25.

The Windmill War Omaha and Beatrice, Nebraska * 19601963 In the late 1950s and the early 1960s, while Buffett wrestled with Sanborn, consolidated the partnerships, and moved into the office with his father, he embarked on another project, again some distance from Omaha. The second major orchestration of his supporting group, this was the first in which he actually took control of a company. And it would consume far more of his time and energy than had Sanborn Map.

Dempster Mill Manufacturing, a family-run company in the worst sense of the word, made windmills and water irrigation systems in Beatrice,*21 Nebraska. This episode of Buffett's career had started like putting a quarter in yet another slot machine to get a dollar back-or so it seemed. The stock sold for $18 a share and the company had a steadily growing book value of $72 a share. ("Book value" is the stated value of a company's assets less what it owes-like a house less the mortgage, or cash in the bank less a credit card balance.) In the case of Dempster, the assets were windmills, irrigation equipment, and its own manufacturing plant.

In 1958, Warren had driven out to Beatrice, a windswept prairie town that depended on Dempster as its sole important employer. He was armed with a list of nineteen questions, such as: "How many dealers does the company have?" and "During the Depression, how bad did the bad debt experience ever get?"1 After the visit he decided that the company was "well-heeled financially but not making dough."2 Its president, Clyde Dempster, was running it into the ground.3 Since Dempster was just another cigar butt, Warren applied his cigar-butt technique, which was to keep buying a stock as long as it continued to sell below book value. If the price rose for any reason, he could sell out at a profit. If it didn't, and he ended up buying until he owned so much stock that he controlled the company, he could sell off-that is, liquidate-its assets at a profit.4 As with Sanborn, Buffett couldn't afford as much of Dempster as he wanted. He called Walter Schloss and Tom Knapp, and said, "I want you to go thirds with me."5 Over several years, the trio got hold of eleven percent of the stock-second only to the Dempster family-and Warren joined the board. In early 1960, the board hired Lee Dimon, formerly purchasing manager of Minneapolis Molding Co., as Dempster's general manager, over Buffett's reservations.6 Buffett maneuvered Clyde Dempster into a figurehead role and continued buying stock.7 He wanted every share that he could lay his hands on. He rang up Schloss in New York and said, "Walter, I want to buy your stock."

"Gee, I don't want to sell it to you," said Schloss. "You know, it's a nice little company."

"Look, I'm doing all the work on this idea. I'd like your stock," said Buffett.

"Warren, you're a friend of mine. If you want it-take it," said Schloss.8 In the adult version of absconding with Doris's bicycle, Buffett took it. He had a weakness: If he felt he needed something, he needed it, and that need must be satisfied. He did this, however, without any apparent malice or arrogance. If anything, it was the opposite; he was just so terribly needy. People like Schloss generally gave in to him because they liked him, and besides, whatever it was he wanted, he obviously seemed to feel he needed it more than they did.

As he gained more stock, Buffett also bought out the Dempster family. With that transaction, he achieved control, eased out Clyde Dempster, and made an offer to all other shareholders on the same terms.9 Here Buffett was treading on tricky ground. As chairman, he felt he could not rightly urge other investors to sell when he was buying. He even bent over backward to warn them that he thought Dempster stock would do well. Nevertheless, money and human nature could be counted on to do their job. People convinced themselves that they would rather have the cash than a thinly traded stock of dubious value. Soon, therefore, Dempster made up twenty-one percent of the partnership's assets.

In July 1961, Warren wrote his partners that the partnership had invested in a nameless company that might prove to be "a deterrent to short-range performance, but it gives strong promise of superior results over a several-year period."10 He named Dempster, which the partnership now controlled, and wrote a little sermon about it in his January 1962 letter, explaining Ben Graham's philosophy of cigar butts.11 The "deterrent to short-range performance" part would prove more prescient than he expected.

During 1962, Buffett coached Lee Dimon and tried to explain to him how to manage inventory. But Dimon seemed to think he could just keep buying windmill parts no matter how many windmills Dempster sold. As a former purchasing manager, he knew how to purchase-so he did. The warehouse bulged with windmill parts12 as Dempster sucked up cash. By early 1962, the company's bank prepared to seize the inventory as security for its loan, then grew alarmed enough to make noises about shutting Dempster down.

Buffett was looking at only a few months before it all caved in and he would have to report to the partners that a business into which he had sunk a million dollars of their money was broke. He tried to recruit his old Columbia friend Bob Dunn to leave his job at U.S. Steel, move to Beatrice, and run Dempster. Dunn actually made a trip out to Beatrice but in the end wasn't interested. Buffett rarely asked advice, but finally that April he took the situation up with his friend Munger while he and Susie were visiting Los Angeles.

"We were going to dinner with the Grahams and the Mungers, Susie and I. We met them at the Captain's Table on El Segundo in L.A. During the dinner, I'm telling Charlie, 'I'm in this mess with this company; I've got this jerk running Dempster, and the inventories keep going up and up.'" Munger, who dissected his law clients' businesses and thought like a manager, said immediately, "Well, I know this guy that used to bring around tough situations out here. Harry Bottle." He knew of Bottle through an acquaintance who specialized in business turnarounds.

Six days later, lured by a $50,000 sign-on bonus, Harry Bottle was in Beatrice. This meant that for the second time-counting the motherly secretary-Buffett had to fire someone. He already knew from that experience that he hated firing people. Not only that, Dempster was the only major business in town, and he had heard through the board that, upon Dimon's appointment to general manager, his wife had crowned herself queen of Beatrice.

Buffett dreaded confrontation. His first instinct was to avoid it, and he ran like a singed cat if anyone threatened to explode at him the way his mother had. But he had also learned to shut down emotionally in the face of a possible eruption. The trick, he felt, was "to create a shell around yourself with respect to that, without creating a shell that extends beyond" the situation, to keep from becoming a hardened person.

Whatever happened when he fired Lee Dimon, Harriett Dimon afterward wrote Warren a letter in which she accused him of being "abrupt and unethical," and, through his coldness, of destroying her husband's confidence. Buffett, at almost thirty-two, had not yet learned to fire people with empathy.

Within days he sent his new employee Bill Scott over to Beatrice to help Harry Bottle rummage around the parts department and decide what to toss out and what to reprice.13 They swept through the place like a swarm of boll weevils and slashed inventory, sold off equipment, closed five branches, raised prices for repair parts, and shut down unprofitable product lines. They laid off a hundred people. This extensive shrinkage of the business by its new out-of-town management on the heels of the firing prompted the townspeople of Beatrice to eye Buffett with increasing distrust, suspecting that he was a ruthless liquidator.

By year-end 1962, Bottle had pulled Dempster into the black. In his January 1963 letter to partners, Buffett called Dempster the high point of the year, and named Harry Bottle the man of the year.14 He estimated the value of the company, worth $35 per share a year earlier, at $51 per share. The bank was happy. As the assets were sold and the inventory whittled, Dempster piled up about $2 million in cash, worth $15 per share. Meanwhile, Buffett had borrowed-another $20 against each share to have funds to invest. With that, Dempster's investment portfolio was as large as the rest of the partnership's.

Now Buffett was faced with a Sanborn-type problem. Ironically, he had become one of those executives with a cash hoard. The market had rebounded smartly from its lows of June 1962. Trying to use Dempster's extra money, he sent Bottle and Scott to upstate New York to see a manufacturing plant of the Oval Wood Dish Company, which made Popsicle sticks, wooden spoons, and the like, but didn't buy it.15 Buffett tried to sell Dempster privately but found no takers at his price, so in August he notified the shareholders that the company was for sale, and ran an ad in the Wall Street Journal: Profitable Manufacturing Company for Sale ...Company is a leading farm equipment, fertilizer applicating equipment and water systems manufacturer. [Dempster] will be sold as a going concern at a public sale on September 30, 1963, subject to a negotiated sale until Sept. 13, 1963.... Contact, Mr. Harry T. Bottle, President.

He gave buyers a month to get their bids in before the public auction. He had already been talking to most of the obvious candidates.

Beatrice went berserk at the thought of another new owner that might impose layoffs or a plant closing on its biggest and virtually only employer. In the postwar boom, plants opened, they didn't close. Less than a quarter century after the end of the Great Depression, the prospect of mass unemployment brought back haunting memories of gray-faced men in soup lines, drifters wearing patched coats, a quarter of the nation unemployed, hunger and malnutrition, demeaning government make-work jobs.

The people of Beatrice pulled out the pitchforks.16 Buffett was shocked. He had saved a dying company. Didn't they understand that? Without him, Dempster would have gone under.17 He had not expected the ferocity, the personal vitriol. He had no idea that they would hate him.

The townspeople launched a crusade to foil Buffett by raising nearly $3 million to keep the ownership in Beatrice.18 Day by day the Beatrice Daily Sun breathlessly counted down to the deadline as the town fought to save its only factory. The day of the deadline, fire sirens sounded and bells rang out as the mayor stepped to a microphone and announced that Buffett had been defeated; Charles B. Dempster, grandson of the company's founder, headed an investor group that pledged to keep the plant open.19 Cash in hand, Buffett handed out more than $2 million to his shareholders.20 But the experience scarred him. Instead of becoming toughened against animosity, he vowed never to let it happen again. He couldn't take a whole town hating him.

One day not long after, Buffett called Walter Schloss, saying, "You know, Walter, I have these small positions in five different companies, and I'll sell them to you." These were Jeddo-Highland Coal, Merchants National Property, Vermont Marble, Genesee & Wyoming Railroad, and another whose name is lost in time. "Well, what price would you want, Warren?" Schloss asked. "I'll sell them to you at the price that I'm carrying them at," Buffett said. "Okay, I'll buy them from you," said Schloss immediately.

"I didn't say, 'Well, you know, you have to look up each one and check what it's worth,'" Schloss says. "I trusted Warren. If I had said, 'Well, I can buy it for ninety percent of what you're carrying it at,' Warren would have said-'Forget it!' I did him a favor, so he wanted to do me one too. If he had also made a profit, then that was fine. And they all worked out brilliantly. I felt that it was his way of saying thank you for selling me your Dempster stock. I don't say that's the reason, but that's what I mean by being an honest guy."

26.

Haystacks of Gold Omaha and California * 19631964 Warren may have said he wanted to become a millionaire, but he never said that he would stop there. Later he would describe himself during this period as "a lousy sport at doing anything I didn't want to do." What he wanted to do was invest. His children now ranged from five to ten years old, and one friend described Susie as "sort of a single mother." Warren would show up at school events or toss around a football if asked, but he never initiated a game. He seemed too preoccupied to notice his children's longing for attention. Susie taught the children that his special mission must be respected; she told them, "He can only be so much, so don't expect any more from him." That applied to her, too; Warren was obviously devoted to his wife, and showed that in public, caressing "Susan-o" affectionately and recounting tender, funny variations of how she, the gentle angel, had stooped to marry him, the ukulele-playing financial prodigy who was a secret wreck. At the same time he was so used to her attention and remained so undomesticated that once, when she was nauseous and asked him to bring her a basin, he came back with a colander. She pointed out the holes; he rattled around in the kitchen and returned triumphantly bearing the colander on a cookie sheet. After that, she knew it was hopeless.

Yet the predictability of Warren's habits gave a certain stability to the Buffett household, as Susie's come-on-in, take-a-number atmosphere unfolded around them. In the evenings he reenacted his own father's routine, arriving at the same time every night, slamming the door from the garage, and yelling, "I'm home!" before heading to the living room to read the newspaper. He wasn't uncaring, and he was often available. But in conversation his words often had a subtly prepared, even rehearsed quality. He was always one step ahead. Whatever went on inside his mind took place between the lines; it came through in the silences, the flashes of wit, the tremulous flight from certain topics of conversation. His feelings danced behind so many veils that even he seemed unaware of them most of the time.

Susie herself was less available these days. Like her father, she stayed busy and surrounded by people; she avoided being alone and unoccupied. She was vice president of the theater guild and involved with United Community Services. She shopped and dined with her large group of women friends, spending far more time with those in the Jewish and black communities than among white socialites.

Susie was becoming prominent among a group of Omaha women who were passionate civil-rights supporters. The battle to end segregation in employment and public facilities, and to remove obstacles to voting rights, was accelerating around the country. She helped organize the Omaha branch of the Panel of Americans, a speakers' bureau that sent one Jew, one Catholic, one white Protestant, and one black Protestant to talk to civic groups, churches, and other organizations about their experiences. The panel was a way of trying to bring people together; one of Susie's friends satirized her role on it as "to apologize for being a WASP." The panel members answered audience questions such as: Why would a Negro want to move to a different part of town? Are any of you prejudiced against one another? Do Jews believe that Christ has been or that He is still coming? Don't you think that sit-ins are just stirring up trouble? At a time when "Negroes" could not use public "white only" restrooms throughout much of the South, the sight of a black woman sitting as an equal on the same stage as white women stirred the audiences.1 In the afternoons, often with Susie Jr. in tow, Susie shot back and forth to meetings and committees on the north side of town, trying to tackle the city's worst problem: dilapidated housing and abysmal living conditions in the ghetto.2 The police stopped her several times. "Why are you in this neighborhood?" they'd ask.

"Honey," the fretful Doc Thompson told Susie Jr., "your mother is going to get killed." He made her carry a police whistle when she rode with her mother. "Honey, you're going to get kidnapped," he said.3 Susie's role as problem-solver and emotional carpet-sweeper meant that people thought of calling her whenever there was trouble, of any kind. She had referred to Warren as her "first patient,"4 and there were others. She stepped in more often now to manage Dottie's life as her sister's ability to cope declined and her drinking increased. She counseled Doris through her divorce from Truman and gave her a copy of a book, Viktor Frankl's Man's Search for Meaning, that Doris turned to again and again looking for hope amid misery.5 For several days, Susie housed an Ethiopian student whom her friend Sue Brownlee was sponsoring in Omaha because Brownlee's father was visiting, and he would have been horrified at a "black woman sleeping in his bed."6 As a cultural experience for the family, Susie arranged for an Egyptian exchange student who was attending the University of Omaha to move in with them for a semester.7 Outside of Warren's study, the Buffetts' home was never a refuge from the world, and opportunities for solitude were rare. Yet despite the freewheeling atmosphere, the children were growing up with a balance of freedom and discipline, strong ethical principles instilled by both parents, an excellent education, and an emphasis on enriching experiences. Warren and Susie had many long conversations about how to bring up children in a rich family so that they became self-sufficient rather than feeling entitled.

What the children lacked was attention. Their father was almost exclusively focused on work. Their mother was like a gardener with too many tomato plants, running with her watering can toward whoever was neediest at any given time. The children responded to this upbringing in their different ways. The older Little Susie got, the fewer overtures she made for her mother's attention and the more authority she assumed over her brothers. She also worked as a crossing guard on the busy street outside their house, and spent much of her time with her own friends.8 Howie, the tornado, tunneled through the backyard, leaped off the banisters, hung from the curtains, and tore through the house. Every day was April Fool's Day. He dumped a bucket of water from the roof onto Phyllis the babysitter. Everybody knew it wasn't safe to drink a glass of anything he handed them. But he was also easily wounded, tenderhearted like his mother, and burdened by a need for attention that outstripped her supply. When Susie reached her limit, she sometimes locked Howie in his room.9 Peter, who was naturally quiet, felt rewarded for staying in the background as his siblings ruled through squabbles, with bossy Little Susie striving to contain Howie's whirlwind.10 Placid by nature, Peter retreated inside his head when the energy around him grew too intense. He played "Yankee Doodle" on the piano in a minor key whenever he was unhappy, rather than express his feelings in words.11 Warren approved of his wife's sprawling interests, was proud of her generosity and her leadership role in Omaha, and appreciated her attentiveness to the children, which freed him to focus on his work. He, too, was always adding one more thing to his list, but unlike her he never overextended himself. When something new came into his life, something else went out. The two exceptions were money and friends.

Thanks to both, by 1963 a number of professional investors had figured out that this Buffett fellow out in Omaha knew what he was doing. Even some who normally would never have heard of Warren Buffett were starting to seek him out. He no longer had to charm, much less prospect; he simply laid down the terms on which he would take people's money.

Those outside Omaha often knew more about him than his own neighbors. A friend of Little Susie's was in the family car on the way to the 1964 New York World's Fair when her parents stopped for gas. They struck up a conversation with the woman at the next pump, who turned out to be the mother's former high school teacher. The woman was traveling from Elmira, New York, to Omaha, carrying with her $10,000 to invest with Warren Buffett. Do you know him? she asked. Should I invest with him? He's our neighbor, the family said. Yes, you should. They got back in the car and headed onward to the World's Fair, thinking no more of it. With five kids and a new house, it didn't occur to them to invest for themselves.12 Another would-be partner, Laurence Tisch, one of two brothers who were building a New York hotel empire, sent in a check for $30,000 made out to Charlie Munger. Buffett called him and said he was glad to have Tisch join the partnership, but next time, "make the check out to me."

Munger could have used the money. Whatever Laurence Tisch may have thought, in 1963 he and Buffett were not partners. Munger had just opened a partnership of his own after waiting until he had accumulated a fair amount of money-around $300,000-by investing in real estate. But this was peanuts by Buffett's standards, a fraction of Warren and Susie's wealth.

"Charlie had a lot of children early on. That hindered him a lot in getting independent. Starting early with no encumbrances is a big advantage. Even when I came back from Graham-Newman, I mean, I had my 174,000 bucks, I felt like I could do what I wanted to do. I could take courses with my father-in-law the psychologist. I could go out there to the university and sit in the library and read all day."

In fact, Buffett had been encouraging Munger to think seriously about investing as a career ever since they first met. He would say to him, It's nice to be a lawyer and to do real estate on the side, but if you want to make some real money, you ought to start something like my partnerships.13 In 1962, Munger had gone into partnership with his poker buddy Jack Wheeler. Wheeler was a trader on the Pacific Coast Stock Exchange, the Wild West version in miniature of what was going on back east: a floor full of screaming traders, aggressive men looking to make a killing the fastest way they could. He owned an investing partnership, Wheeler, Cruttenden & Company, which included two "specialist posts" on the exchange, where traders took orders from brokers to trade stocks on the floor. They renamed the business Wheeler, Munger & Co., and sold the trading operation.

Munger continued his law practice but bolted from his old firm together with several other lawyers, among them Roy Tolles and Rod Hills. They founded a new firm, Munger, Tolles, Hills & Wood, that suited their ideals of how a law firm should be managed.14 All along, Munger had naturally resisted following the rules of a law firm run by anyone but himself.

"It's no coincidence that the year he started his partnership was the same year he started his new law firm. The partners at the old firm found it abhorrent that a young lawyer in their firm would want to be a member of that gambling den, the Pacific Coast Stock Exchange. When Charlie and Roy left the firm, they sat down with the senior partners and said that they wanted these senior partners to understand that the day would come when every first-rate law firm had a member of the Pacific Coast Stock Exchange. This is probably apocryphal, but you can easily picture Charlie delivering that message to them as a parting shot."

At their new firm, Munger and Hills imposed an elitist, Darwinian ethos designed to attract the brightest and most ambitious. The partners all voted on one another's pay, which was circulated for everyone to know. Even as the firm launched, however, Munger was already spending a significant amount of time at the Pacific Coast Stock Exchange. Within three years, when he was forty-one, he abandoned the law altogether to work full-time at investing. But he still consulted to the firm and kept an office there, where he remained an important, almost spiritual presence. Tolles, too, shifted most of his attention to investing. Hills, by far the most ambitious and dedicated to law of the three, ran the firm and kept it going.

In his new role as a money manager, Munger had to raise money to manage. Buffett had always hustled for investors in an understated way, often using others as his promoters-people like Bill Angle and Henry Brandt, who found and prepared prospects-so that he could show off his impressive track record with a pleasing modesty. But however gracefully he'd hustled, he'd still done it. Munger felt this was demeaning. "I didn't really like raising money," he says. "I always felt that a gentleman should have his money." Now, however, he managed to parlay his law practice into an investing partnership by raising funds from his powerful Los Angeles business connections. While his partnership was of course much smaller than Buffett's, the money would be enough.

Jack Wheeler had explained to him that, as a member of the exchange, under its rules he could borrow an additional ninety-five cents for every dollar invested.15 Thus, if he put up $500, he could borrow another $475 and invest a total of $975. If the investment earned a profit of twenty-five percent, the profit on Munger's $500 of capital would be nearly double that.16 While having the potential to nearly double his returns, this borrowing likewise nearly doubled his risk. If he lost twenty-five percent, he would lose nearly half his capital. But Munger, more than Buffett-far more than Buffett-was willing to take on some debt if he was positive the odds were right.

He and Wheeler set themselves up at the exchange in a "crude, cheap" office festooned with radiator pipes and stuck their secretary, Vivian, in the tiny private back office overlooking an alley.17 Wheeler, a big spender who liked to live large, had just had a hip replacement and soon started showing up for work on the golf course most mornings.18 Munger fell into a routine, arriving at five a.m., before the market opened on the East Coast, and checking the quotation board.19 Buffett had connected him with Ed Anderson, the Graham-Newman investor who had worked for the Atomic Energy Commission and seemed so smart; Munger hired him as his assistant.

Most of the traders at the stock exchange had ignored Munger's arrival on the scene, but one of them, J. Patrick Guerin, took note. Guerin had bought the trading part of Wheeler's partnership when Wheeler had spun it off and gone into business with Munger. A rough-and-tumble guy who was scrambling like mad to better himself, Guerin had grown up with a "divorced father," says Munger, "and his mother was a drunk, so he raised himself on the streets. He was high IQ, rebellious, and maladjusted."20 After a stint in the Air Force, Guerin had worked as a salesman for IBM, then became a stockbroker at a couple of small firms that peddled third-class stocks because they carried the highest profit, or "spread," for the firm. This was a part of stockbroking Buffett had detested; Guerin, too, found it a relief to escape life as a "prescriptionist."

By the time Munger met him, the lean, handsome Guerin had learned to roll his crisp shirt cuff down over his tanned forearm to cover his tattoo. He seemed to have a great number of friends as well as a tinge of Hollywood in his blood; one day he brought his friend, the actor Charlton Heston, down to the exchange for a tour.21 He did the trading for Wheeler, Munger, and says he immediately recognized that Munger had a money mind and began to cultivate him. He came to the conclusion that he'd been on the wrong side of the Wheeler deal right away, and began to emulate Munger and Buffett, with the goal of forming his own investing partnership.

"With some, the idea of buying dollar bills for forty cents takes, and with some it doesn't take. It's like an inoculation. It's extraordinary to me. If it doesn't grab them right away, I find that you can talk to them for years and show them records-you can do everything-and it just doesn't make any difference. I've never seen anyone who became a convert over a ten-year period with this approach. It's always instant recognition or nothing. Whatever it is, I've never understood it. But with a fellow like Rick Guerin-no business background in terms of studying it, but he saw it like that, he understood what it's about, and he was applying it five minutes later. And Rick was smart enough to know that you should get a great teacher, which is what I was lucky enough to do with Ben Graham."

As the day progressed at the Pacific Coast Stock Exchange, Munger would sit, lost in thought, usually reading. "Charlie! Charlie!" Ed Anderson would shout from the next desk. Munger would say nothing, or grunt something in response.22 Eventually, Anderson learned to make Munger respond clearly to questions, erasing ambiguity; a simple grunt was not sufficient. But it took time and experience for most people to figure out that Munger's mind and mouth often went their separate ways.

Guerin did not know this yet. One day he came into the office from his booth on the floor. "Charlie," he said. "I've just been offered fifty thousand shares of XYZ at fifteen dollars. This looks like a good deal."

"Hmmm, uhm," said Munger.

"Look, Charlie," Guerin carried on, "if this interests you, I'm going to buy it."

"Yeah, yeah," said Munger.

A little later, Guerin walked back into the office and said, "Charlie, we got them."

"Got what?" said Munger.

"We bought the fifty thousand shares at fifteen dollars." Big money.

"What!?" screamed Munger. "What are you talking about! I don't want 'em! Sell 'em! Get rid of 'em right now!"

Guerin tried to explain. He called on Anderson for backup: "Ed, did you hear this when I said it earlier?"

"Charlie, I was sitting here listening to it, just as Rick said," Anderson interjected.

"I don't care! I don't care! Sell 'em! Sell 'em! Sell 'em!" yelled Munger.

Guerin ran out the door and got rid of the shares. "That was an object lesson," says Anderson.23 Munger bought cigar butts, did arbitrage, even acquired small businesses-much of this in Buffett's style-but he seemed to be heading in a slightly different direction than Buffett. Periodically, he said to Ed Anderson, "I just like the great businesses." He told Anderson to write up companies like Allergan, the contact-lens-solution maker. Anderson misunderstood and wrote a Grahamian report emphasizing the company's balance sheet. Munger dressed him down for it; he wanted to hear about the intangible qualities of Allergan: the strength of its management, the durability of its brand, what it would take for someone else to compete with it.

Munger had invested in a Caterpillar tractor dealership and saw how it gobbled up money, which sat in the yard in the form of slow-selling tractors. To grow, the business had to buy more tractors, gobbling up more money. Munger wanted to own a business that did not require continual investment, and spat out more cash than it consumed. But what were the qualities of such a business? And what gave such a business an enduring competitive advantage? Munger was always asking people, "What's the best business you've ever heard of?" But he was a man of no great patience, and inclined to think that people could read his mind.24 His impatience stood out more than any theory that was emerging inside his head. He wanted to get really rich, really fast. He and Roy Tolles made bets on whose portfolio would be up more than one hundred percent in a year. And he was willing to borrow money to make money, whereas Buffett had never borrowed a significant sum in his life. "I need three million dollars," Munger would say, on one of his frequent visits to the Union Bank of California. "Sign here," the bank would reply.25 With these huge sums, Munger did enormous trades like British Columbia Power, which was selling at around $19 and being taken over by the Canadian government at a little more than $22. Munger put not just his whole partnership, but all the money he had, and all that he could borrow into an arbitrage on this single stock26-but only because there was almost no chance that this deal would fall apart. When the transaction went through, the deal paid off handsomely.

Yet despite their different approaches, Munger regarded Buffett as the king of investing, and saw himself as merely a friendly pretender to the throne.27 "Vivian, get me Warren!" he shouted several times a day to whichever secretary had come to occupy Vivian's desk.28 He cultivated Buffett like a garden he was tending. Buffett explained his philosophy: "You've got to coattail," he said.29 But he did not want his friends to coattail him and considered it unethical when they did. Hence, while Munger, cultivating Buffett, was open about his trades-he got Buffett into his British Columbia Power deal, for example-Buffett always kept his trades to himself unless he was working an idea with a partner.

By the early 1960s, the Buffetts had begun to vacation in California, so that Warren could spend more time with Graham and Munger. Once Warren and Susie took the kids on a long trip up and down the coast, but usually when they came to visit, they'd settle into a motel on Santa Monica Boulevard, and he and Munger would talk stocks for hours. The differences in their philosophies made for long conversations. While Buffett made many of the same investments, he would forgo the chance of profits any day to avoid too much risk, and viewed preserving his capital as an almost holy imperative. Munger had the attitude that unless you were already wealthy, you could afford to take some risk-if the odds were right-to get rich. His audacity put him in a different category from all the others who cultivated Buffett, for his deference to Buffett was limited by his high opinion of himself. "Charlie would get so excited by his own words that he'd hyperventilate," says Dick Holland, Buffett's friend and partner, who was present at some of these California get-togethers.30 In his quest for the great businesses, Munger did not understand Buffett's fascination with Ben Graham. "Because he is good at explaining Ben Graham," Munger later wrote, Buffett was "behaving like the old Civil War veteran who after a few minutes of ordinary conversation always interjected: 'Boom Boom, that reminds me of the battle of Gettysburg.'"31 Graham's flaw, Munger felt, was that he considered the future "more fraught with hazard than ripe with opportunity." Graham was a man, he said, "whose favorite story is that of Croesus, surveying the ruin of his life and empire after the too-hopeful misadventure with Persia, and recalling the words of Solon that 'no man's life should be accounted a happy one until it is over.'"32 Munger began trying to wean Buffett away from Graham's dreary pessimism, which underlay the drudgery of stooping for cigar butts and sucking out their last puff.

Buffett had a buoyant optimism about the long-term economic future of American business, which had enabled him to invest in the market against his father's and Graham's advice. Yet his investing style still reflected Graham's doom-laden habits of looking at businesses based on what they were worth dead, not alive. Munger wanted Buffett to define the margin of safety in other than purely statistical terms. In doing so, Munger was working against a subtle tendency toward catastrophism in Buffett's outlook that sometimes cropped up when solving theoretical problems. His father, Howard, had always prepared for the day the currency became worthless, as if that day were imminent. Warren was far more realistic. Nonetheless, he tended to extrapolate mathematical probabilities over time to the inevitable (and often correct) conclusion that if something can go wrong, it eventually will. This style of thinking was the proverbial double-edged sword: It made Buffett a gifted visionary whose thoughts oriented toward doomsday. He would come to use this sword often to slice through knotty problems, sometimes in a very public way.

A few years earlier, another friend of Buffett's, Herb Wolf of New York Hanseatic, an over-the-counter trading house, had helped Buffett tame another personality trait that was hindering his financial quest. Wolf, an investor in the water utility American Water Works, had sought Buffett out in the early 1950s after reading an article that Warren had written on IDS Corporation in the Commercial & Financial Chronicle.33 "Herb Wolf was one of the smartest guys I ever met. He could tell the effect on American Water Works' earnings if somebody took a bath in Hackensack, New Jersey. He was unbelievable. One day Herb said to me, 'Warren, if you're looking for a gold needle in a haystack of gold, it's not better to find the gold needle.' I had this thing that the more obscure something was, the better I liked it. I thought it was a treasure hunt. Herb got me out of that way of thinking. I loved that guy."

By 1962, Buffett had shaken off the treasure-hunt way of thinking. But he still had Wolf's passion for detail, and even with the addition of Bill Scott, his operations had expanded so much that he now needed another employee to assist him. He managed to keep this one off his own payroll; Buffett would forever go to extremes to control his overhead by paying for expenses in ways that could be shut off as needed, or, better yet-as in this case-could be covered in ways that made them effectively free.

Henry Brandt, Buffett's stockbroker friend who worked at Wood, Struthers & Winthrop, was a born sleuth who had been doing part-time research for the BPL partnership. Buffett had been paying Wood, Struthers for Brandt's time through the brokerage commissions he paid for trading stocks through it. Since he would be paying commissions to somebody anyway, Brandt effectively worked for him for free.34 If Buffett decided he did not need Brandt's research anymore, he could use another brokerage firm to execute his trades.

Now, Brandt worked for Buffett almost one hundred percent of the time. Buffett paid Brandt by waiving his partnership fee and beginning to cut him in on outside deals without an override. The two men shared an interest in knowing the minutest details about a company. Brandt was fearless about asking questions. Unlike Buffett, he never thought twice about making himself obnoxious if this was what it took. He gladly did enormous amounts of meticulous research by gumshoeing and pestering people. Brandt, however, was incapable of stopping before he found the gold needle. Therefore, Buffett set the agenda and steered the process to keep it from turning into a treasure hunt. Brandt produced foot-high stacks of notes and reports.35 Part of Brandt's job for Buffett was finding scuttlebutt, a term used by investment writer Phil Fisher, the apostle of growth, who said that many qualitative factors like the ability to maintain sales growth, good management, and research and development characterized a good investment.36 These were the qualities that Munger was searching for when he spoke of the great businesses. Fisher's proof that these factors could be used to assess a stock's long-term potential was beginning to creep into Buffett's thinking, and would eventually influence his way of doing business.

Buffett now had Brandt digging into an idea that would have pleased Munger, had he known about it. The episode that resulted would become one of the high points of Buffett's career. This opportunity had its roots in the machinations of a big-time commodities trader, Anthony "Tino" De Angelis, who had become convinced in the late 1950s that he'd found a shortcut to making money in soybean oil. De Angelis-who had a shady past, having once sold tainted meat to the government school-lunch program-had by then become arguably the world's most important and legitimate dealer in soybean oil.

It apparently struck De Angelis one day that no one actually knew how much oil was in his warehouse. He was using the oil as collateral to borrow from banks.37 As long as nobody knew how much soybean oil was in the tanks, why not goose up the numbers a little bit so he could borrow more money?

The tanks sat in a warehouse in Bayonne, New Jersey, which was managed by a tiny subsidiary that was an almost invisible part of the gigantic empire of American Express. This arm of the business issued warehouse receipts: documents that certified how much oil was in a tank and could be bought and sold, just like the warehouse receipts for cocoa beans that Graham-Newman had bought from Jay Pritzker in exchange for Rockwood shares.

After American Express had verified the oil in the tanks, De Angelis and his Allied Crude Vegetable Oil Refining Corporation sold these receipts or used them as collateral to borrow from banks-fifty-one banks. Furthermore, American Express stood as guarantor of the quantity of oil behind those receipts.

As for the tanks, they were connected by a system of pipes and valves, and De Angelis found that the soybean oil could be sloshed and shunted around from one tank to another. Thus, a gallon of oil could pull double or triple or quadruple duty as collateral for a loan. Pretty soon, the loans guaranteed by warehouse receipts were secured by a smaller and smaller amount of soybean oil.

Eventually, it occurred to De Angelis that, in fact, very little oil was needed. Indeed, just enough to fool the inspectors would do the trick. So the tanks were filled with seawater, and oil was placed inside a little tube that the inspectors used to guide their measuring sticks. They did not notice the difference or think to test a sample from outside the tube.38 At about that point, dealing in the oil itself was no longer generating enough money to satisfy De Angelis, so he began to trade in the futures market. Futures contracts give someone the right to buy soybean oil at a later date, betting on the price of oil in the future versus the price today. They are like the futures contracts Graham-Newman had sold to lock in the price of cocoa beans. For a buck or two per ton, De Angelis could buy tons of soybean oil to be delivered in nine months at a certain price to be paid on that date. The contracts could be sold before the payment came due, which made speculating in oil much cheaper than paying twenty dollars to buy the oil outright in order to sell it later. Thus stretched, the borrowed money went much further; De Angelis could, through the futures market, control a great deal of soybean oil.

The people at American Express had not been entirely asleep; after an anonymous tip in 1960 that something was amiss down in New Jersey, they made inquiries of De Angelis and his employees. But De Angelis, who was as tubby as the tanks full of seawater sitting there right in front of the investigators' eyes, managed to give them answers that apparently satisfied them.

In September 1963, De Angelis saw a chance to make a further killing. The Soviet sunflower crop had failed, and rumors spread that the Russians would have to turn to soybeans for oil. De Angelis decided to corner the soybean market, forcing the Communists to buy from him at an inflated price. There was no particular limit to how many soybean futures he could buy. In fact, he could and did control more soybean oil than actually existed on the planet39 by borrowing heavily from Ira Haupt & Co., his broker, and taking on obligations in the futures market to buy 1.2 billion pounds of soybean oil. But this large a bet meant that he could afford to have the price of soybean oil go in only one direction-up.

Then, suddenly, it appeared that the U.S. government might not let the Soviet deal go through. The price of soybean oil collapsed, driving the market down by $120 million. Haupt began calling on De Angelis to meet his obligations, but De Angelis sent excuses instead. When Haupt came up short of money, the New York Stock Exchange shut the firm down and Haupt was forced into bankruptcy.40 De Angelis's lenders, holding the now-worthless warehouse receipts, hired investigators and turned to American Express, issuer of the receipts, to recoup their $150 to $175 million in losses. And American Express-caught holding tanks full of nothing but worthless seawater-saw its stock plummet. The story began to hit the newspapers.

Two days later, on Friday, November 22, 1963, President John F. Kennedy was assassinated while riding in a Dallas motorcade.

Buffett was downstairs eating lunch in the Kiewit Plaza cafeteria with an acquaintance, Al Sorenson, when somebody came in with the news that Kennedy had been shot. He went back upstairs to his office and found that the New York Stock Exchange floor was in a state of stupefaction; stocks were plunging on heavy trading. With the Dow down twenty-one points in half an hour, the market had lost $11 billion.41 Then the exchange closed, its first emergency closing during trading since the Great Depression.42 Shortly afterward, the Federal Reserve made a statement of confidence that meant-after translation from Fedargot to English-that international central banks would work together to thwart speculation against the dollar.43 As a stunned country erupted in sorrow, anger, and shame, schools were dismissed and businesses shut their doors. Buffett went home to sit, along with the rest of the country, and watch the nonstop television coverage throughout the weekend. He characteristically displayed no powerful surge of emotion, rather a detached gravity. For the first time in history, a U.S. presidential assassination was being covered on television around the globe. For the first time, shock and sorrow united the world through the medium of television. For a brief while America stopped thinking about anything but the assassination.

The newspapers, of course, relegated the American Express scandal to their back inside pages for days as the dramatic headlines took precedence.44 But Buffett went looking for it. The stock never recovered from the blow it took on Friday when the market closed, and afterward it continued to slide downhill. Investors were fleeing in droves from the stock of one of America's most prestigious financial institutions. Its price had been cut in half.45 Indeed, it wasn't clear whether American Express would survive.

The company was an emerging financial powerhouse. Now that the average person could suddenly afford air travel, half a billion dollars of the company's Travelers Cheques floated around the world. Its credit card, launched five years earlier, was a huge success. The company's value was its brand name. American Express sold trust. Had the taint to its reputation so leaked into customers' consciousness that they no longer trusted the name? Buffett started dropping in on Omaha restaurants and visiting places that took American Express cards and Travelers Cheques.46 He put Henry Brandt on the case.

Brandt scouted Travelers Cheque users, bank tellers, bank officers, restaurants, hotels, and credit-card holders to gauge how American Express was doing versus its competitors, and whether use of American Express Travelers Cheques and cards had dropped off.47 Back came the usual foot-high stack of material. Buffett's verdict after sorting through it was that customers were still happy to be associated with the name American Express. The tarnish on Wall Street had not spread to Main Street.48 During the months that Buffett was investigating American Express, his father's health declined precipitously. Despite having undergone several surgeries, Howard's cancer had spread throughout his body. In early 1964, Warren took charge as the de facto leader of the family. While time remained, he had Howard remove him from his will to increase the share left to Doris and Bertie in a trust. The amount-$180,000-was a fraction of his and Susie's net worth; he felt it made no sense for him to share it when he could so easily earn money himself. He set up another trust for his children so that Howard could leave them the farm to which the Buffett family had planned to flee when the dollar became worthless. Warren would be trustee of these trusts. Howard's previous will had specified an ordinary wood casket and an economical funeral, and the family convinced him to delete that part.49 One of the most difficult things Warren felt he had to do was to level with his father that he was no longer a Republican at heart.50 The reason, he said, was civil rights.51 Amazingly, however, he could not bring himself to change his voter registration as long as Howard was alive.52 "I wouldn't throw that in his face. In fact if he had lived, it would have really constrained my life. I would not have come out against my father politically in public. I can envision his friends wondering why Warren was behaving that way. I couldn't have done it."

Although the family did not talk about Howard's impending death at home,53 Susie took over much of his care from Leila. She also saw to it that the children took part in their own way. She arranged for them to stand outside his hospital window with a sign that said, "We Love You, Grandpa." At ten and nine years old, Susie Jr. and Howie understood what was going on. Five-year-old Peter had a vaguer sense of his grandfather's illness. Susie also made sure that Warren-who had trouble facing illness under any circumstances-went to the hospital every day to see his father.

As Howard worsened, Warren poured his attention into American Express. At the time, he had the largest cache of money with which to work that the partnership had ever seen: Its huge profits in 1963 meant that on January 1, 1964, $5 million of new money had come in, and the partnership was already enriched by $3 million of stock gains from the previous year. His own money had exploded: He was now worth $1.8 million. BPL's capital at the beginning of 1964 stood at just under $17.5 million. During Howard's last weeks, Warren began to invest in American Express at a hyperactive sprint, pouring money into stock as fast as he could trade, working tirelessly and methodically to get as many shares as he could without running up the price. Only five years before, he had had to scrape and scrounge to find a few tens of thousands for National American. Never before had he invested like this. Never had he put to work anything approaching this much money, and so fast, in his life.

Through most of Howard's final few days, Susie was alone with him, often for hours at a time. She both feared and understood pain, but she was unafraid of death and had the strength to sit with Howard even when those around her were falling apart. Her gift for comforting the hopeless and those in misery blossomed, and Leila, devastated, let her take charge. In such close proximity to death, Susie found that the boundaries between herself and the other dissolved. "Many people kind of flee, but for me it was natural," she said. "It was a beautiful experience to be that physically and emotionally intimate with someone you loved, because I knew exactly what his needs were. You know when they need to turn their head, or you know when they need a little ice chip. You know. You feel it. I loved him very much. And he gave me that gift for myself of knowing, of having that experience, and realizing how I felt about it."54 Susie Jr., Howie, and Peter were sitting at the kitchen table one evening when their father came in, looking more depressed than they had ever seen him. "I'm going to Grandma's house," he said. "Why?" they asked. "Aren't you going to the hospital?" "Grandpa died today," Warren said, and walked out the back door without another word.

"I thought, we don't want to talk about this," Susie Jr. recalls. "This was going to be so big that talking about it was too painful." Big Susie represented the family in planning the funeral, while Warren sat at home, stunned into silence. Leila was distraught, but she anticipated her reunion with her husband in heaven. Susie tried to get Warren to explore and express his feelings about his father's death, but he literally could not think about it, fending it off with anything else available. Falling back upon his core of financial conservatism, he argued with Susie that she had been conned into spending too much money on Howard's coffin.

On the day of the funeral, Warren sat in silence through the service as five hundred people mourned his father. No matter how controversial Howard Buffett's views had been during his life, people came out to show respect for him in the end. Afterward, Warren stayed home for a few days.55 He parried unwelcome thoughts with the distraction of watching Congress debate landmark civil rights legislation on television. When he returned to the office, he continued buying American Express at a hectic pace. By the end of June 1964, two months after Howard's death, he had put almost $3 million into the stock; it was now the partnership's largest investment. Although he never did show any visible sign of grief,56 eventually he placed a large portrait of his father on the wall across from his desk. And one day, weeks after the funeral, two bald patches appeared on the sides of his head. His hair had fallen out from the shock.

27.

Folly Omaha and New Bedford, Massachusetts * 19641966 Six weeks after Howard died, Warren did something unexpected. It was not just about money anymore. American Express had done wrong, and he thought that the company should admit it and pay for the damage. The company's president, Howard Clark, had offered the banks $60 million to settle their demands, saying the company felt morally bound. A group of shareholders sued, arguing that American Express should defend itself rather than pay. Buffett offered to testify on behalf of the management's plan to settle, at his own expense.

"It is our feeling that three or four years from now, this problem may well have added to the stature of the company in establishing standards for financial integrity and responsibility which are far beyond those of the normal commercial enterprise."

But American Express wasn't offering the money to be an example; it just wanted to get the risk behind it of losing a lawsuit that was shadowing its stock. Nor did its customers care; the salad-oil scandal hadn't registered with them in the first place.

Buffett wrote that two paths lay before the company, and that an American Express that took responsibility and paid the $60 million to the banks would be "worth very substantially more than American Express disclaiming responsibility for its subsidiary's acts."1 He described the $60 million payment as inconsequential in the long run, like a dividend check that got "lost in the mail."

Susie, who had thrown the dividend checks down the incinerator and had never had the nerve to tell her husband about the incident, might have been shocked to hear him so cavalierly dismiss a $60 million dividend check lost in the mail, had she known.2 And why should Buffett now be interested in whether American Express had "standards for financial integrity and responsibility...beyond those of the normal commercial enterprise"? From whence had come the notion that a reputation for integrity would translate into a business "worth substantially more"? Why did Warren want to testify? While he had always shared his father's commitment to honesty, now he seemed to have inherited Howard's penchant for pontificating on matters of principle.