Buffett

  Praise for

  Buffett

  “In this engaging biography, Roger Lowenstein tells not only how Mr. Buffett made it but how he has managed to avoid spending it—the most fascinating part of the story … a delightful portrait of a homespun capitalist.”

  —The New York Times

  “Lively, smoothly written, and elaborately researched … the best book by far on this legendary character.”

  —Business Week (Top 10 Business Books of 1995)

  “A delightful portrait.”

  —The New York Times Book Review

  “A significant contribution to the craft of biography as well as an illuminating and comforting story for investors everywhere.”

  —Chicago Tribune

  “Thoroughly researched and perceptive … a highly readable account.”

  —Financial Times

  “Lowenstein has accomplished something remarkable.”

  —Los Angeles Times

  “Buffett throws a lot of light on the character of a man who is now almost as famous for his homespun aphorisms as he is for the prowess which has made him the second wealthiest individual in the United States.”

  —The Independent (London)

  “Lowenstein’s excellent … biography … burnishes the Buffett myth while deconstructing it with heavy doses of reality.”

  —Barron’s

  “Many people know of Warren Buffett’s riches and investment savvy. But here you’ll get to know the boy who searched the local golf course for ‘used but marketable golf balls’ and started a lemonade stand on a heavily trafficked street in front of a friend’s house instead of his own quieter street. And you can explore the psyche of a father of three who, while married to one woman, lived with another, among other personal details about the man behind the investments.”

  —U.S. News & World Report

  “Buffett is a landmark portrait of a uniquely American life—a portrait that offers an enthralling, precisely documented, full-fleshed characterization of an American icon. It is a work that should be required reading in every business curriculum, for it relates directly to the current and future interests of individual and corporate investors throughout America.”

  —Business Book Review

  “Anyone who reads this will walk away from the experience with a much richer sense of who Warren Buffett is and what makes him a great investor, perhaps enhancing their own investment returns as well … one heck of a good book.”

  —The Motley Fool

  “As much a history of investing in the latter half of the 20th century as it is a penetrating look at Buffett … splendid.”

  —Salon.com

  “[An] excellent biography … [that provides] personal glimpses of a very private man.”

  —Publishers Weekly

  “Lowenstein does a remarkable job of telling the financial story of Buffett’s rise to securities fame … [in this] highly interesting, fascinating … near hagiographic biography.”

  —Library Journal

  “The first definitive, inside account of the life and career of this American original.”

  —Ingram

  “The prose [Roger Lowenstein] displays here is an admirable mixture of the clear-eyed and the poetic. The book is both empathetic and intelligent, without ever slopping over into fawning.”

  —The Washington Monthly

  “This work of art from Roger Lowenstein … chronicles the intimately private as well as the investing life of one of the greatest investors ever.”

  —MarketThoughts.com

  2008 Random House Trade Paperback Edition

  Copyright © 1995, 2008 by Roger Lowenstein

  All rights reserved.

  Published in the United States by Random House Trade Paperbacks, an imprint of The Random House Publishing Group, a division of Random House, Inc., New York.

  RANDOM HOUSE TRADE PAPERBACKS and colophon are trademarks of Random House, Inc.

  Originally published in hardcover and in slightly different form in the United States by Random House, an imprint of The Random House Publishing Group, a division of Random House, Inc., in 1995.

  Grateful acknowledgment is made to the following for permission to print both previously published and unpublished material:

  WARREN E. BUFFETT: Excerpts from letters, reports to the Buffett Partnership and Berkshire Hathaway, and annual reports. Reprinted by permission of Warren E. Buffett.

  FORBES: Excerpt from “Look at All Those Beautiful, Scantily Clad Girls Out There” (November 1, 1974). Copyright © 1974 by Forbes Inc. Reprinted by permission of Forbes magazine.

  OMAHA WORLD-HERALD: Excerpts from “Susie Sings for More Than Her Supper” by Al Pagel (April 17, 1977) and “Klewitt Legacy as Unusual as His Life” by Warren Buffett (January 20, 1980). Reprinted by permission of the Omaha World-Herald. THE WALL STREET TRANSCRIPT: Excerpt from “Pension Fund and Money Managers” (December 23, 1974), excerpt from editors’ interview tih Eric T. Miller (April 23, 1973), and excerpt from “Some Thoughts for Financial Analysis” (June 17, 1974).

  Copyright © 1973, 1974 by The Wall Street Transcript Corporation. Reprinted by permission of The Wall Street Transcript.

  eISBN: 978-0-8041-5060-6

  www.atrandom.com

  v3.1_r3

  Contents

  Cover

  Title Page

  Copyright

  INTRODUCTION

  1. OMAHA

  2. RUNAWAY

  3. GRAHAM

  4. BEGINNINGS

  5. PARTNERS

  6. GO-GO

  7. BERKSHIRE HATHAWAY

  8. RETURN OF THE NATIVE

  9. ALTER EGO

  10. WASHINGTON REDUX

  11. PRESS LORD

  12. PARTNERS, REDUX

  13. THE CARPET WOMAN

  14. THE EIGHTIES

  15. PUBLIC AND PRIVATE

  16. CRASH

  17. A BRIEF INTRODUCTION TO DARTS

  18. SECRETS OF THE TEMPLE

  19. HOWIE BUFFETT’S CORN

  20. RHINOPHOBIA

  21. THE KING

  22. SALOMON’S COURT

  23. BUFFETT’S TROLLEY

  AFTERWORD: JANUARY 2008

  Photo Insert

  Author’s Note/Acknowledgments

  NOTES

  Other Books by This Author

  About the Author

  INTRODUCTION

  In the annals of investing, Warren Buffett stands alone. Starting from scratch, simply by picking stocks and companies for investment, Buffett amassed one of the epochal fortunes of the twentieth century. Over a period of four decades—more than enough to iron out the effects of fortuitous rolls of the dice—Buffett outperformed the stock market, by a stunning margin and without taking undue risks or suffering a single losing year. This is a feat that market savants, Main Street brokers, and academic scholars had long proclaimed to be impossible. By virtue of this steady, superior compounding, Buffett acquired a magical-seeming net worth of $15 billion, and counting.

  Buffett did this in markets bullish and bearish and through economies fat and lean, from the Eisenhower years to Bill Clinton, from the 1950s to the 1990s, from saddle shoes and Vietnam to junk bonds and the information age. Over the broad sweep of postwar America, as the major stock averages advanced by 11 percent or so a year, Buffett racked up a compounded annual gain of 29.2 percent.1

  The uniqueness of this achievement is more significant in that it was the fruit of old-fashioned, long-term investing. Wall Street’s modern financiers got rich by exploiting their control of the public’s money: their essential trick was to take in—and sell out—the public at opportune moments. Buffett shunned this game, as well as the more venal excesses for which Wall Street is deservedly famous. In effect, he re
discovered the art of pure capitalism—a cold-blooded sport, but a fair one.

  The public shareholders who invested with Buffett also got rich, and in exactly the same proportion to their capital that Buffett did. The numbers themselves are almost inconceivable. If one had invested $10,000 when Buffett began his career, working out of his study in Omaha in 1956, and had stuck with him throughout, one would have had an investment at the end of 1995 worth $125 million.2

  And yet, the numbers alone do not account for the aura that Buffett cast on Wall Street. Once a year, disciples and money men would flock to Omaha like pilgrims on a hajj, to hear Buffett deconstruct the intricacies of investing, business, and finance. His annual meetings became a piece of Americana, like an Elvis concert or a religious revival. Financial groupies arrived in Omaha clutching Buffett’s writings like a Bible and reciting his aphorisms like excerpts from the Sermon on the Mount.

  His grasp of simple verities gave rise to a drama that would recur throughout his life. Long before those pilgrimages to Omaha, long before Buffett had a record, he would stand in a corner at college parties, baby-faced and bright-eyed, holding forth on the universe as a dozen or two of his older, drunken fraternity brothers crowded around. A few years later, when these friends had metamorphosed into young associates starting out on Wall Street, the ritual was the same. Buffett, the youngest of the group, would plop himself in a big, broad club chair and expound on finance while the others sat at his feet.

  On Wall Street, his homespun manner made him a cult figure. Where finance was so forbiddingly complex, Buffett could explain it like a general-store clerk discussing the weather. He never forgot that underneath each stock and bond, no matter how arcane, there lay a tangible, ordinary business. Beneath the jargon of Wall Street, he seemed to unearth a street from small-town America.

  It is a curious irony that as more Americans acquired an interest in investing, Wall Street became more complex, more abstruse, more arcane, and more forbidding than ever. When Buffett was born, in the midst of the Depression, the few Americans who did have capital felt personally equipped to manage it. This they did by salting it away in blue chips and triple-A bonds. The Depression cast a long shadow, but the postwar prosperity eclipsed it. Today, tens of millions have at least a small grubstake, but very few feel comfortable with handling it, and fewer still have the old habit of prudence. At best, they anxiously scan the financial pages, as though each day’s twitch in the data on housing or inflation might bring the long-awaited “answer.” At worst, they switch in and out of mutual funds with an impatience that would have shocked their grandparents.

  In such a complex age, what was stunning about Buffett was his applicability. Most of what Buffett did was imitable by the average person (this is why the multitudes flocked to Omaha). 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. In this sense, Buffett’s character and career unfolded as a sort of public tutorial on investing and on American business. Buffett was aware of his role from the very beginning, and he nurtured a curious habit of chronicling his escapades even as he lived them.

  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. In this, he resembled the magnates of a previous age, such as J. P. Morgan, Sr.

  But the secretive Morgan was a Wall Street archetype; Buffett, a plainspoken Midwesterner, was its antithesis. He was famous for quipping that it was the bankers “who should have been wearing the ski masks,”3 or that, as he said to a friend who had been offered a job in finance, “you won’t encounter much traffic taking the high road in Wall Street.”4 He once wrote that he would no more take an investment banker’s opinion on whether to do a deal than he would ask a barber whether he needed a haircut.5 This commonsensical cracker-barrel wit made him an archetype of something larger, and far more basic, to the country’s past. It answered to a deeply American need for authentic heroes.

  This has always been America’s secular myth: the uncorrupted commoner from the Midwest or West who stands up to the venal Easterners, be they politicians, bankers, big businessmen, or other. It is a ransom to the country’s origins, a remembrance that the first authentic and pure Americans were destroyed. Let Europe have its princes; the American ideal has always been a self-made man from the midcountry—a Lincoln, a Twain, a Will Rogers. In an age without heroes, this, too, is what Buffett’s disciples were seeking in Omaha.

  As Jack Newfield wrote of Robert Kennedy, Buffett was not a hero, only a hope; not a myth, only a man.6 Despite his broad wit, he was strangely stunted. When he went to Paris, his only reaction was that he had no interest in sight-seeing and that the food was better in Omaha. 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. Once, when Buffett was visiting the publisher Katharine Graham on Martha’s Vineyard, a friend remarked on the beauty of the sunset. Buffett replied that he hadn’t focused on it, as though it were necessary for him to exert a deliberate act of concentration to “focus” on a sunset.7 Even at his California beachfront vacation home, Buffett would work every day for weeks and not go near the water.

  Like other prodigies, he paid a price. Having been raised in a home with more than its share of demons, he lived within an emotional fortress. The few people who shared his office had no knowledge of the inner man, even after decades. Even his children could scarcely recall a time when he broke through his surface calm and showed some feeling.

  Though part of him is a showman or preacher, he is essentially a private person. Peter Lynch, the mutual-fund wizard, visited Buffett in the 1980s and was struck by the tranquillity in his inner sanctum. His archives, neatly alphabetized in metal filing cabinets, looked as files had in another era. He had no armies of traders, no rows of electronic screens, as Lynch did. Buffett had no price charts, no computer—only a newspaper clipping from 1929 and an antique ticker under a glass dome. The two of them paced the floor, recounting their storied histories, what they had bought, what they had sold. Where Lynch had kicked out his losers every few weeks, Buffett had owned mostly the same few stocks for years and years. Lynch felt a pang, as though he had traveled back in time.8

  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.

  Chapter 1

  OMAHA

  Like a diamond set in emerald, gracing the west bank of the Missouri River, lies Omaha, the wonder city of the West and marvel of enterprise, ability, and progressiveness.

  TELEPHONE COMPANY PROMOTION, 1900

  Almost from the day that Dr. Pollard awakened him to the world, six pounds strong and five weeks early, Warren Buffett had a thirst for numbers. As a boy, he and his friend Bob Russell would pass an afternoon on the Russells’ front porch, which overlooked a busy intersection, recording the license-plate numbers of passing cars. When the sky darkened, they would go inside and spread open the Omaha World-Herald, counting how often each letter appeared and filling entire scrapbooks with progressions of numbers, as though they held the key to some Euclidean riddle. Often, Russell would reach for the almanac and read out a list of cities. One by one, Warren would spit back the populations. “I’d say a city, he’d hit it on the nose,” Russell would recall, half a century later. “I might
say, ‘Davenport, Iowa; Topeka, Kansas; Akron, Ohio.’ If I gave him ten cities, he’d hit every one.” Baseball scores, horse-racing odds—every numeral was fodder for that precocious memory. Combed, scrubbed, and stuffed into a pew of Dundee Presbyterian Church, Warren would pass the time on Sundays calculating the life spans of ecclesiastical composers. He would stand in the living room with a paddle and ball, counting, counting by the hour. He would play Monopoly for what seemed forever—counting his imagined riches.

  Blue-eyed, with a fair complexion and pink cheeks, Warren was intrigued not merely with numbers, but with money. His first possession was a nickel-coated money changer, given to him by his Aunt Alice at Christmas and thereafter proudly strapped to his belt. When he was five, he set up a gum stand on his family’s sidewalk and sold Chiclets to passersby. After that, he sold lemonade—not on the Buffetts’ quiet street, but in front of the Russells’ house, where the traffic was heavier.

  At nine, Warren and “Russ” would count the bottle caps from the soda machine at the gas station across from the Russells’ house. This was not idle counting, but a primitive market survey. How many Orange Crush caps? How many Cokes and root beers? The boys would cart the caps in a wagon and store them in Warren’s basement, piles of them. The idea was, which brand had the highest sales? Which was the best business?

  At an age when few children knew what a business was, Warren would get rolls of ticker tape from his stockbroker father, set them on the floor, and decipher the ticker symbols from his father’s Standard & Poor’s. He would search the local golf course for used but marketable golf balls. He would go to Ak-Sar-Ben* racetrack and scour the saw-dusted floors, turning over torn and discarded stubs and often finding a winning ticket that had been erroneously thrown away. In the sweltering Nebraska summers, Warren and Russ would carry golf clubs for the rich gentlemen at the Omaha Country Club and earn $3 for the day. And at dusk, as they rocked on the Russells’ front-porch glider in the stillness of the Midwestern twilight, the parade of Nashes and Stude-bakers and the clanging of the trolley car would put a thought in Warren’s mind. All of that traffic with no place to go but right by the Russells’ house, he would say—if only there were a way to make some money off it. Russell’s mom, Evelyn, recalled Warren after fifty years. “All that traffic,” he would say to her. “What a shame you aren’t making money from the people going by.” As if the Russells could set up a toll booth on North 52nd Street. “What a shame, Mrs. Russell.”