.”
• While they had always had different interests, as the house emptied of children Susie was more aware of a sense of missing something. Kent Bellows, an artist friend who was hanging around the house, thought Warren and Susie had “a great marriage”; they were a case of opposites attracting. Yet so much of the time, Warren seemed to be in a shell—present physically, but not much more. He would be enveloped in a volume of Standard & Poor’s or preoccupied with his thoughts.4 In an emotive sense, he was, indeed, Susie’s opposite. Susie said to Bellows, “All Warren needs to be happy is a book and a sixty-watt bulb.”
• He couldn’t rise early enough, as though a bundle of papers still awaited him at the office.
• As Buffett was investing, he also began to write, occasionally for business magazines, but primarily in the Berkshire Hathaway annual reports. He had always had an urge to chronicle his progress, but his pen had been strangely silent since the days of Buffett Partnership. Now, increasingly, he used the letters to sketch lucid business primers that ranged over investing, management, and finance.
• It comforted no one that Wall Street had survived a similar brush with Armageddon only five years before—or that the earlier slump had been followed by one of the greatest rallies ever. Financial cycles are apparent only in retrospect.
• Heinz H. Biel, vice president of Janney Montgomery Scott, joined the chorus: Knowing that stocks are cheap does not impel one to go on a buying spree; the future is clouded by many ugly questions.
• Buffett could not have disagreed more. The same week, he penned an essay for Forbes, attacking the herd instincts of pension-fund managers and their age-old rationalization. The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.
• The origin of this singular insight was that Buffett looked beneath the form of a security to its economic substance. A stock, like a bond, was a claim on a corporate asset. A stock also bore a “coupon,” at least implicitly—the underlying corporate earnings.
• Buffett suggested that such managers and directors could “sharpen their thinking” by asking if they would be willing to sell all of their company on the same basis as they were selling part of it. And if not, why were they selling part of it?
• Where the latter loathed businessmen as capitalists, Buffett arrived at his critique via the opposite route. He attacked CEOs for being wards of the corporate state—that is, for being insufficiently capitalist and self-reliant.
• overstate. At virtually every public company in America, high share turnover is not only the rule, it is devoutly encouraged by the executives. The typical CEO thinks of his investors as a faceless and changeable mass—to use Phil Fisher’s analogy, like the diners in a highway road stop. At Berkshire, the turnover was extremely low, which—as was clear from Buffett’s letters—was how he wanted his “café” to operate: “We much prefer owners who like our service and menu and who return year after year.”
• In part, Buffett was good at writing annual reports because he was good at reading them.
• Many run the business so as to maximize not the economic reality but the reported results. “In the long run,” Buffett warned, “managements stressing accounting appearance over economic substance usually achieve little of either.”
• Shareholders pressed Buffett to split his stock. The rationale—and it is an article of faith at virtually every public company—is that a lower share price is more affordable and thus tends to enhance the public’s interest in a stock. But in his 1983 letter, Buffett ruled out a split. Slicing the pie into more pieces would hardly increase its value. (Try it with a pizza.)
• His aim was to profit from the long-term growth of (hopefully) well-chosen businesses, but not from nimbly entering and exiting them, or from financial legerdemain, or from various forms of pie-splitting and (at foolish prices) pie-acquiring.
• Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns, and are very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations. We hope not to repeat the capital-allocation mistakes that led us into such sub-par businesses.… Nevertheless, gin rummy managerial behavior (discard your least promising business at each turn) is not our style.
• One question Buffett always asked himself in appraising a business is how comfortable he would feel having to compete against it, assuming that he had ample capital, personnel, experience in the same industry, and so forth.
• Her method was her motto: “Sell cheap and tell the truth.”
• Since Buffett had no wish to run a store himself, or even to closely supervise one, he wanted managers who would “feel like I do,” ready to tap-dance at the start of the workday.
• When the Omaha World-Herald inquired as to her favorite movie, Mrs. B replied, “Too busy.” Her favorite cocktail? “None. Drinkers go broke.” Her hobby, then? Driving around and spying on competitors.19
• Like the Furniture Mart, it perfected the high-volume/low-price formula—which, once in place, tends to be self-perpetuating. Of course, the profits on diamonds were considerably higher than those on carpets.
• The comparison is illustrative, because the Hathaway mill was everything the Mart was not. The mill was indistinguishable from its competitors; the end consumer didn’t know it existed. As Buffett would bitterly joke, no one went into a men’s store and asked for “a pinstriped suit with a Hathaway lining.”
• Buffett drew from this a broad maxim: a good manager was unlikely to overcome a bad business.30 This led to a truism about problem businesses in general: “ ‘turnarounds’ seldom turn …”
• This devastating outcome for the shareholders indicates what can happen when much brain power and energy are applied to a faulty premise. The situation is suggestive of Samuel Johnson’s horse. “A horse that can count to ten is a remarkable horse—not a remarkable mathematician.”35 And a brilliantly run textile firm was not a brilliant business.
• Buffett’s perspective had also changed. At one time, his view of the Street had been exclusively that of a shareholder. Now, in middle age, he also identified with CEOs—with the Dick Munros and Andy Siglers. He was suspicious of the raiders and of the havoc they caused in corporate boardrooms, and wary of stock prices inflated by takeover fever.
• When the ABC team returned, Buffett blinked. “I know I’ll regret doing this,” he began—and declared that Wasserstein could have the warrants. The ABC people were stunned. Now each side had to figure out what the warrants were worth. Wasserstein’s computer mavens began to crunch a series of numbers. Buffett, handling the calculations for Cap Cities, simply did them in his head.
• Perelman eschewed high-tech and looked for strong cash flow. Like Buffett, he took a long-term view and was, at heart, a financial person, not a manager. He once told Forbes that he carefully read ten annual reports a week.
• A raider with access to somebody else’s dough would pay a lot more than a company was worth. And Wall Street’s soaring appetite for junk bonds was providing a vast supply of easy money.
• One of the best young money managers thought Buffett had sort of lost it. “Warren has had three careers,” this investor-critic explained. “In the old days, he was a scavenger. He looked for value. Then it got hard to find stuff and he became a franchise investor; he bought great businesses at reasonable prices. And then he said, ‘I can no longer find good businesses at even acceptable prices, and I will take advantage of my size and teach the world a lesson about long-term investing.’ We think he screwed up. It’s stupid.” Buffett and Munger doubted that they could have done better trying to dance in and out.32 For one thing, a buy-and-hold investor put off the tax man—over time, a very big saving.‖ For another, their long-term approach created opportunities: a Mrs. B or Ralph Schey was more inclined to sell to an owner such as Buffett. And, knowing that divorce was not an option, Buffett was a bit—quite a bit—more circumspect in choosing a partner. To the extent that he, or any investor, is not thinking about how and when he will get out, he will be more selective on the way in. As in a marriage, this is apt to lead to better results.
• LBO artists did not really qualify as “investors.” They merely transferred assets from one pocket to the next. They did not “create” value, which Buffett defined as adding to the sum of socially useful or desirable products and services.
• One time, when Buffett was speaking off-the-cuff to a group at Cap Cities, he was asked what techniques he recommended to managers. He launched into a tale about a stranger in a small town. The fellow wanted to get acquainted with folks, so he went over to the village square and saw an old-timer with “kind of a mean-looking German shepherd.” Buffett continued: He looked at the dog a little tentatively and he said, “Does your dog bite?” The old-timer said, “Nope.” So the stranger reached down to pet him and the dog lunged at him and practically took off his arm, and the stranger as he was repairing his shredded coat turned to the old-timer and said, “I thought you said your dog doesn’t bite.” The guy says, “Ain’t my dog.”28 The moral for managers: It’s important to ask the right question.
• A compact organization lets all of us spend our time managing the business rather than managing each other.
• Munger said it was lucky that the heads of Berkshire’s operating units, such as See’s Candy, did not work in the same office. Close up, comparing oneself to Buffett would be “hard on the human ego.”40 His intensity was better at a distance.
• Buffett tried to offset his managerial shortcomings by restricting his role at World Book, See’s Candy, and such to a very few big decisions.43 † He liked to say that one didn’t need a big “circle of competence”—but it was important to know where the “perimeter” was.44 And Buffett was unusually aware of his own limitations. As applied to managing, he picked the chorus line but didn’t attempt to dance (no “advice” on carpets for Mrs. B). Where other managers often created problems by interfering, Buffett’s native genius for simplicity averted them.
• The common thread is that historians, football coaches, and CEOs are equally fearful of shouldering, or even delegating responsibility for, big decisions.
• Buffett did not rule out expansion; he simply demanded that a Blumkin, a Lipsey, or a Schey convince him that said manager could do more by retaining a dollar of earnings than Buffett and Munger could do by investing it elsewhere. The manager who did not convince sent a dividend to Omaha. Buffett applied the same equation to himself at the corporate level. That is, if he and Munger could not find superior investments, it would be time for Berkshire to stop growing and to pay dividends to shareholders.
• Buffett was looking for “people with no ego.”
• Without due recognition of crowd-thinking (which often seems crowd-madness) our theories of economics leave much to be desired. BERNARD BARUCH
• scarcely a business school in the country used Graham’s texts. Instead of price and value, Buffett lamented in a postmortem, “professionals and academicians talk of efficient markets, dynamic hedging and betas.”
• The premise of Buffett’s career was that stockpicking, though difficult and subjective, was susceptible to reasoned analysis. Occasionally, certain stocks sold for far less than they were “worth.” An astute investor could profit by buying them.
• This “science” was grounded in the only evidence that scholars considered relevant: the data of (supposedly perfect) stock prices. It ignored all of the myriad and changing factors—such as a company’s strategy, products, market strength, and management—that are central to valuing a business in the real world. Such variables are subjective and imprecise; but they are, of course, the stuff that investor-analysts such as Buffett reckon with every day.
• This fetching comment introduced a straw man. Graham-and-Dodders did not claim to know the proper price for a stock. Theirs was a rough science, at best. What they said was that on occasion a stock was so out of line that one could leap in without any claim to precision. Such instances might be rare. Graham-and-Dodd investors typically owned only a dozen or so stocks from among the thousands available. But those few could make one rich. Quoting Buffett: Observing correctly that the market was frequently efficient, [EMT adherents] went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day.26
• The only factor necessary to calculate the expected relative return on a stock was its beta. Nothing about the fundamentals of a company mattered; the one number, beta, computed from past stock prices, was the only relevant issue.
• Buffett found it “extraordinary” that academics studied such things. They studied what was measurable, rather than what was meaningful.
• In a remarkable comment, circa 1979, the chief strategist at Drexel Burnham said his aim was to make the analyst less like an independent entrepreneur who worked alone judging stocks.35 Less, that is, like a Warren Buffett.
• Speculation had so overwhelmed markets that their proper, value-discovering role was being swamped by hyperactive trading.
• As a remedy for the “casino society,” Buffett proposed what Jonathan Swift would have called “a modest tax”: 100 percent of the profits on stocks and futures held for less than a year. This idea disappeared without a trace. But fears about hyperactive trading did not.
• But the general rule was true for all: if you didn’t understand the business—be it a newspaper or a software firm—you couldn’t value the stock. • Look for managers who treated the shareholders’ capital with ownerlike care and thoughtfulness. • Study prospects—and their competitors—in great detail. Look at raw data, not analysts’ summaries. Trust your own eyes, Buffett said. But one needn’t value a business too precisely. A basketball coach doesn’t check to see if a prospect is six foot one or six foot two; he looks for seven-footers. • The vast majority of stocks would not be compelling either way—so ignore them. Merrill Lynch had an opinion on every stock; Buffett did not. But when an investor had conviction about a stock, he or she should also show courage—and buy a ton of it.
• Sounding remarkably like Buffett, Goizueta, who had no training in finance, would later remark, “I learned that when you start charging people for their capital, all sorts of [good] things happen.”28 Buffett recognized a kindred spirit.29
• And some of these others, being less than anxious to slog through annual reports, were reluctant to believe that Buffett found his stocks the way he said he did.
• Most of what Buffett did, such as reading reports and trade journals, the small investor could also do. He felt very deeply that the common wisdom was dead wrong; the little guy could invest in the market, so long as he stuck to his Graham-and-Dodd knitting.39 But people, he found, either took to this approach immediately or they never did. Many had a “perverse” need to make it complicated.
• Of course, following Graham and Dodd would not make Doris—or most anyone else—as gifted as Buffett. At the mere mention of a stock—any stock—he could spit back a fact-filled summary of it, just as the young Warren had once recited from memory the populations of cities. Similarly, his ability for figures left his colleagues stunned.42 (Buffett explained his penchant for mental math by saying that if he didn’t understand a figure in his head, he didn’t “understand” it; thus, no computer.)
• Anyone is free to adopt the approach of evaluating a stock as a share of a business, rather than a blip on a screen, just as anyone is free to trade options. Munger said the Buffett style was “perfectly learnable.” Don’t misunderstand. I do not think that tens of thousands of people can perform as well. But hundreds of thousands can perform quite well—materially better—than they otherwise might. There is a duality there.
• Buffett said it did not require a formal education, nor even a high IQ.45 What mattered was temperament. He would illustrate this with a little game at business schools. Suppose, he would tell a class, each student could be guaranteed 10 percent of one of their classmates’ future earnings. Whom would they choose? The students would start to scrutinize one another intently. They weren’t looking for the smartest, necessarily, Buffett would observe, but for someone with the intangibles: energy, discipline, integrity, instinct. What mattered most was confidence in one’s own judgment, from which would flow the Kiplingesque cool to keep one’s head “when all about you are losing theirs.” In market terms, if you knew what a stock was worth—what a business was worth—then a falling quote was no cause for alarm. Indeed, before he invested in a stock, Buffett wanted to feel sufficiently comfortable so that if the market were to close for a period of years and leave him with no quoted price at all, he would still be happy owning it.46 This sounds extraordinary, but one’s house is not quoted day-by-day, and most people do not lose sleep over its value. That is how Buffett looked at Coca-Cola.
• In fact, Buffett approached philanthropy more or less as he did investing. He refused to “diversify,” preferring that his foundation give to a few “high-leverage” causes that he hoped would reap the biggest social bang for the buck. Sensibly, he wanted to focus his giving, and he recognized that in the case of many charities, too much may be spent on administrator lunches and so forth.
• Buffett liked to point out that rich people threw money at their colleges in return for getting their names on buildings, but did nothing for their elementary schools, which were trusted with more formative years.
• People who did not have powerful jobs, women in particular, noticed that Buffett treated them without any hubris or air of self-importance.
• “Don’t tell me about the economics—I know they’re great. You make a product for a penny, you sell it for a dollar, and you sell it to addicts. And it has tremendous brand loyalty.”
• On Wall Street, it was often the good ideas that got you into trouble, for what the wise did in the beginning, “fools do in the end.”
• At one point, Seth Schofield, the chief executive, called Buffett to apologize for the way his investment was turning out. “Seth, I want you to remember one thing,” Buffett shot back. “I called you, you didn’t call me. So I have no one to blame but myself if it doesn’t work out, and let’s let it go at that.”
• What’s more, the problems at his companies did not require Buffett to get personally involved. He liked to say that he had “arranged” his life so that he needn’t do anything he didn’t like.
• I view Warren as a resource. I go to him if I’ve got something that I can’t ask anybody inside the firm about and get a reliable answer. Or, more than that, if I don’t trust the answer that I can get in the firm to be truly objective. Warren is a terrific call.
• For varying reasons, each of the directors is convinced that Buffett is the one person who has the combination of reputation, financial clout, experience, and inner strength to save the firm.
• Instinctively, he shrank from confronting his adversaries, but he was superb at winning them over without a fight. He did not so much convince; he disarmed, he co-opted. Though fearful of hostility, he knew what many are slow to learn—that a sustained demonstration of good faith is apt to be returned in kind, if it is not undermined by any conflicting behavior. That is how he had induced Kay Graham to trust him, and Stan Lipsey to go to Buffalo and save his newspaper; and the SEC to drop its investigation of Blue Chip. Now he had to cooperate with Salomon’s investigators, bow down before its accusers, actually help Justice prove its case. He had to assume, very publicly, as only Buffett could, a personal responsibility for the scandal—to show that the stain was not only purged but deeply and sincerely regretted.
• People—at least some people—he maintained, were not the purely economic creatures depicted by economists. They could also be motivated by loyalty.
• This was Buffett’s essential virtue—the courage to stick to his course.
• Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.
• into Berkshire and like amounts into the S&P 500 and crude oil, the Berkshire at year-end 1995 would have been worth $17.8 million, the S&P portfolio $224,000, and the crude oil $72,000.
• Among history’s great capitalists, Buffett stands out for his sheer skill at evaluating businesses. What John D. Rockefeller, the oil cartelist, Andrew Carnegie, the philanthropic steel baron, Sam Walton, the humble retailer, and Bill Gates, the software nerd, have in common is that each owes his fortune to a single product or innovation. Buffett made his money as a pure investor: picking diverse businesses and stocks.
• When he took over Berkshire, in 1965, the once-great yarn mill was fading. He redeployed its capital into insurance, candy, department stores (a mistake), banking, and media. These were followed by tobacco, soft drinks, razor blades, airlines (another mistake), and various whole businesses from encyclopedias to shoes. In sum, he built an industrial empire now worth $38 billion entirely from what miserable trickle of cash he could wrest from a dying textile mill, before that mill was sold for scrap.
• His one passion has been to collect—not money, precisely, but tangible evidence of himself. He clings to his friends, his house, his old foods and stock lines, and his stocks themselves. Notably, he says he does not enjoy running businesses; he enjoys owning them.
• Indeed, Buffett tracks the destiny of every one of Berkshire’s million-plus shares—a level of familiarity that no other public CEO would dream of or, for that matter, even remotely desire.
• The point is that Buffett views all investing, and all that he has ever attempted, as “value investing.”
• If we have lost the people with Emersonian inner conviction, it is because we have lost the fixed stars that formerly guided them. The modern relativism has reduced us all to being timid specialists, peeping out from cubbyholes marked “growth” and “derivative.”
• We see him in his inner sanctum, without advisers or lackeys, opposite the framed and fading newspapers and the looming picture of his father, who counseled him toward just such sweet Emersonian solitude. Hours pass without interruption; the telephone scarcely rings. He is looking not for patterns on a screen but for the fundamental values,
• He stripped Wall Street of its mystery and rejoined it to Main Street—a mythical or disappearing place, perhaps, but one that is comprehensible to the ordinary American.
• In Munger’s phrase, he strove to be more than a “miserable accumulator,” in particular by treating investors and investees as partners, with no fingers crossed and no “exit strategies.”
• I certainly have no desire to sell a good controlled business run by people I like and admire, merely to obtain a fancy price.
• This is why Buffett filled a hollow. More than most, he reclaimed the rewards that spring not from trading commitments one for the next, but from preserving them.
• “Never lose money” is an unyielding standard; it forecloses the option of taking any speculative risks. This is why Buffett has so outdistanced investors who earn impressive returns in many years but who, on occasion, succumb to speculation and suffer punishing losses.
• The man who taught America how to invest is writing a new chapter on giving it away.