This Forbes piece struck a very different tone than the glowing article the magazine had published two years before. It described a San Jose Water Works shareholder who wanted to unload his stock. He went to a company director who sent him to Buffett. The article insinuated that Buffett must have known that a deal was brewing for the city to take over the water works at a higher price than he was paying for the stock-simply because a director had referred a seller to him. He had connections, so he must have known something-right? The article ended: "...the American Stock Exchange and the San Francisco office of the Securities Exchange Commission are making inquiries and asking questions."14 But there was nothing illegal about a director referring a seller of stock to a buyer.15 Indeed, no deal ever took place. Yet to anyone checking him out, this would be the most prominent, public, recent mention of his name apart from Supermoney.16 Buffett felt like a cat's scratching post. If this cascaded into a series of expanding stories, it could wreck his newly gilded reputation even though the story had no substance to it. He was not the type to storm and shout, however, but to brood and plan. Thus, while angry, he was too clever to confront the magazine and denounce its nameless reporter. He wanted retribution and vindication, so he used the opportunity to bring himself to the attention of magazine publisher Malcolm Forbes, writing him an artfully worded letter in which he talked of the pitfalls of journalism, complimented him on the magazine's good "batting average" in investigative reporting over the years-to which the article on San Jose Water Works was some kind of unfortunate exception-and mentioned the Sun's Pulitzer.17 On the same date he wrote a crisper letter, sans the flattery, to the editor, stating the facts to support his innocence.

Sure enough, Forbes ran a correction. Buffett knew, however, that corrections were rarely read and had no impact as compared to the initial story. So he also sent one of his proxies, the loyal Bill Ruane, to talk to the editors, not to complain but to position Buffett as an expert who could write an article about investing.18 The attempt failed, at least initially.

Buffett now had a new cause-outrage at bias in news reporting-which wound itself around his sense of justice and his interest in journalism in general. That a reporter could lie by inference or omission without any accountability drove him wild. He knew that even well-intentioned news publications flew into a state of high dudgeon and defended their reporters' dubious behavior on the premises of newsroom morale and press independence. This stance, he would later learn, was referred to at the Washington Post as the "defensive crouch."19 Eventually, he would end up helping to fund the National News Council, a nonprofit organization that arbitrated complaints of journalistic malpractice. The council's position was that media had become dominated by monopolies and concentrated in a few hands; this lack of competition meant that the First Amendment's right of freedom of the press gave publishers "power without responsiblity." The council offered redress to victims who had been "traduced, misquoted, libeled, held up to unjustified ridicule, or whose legitimate views have been ignored in a one-sided report." Unfortunately, those very monopolies and the few publishers who dominated the media had no interest in publishing the News Council's rulings, which exposed their biases and the carelessness and incompetence of their reporters. The News Council eventually folded after its findings were spiked, time and time again, by the free and independent press that was supposed to publish them.20 The National News Council was a worthy crusade, indeed perhaps ahead of its time, like many of the causes on which Buffett spent his energy. But by 1973, Susie Buffett had seen him expend a tidal wave of energy on each new crusade or obsession, sometimes changing entire coastlines in his wake. While many people shift their interests over time, the shy, insecure man she had married seized on one obsession after another. From his childhood hobby of collecting license-plate numbers to reforming the jiggery-pokery of journalism, three roles invariably interested him. The first was the relentless collector, expanding his empire of money, people, and influence. The second was the preacher, sprinkling idealism from the lectern. The third was the cop, foiling the bad guys.

The perfect business would allow him to do all of these at once: preach, play cop, and collect money to ring the cash register. The perfect business, therefore, was a newspaper. That was why the Sun had been a sliver of something that he wanted more of, much, much more.

But he and Munger had struck out at trying to buy major city newspapers. Now here was Katharine Graham, unsteady on her feet when it came to business, manipulated by those around her, flailing, seeking a lifesaver ring from anyone she could find. Yet despite her insecurities and vulnerabilities, because of her position at the helm of the Washington Post, she had become one of the most powerful women in the Western Hemisphere. And Buffett had always had a strong attraction to powerful people.

Graham was afraid of him. She asked George Gillespie whether he was crooked. She could not afford to make a mistake. For several years the Nixon administration had been waging an all-out war to discredit the Post. The Senate Watergate Committee was holding hearings. Woodward and Bernstein had unearthed Nixon's "enemies list." A set of newly discovered tapes implicated the President, who had refused to hand over information he claimed was privileged, information that could answer the question of what happened and who was involved. Graham labored every day over the Watergate story. In a sense, she had staked the Post's franchise on it.

She relied heavily on the opinion of the devoutly religious, utterly respectable Gillespie. He had served the Graham family ever since, as a twenty-eight-year-old trust lawyer at Cravath, Swaine & Moore, he had drafted Eugene Meyer's final will, witnessing the signature of the fading old man. "He's going to take over the Washington Post," she said about Buffett. "Kay, he can't take over the Post," Gillespie said. "Forget it. It's not possible. It doesn't make any difference how much B stock he owns. He has no rights. All he could do would be to elect himself to the board if he owned the majority of the B stock."

Gillespie had called a San Jose Water Works director and was convinced that Buffett had had no inside information. He made it clear that he disagreed with the powerful Andre Meyer, going out on a limb, given Meyer's position and connections. He told her to talk to Buffett, that he would be good for her to know.21 Graham wrote Buffett, quaking as she dictated the letter, suggesting that they get together in California, where she would be traveling late that summer on business. He agreed eagerly, and when she arrived at an office provided by the Los Angeles Times, the Post's West Coast news-service partner, she looked exactly as she had two years before: impeccably tailored shirtdress, her pageboy hairdo lacquered into place, lips pursed in a small smile. When she saw Buffett, Graham said, his "very appearance surprised" her.

"The great blessing and curse in my mother's life," says her son Don, "was she had very high standards when it came to taste. She was used to traveling in high-falutin circles. She thought there was one right way to dress and eat and one circle of people to be paid attention. Warren violated all her standards when it came to these things, yet he didn't care."22 Wearing a suit that looked tailored for some other man, the hair no longer crew-cut and beginning to float up slightly at the ends, "he resembled no Wall Street figure or business tycoon I'd ever met," she later wrote. "Rather, he came across as cornfed and Midwestern, but with that extraordinary combination of qualities that has appealed to me throughout my life-brains and humor. I liked him from the start."23 But at the time, that certainly didn't show. Instead, she came across as frightened, unsure of both him and herself.

"When I first met with Kay, she was wary and scared. She was terrified by me, and she was intrigued by me. And one thing about Kay was that you could tell. She was not a poker-face type."

Buffett could see that Graham knew nothing about business and finance and that she thought her board and managers outclassed her in running the business despite what was by now a decade of experience. He told her he thought Wall Street did not see the value of the Post. Graham relaxed her guard slightly. In her patrician accent, she invited him to meet with her in Washington a few weeks later.

Warren and Susie arrived November 4, the evening before the meeting, drove up in a taxi to the Madison Hotel, directly across the street from the Post headquarters, and, as they were checking in, found that the newspaper was in the middle of a printers' union work stoppage. Federal marshals were evicting the mutinous printers amid rumors of pressmen carrying guns. Commotion, glaring lights, and television cameras carried on until dawn. Given what was happening in the political sphere, it would be hard to find a worse time to shut down a newspaper, which of course was exactly what the union intended. Vice President Spiro Agnew had been under criminal investigation but suddenly pleaded "no contest" less than a month ago to a tax-evasion charge, then resigned. The Watergate scandal had reached an explosive crisis. Two weeks after Agnew's resignation, U.S. Attorney General Elliot Richardson and Deputy Attorney General William Ruckelshaus resigned in protest rather than execute President Nixon's order to fire special prosecutor Archibald Cox-who had been appointed to investigate the unfolding scandal-and abolish his office. Nixon did so anyway, in what became known as the "Saturday Night Massacre."24 The President's interference in the supposedly independent judiciary branch of government marked a turning point in the Watergate affair by shifting public opinion decisively over the course of the past two weeks against him. Pressure was mounting rapidly on Congress to impeach.

The morning after the Buffetts' arrival, Graham, exhausted from working with most of her managers until six a.m. to get the paper out, was embarrassed at the introduction her new shareholder had received to her paper and nervous about how the day's meeting would proceed. But she had arranged lunch for Buffett with Ben Bradlee, Meg Greenfield, Howard Simons, and herself.

Graham considered Meg Greenfield her closest friend, yet referred to her as "a lone fortress...no one ever really got to know Meg." Editorial-page editor of the Post, Greenfield was a short, chunky woman with cropped dark hair and a plain no-nonsense face. She exemplified humor, honesty, toughness, good manners, and modesty.25 Howard Simons, the Post's managing editor, was known for his sharp-witted way of twitting Graham. "Howard Simons used to say that you don't have to be dead to write obituaries. He was a great guy, but he was wicked. He used to tease Kay so much.26 "We were eating lunch, talking about acquisitions and media properties. I could see that even though she had all the A stock, she was afraid of me. I mean, they had spent their whole life dreaming up and putting defenses around the stock. So I said something about how the amortization of intangibles made it harder for the media companies, because they paid so much for goodwill, which caused problems if they were conscious of valuation."*27 Buffett was trying to reassure Graham that it was hard to take over media companies because the accounting made it burdensome to would-be acquirers. "And Kay was showing off. She said, 'Yes, the amortization of intangibles caused us a problem' or something like that. Howard looked her right in the eye, and he said, 'Kay, what is the amortization of intangibles?'

"And at that moment, I mean, I loved it. She was just frozen. She was paralyzed. Howard was enjoying it. So I jumped in and explained what amortization of intangibles was to Howard. And when I got through with this description, Kay said, 'Exactly!'"

Buffett loved outthinking Simons, short-circuiting the game, and coming-indirectly and subtly-to Graham's defense. Graham's tight little smile began to ease. "From that point forward, we were the best of friends. I was Sir Lancelot. That was one of the greatest moments of my life. Turning defeat into triumph for her."27 After lunch, Buffett met with Graham for about an hour, then he reassured her in writing. "I said, 'Kay, George Gillespie's arranged for the A shares to give you control. But,' I said, 'I also know that it is so important to you in this world that you're going to worry about it no matter what you've got. It's your whole life.' And so I said, 'I'm telling you that even though these teeth look like Little Red Riding Hood's wolf fangs to you, they really are baby teeth. But we'll just take them out. Just have the orders come up this afternoon, and we'll white out*28 some things, and I'll never buy another share of stock unless you're okay with it.' I knew that was the only way that she would ever be comfortable." That afternoon, Buffett-who had spent $10,627,605 to buy twelve percent of the company-signed an agreement with Graham not to buy any more of the Post stock without her permission.

In the evening, the Buffetts were due at Graham's for one of her famous dinners, this one for forty guests honoring Warren and Susie. Despite Graham's personal insecurity, she was considered Washington's greatest hostess, above all because she knew how to help people relax and enjoy themselves. This evening, despite her exhaustion and the temptation to cancel, "She had a little party for me. That was her way of reciprocating. And when she had a party, she could get anybody she wanted. Anybody-the President of the United States, anybody."

"She traveled widely in the world, so found occasions to give dinners," says Don Graham. "If she had gone to Malaysia, when the prime minister came to town, she'd give a dinner for him. The ambassador would look up what they did last time, and there was always a meal at Mrs. Graham's house, so there would be another one. Someone would publish a book, someone would have a birthday, and she'd give a dinner because she loved to give a dinner." Graham used the dinners as a way of making new friends and as a way of getting people to know one another. "She would sort of adopt people in different administrations," says Don.28 This particular administration, however, was Richard Nixon's. Graham had made few friends there, other than Secretary of State Henry Kissinger, and he had to defend socializing with her.

"So all of a sudden I'm at the Madison Hotel with Susie, and about five o'clock somebody slips something under the door and it describes the party, which I had been invited to weeks before. At the bottom it says 'black tie.' Well, I didn't have that, needless to say. So here's this pathetic guy from Nebraska, and he shows up with a business suit. He's going to a black-tie dinner in his honor and he's going to be the only one without black tie. So I called her secretary, panicked.

"Her secretary is a very nice gal. She says, well, let's put on our thinking cap. While I'm trying to cross the street to find a store that was open to rent me something, and nothing was open," Graham's assistant, Liz Hylton, called another local store, however, and found something suitable.29 The Buffetts left the Madison Hotel and were driven past mansion after mansion on Embassy Row. The taxi turned onto Q Street, past the historic Oak Hill Cemetery where Phil Graham was buried. Around the corner, they passed a row of historic nineteenth-century town houses with tiny manicured gardens. It was early November; the leaves glowed with traces of russet, amber, and gold. The taxi's passage into Georgetown was like crossing a border into a Colonial-era town. Tucked into the corner of the cemetery and sprawling down its tree-swagged hill stood Dumbarton Oaks, the ten-acre Federal estate where the conference at which the United Nations had been planned took place.30 The taxi swiveled left at the corner, between a pair of stone gateposts. The sight ahead was breathtaking. As the taxi began to crunch its way up the wide sweep of white pebbled drive, the Buffetts saw in the distance a dignified three-story cream-colored Georgian mansion with a green mansard roof. The broad lawns that surrounded it lapped all the way to the top of Georgetown's Rock of Dumbarton, so that the house looked down on the cemetery. To the right, down the hill past a deep colonnade of trees, were the neighborhoods leading to the old Buffett house in Spring Valley not far away, and just beyond that, Tenleytown, where Warren had delivered papers at The Westchester and stolen golf balls from Sears.

The Buffetts were ushered through Graham's front door to join the other guests, who were having cocktails in the living room. Asian art from her mother's collection hung everywhere on eggshell-white walls swagged with blue velvet curtains, along with a Renoir painting and Albrecht Drer engravings. Graham began to introduce the Buffetts to her other guests. "She told them nice things about me," Buffett says. "Kay was doing everything in the world to make me comfortable. [Yet] I was so uncomfortable."

He had never attended a gathering of such formality or grandeur. When the cocktail hour ended, crossing the hallway to the huge dining room where Graham held her famous parties, its paneled walls lit by the glow of tapered candles in bronze sconces, did nothing to make Buffett feel more at home. This setting intimidated even more than the living room. Crystal candlesticks and armorial porcelain gleamed on the round walnut dining tables, although the guests whom Graham had invited outshone the splendor of the surroundings. The room at any given time could be filled with a selection of U.S. Presidents, foreign leaders, diplomats, administration officials, Congressional members of both parties, senior lawyers in town, and people chosen from her group of perennial friends-Ed Williams, Scotty Reston, Polly Wisner,31 Roy Evans, Evangeline Bruce, Joseph Alsop, along with people like the Buffetts who, for one reason or another, suited the occasion or were interesting to her.

Buffett found himself seated next to Edmund Muskie's wife, Jane, an obvious dinner partner, since the Buffetts had entertained her husband in Omaha. On his other side was Barbara Bush, whose husband was the U.S. Ambassador to the United Nations but would soon become the Chief of the U.S. Liaison Office in Peking, with the important role of steering the United States through the delicate process of renewing its diplomatic ties with China. Graham pressed a button to signal the kitchen, and waiters began to move around the antique Georgian tables and serve. Warren tried not to gape at the protocol. "Susie's over there sitting next to some senator. And he's trying to make out with her, he's got his hand on her leg and all these things. But me, I'm dying, because I don't know what to talk to these people about. Barbara Bush could not have been nicer. She could see how ill at ease I was."

The waiters began to follow an American version of service la russe, serving the first course followed by a fish course, then the main course, all borne on trays from which the diners served themselves. On and on the courses went as wine was poured to the sound of Washington chatter. The waiters added and removed unfamiliar sterling implements like fish knives. As they offered him food that he would never eat and wines that he would never drink, he found the meal increasingly more complex and intimidating. Graham's other guests were relaxed and comfortable, but by the time dessert was served, Buffett was thoroughly cowed. Then came coffee he did not drink. His discomfort increased to terror when, as at the end of every evening, Graham stood up and read an articulate, witty, polished, personal, and original toast to her guest of honor that she had obviously put considerable thought into writing, however lacking in confidence her delivery. The guest of honor was supposed to stand and toast his hostess in kind.

"I didn't have the nerve to stand up and offer a toast, which you're supposed to do. I blew it totally. I was so uncomfortable. I even thought I might throw up, actually. I could not stand up there in front of half the cabinet and talk. I wasn't up to it." All he wanted to do was escape. Afterward, as he and Susie made their goodbyes, they had the feeling that the hicks from Nebraska would be the talk of Georgetown long after they left.

"This Senator was still trying to score with Susie as we were leaving and was so concentrating on explaining how she should come down to the Senate and see his offices as we were leaving that he opened the door to a closet and walked in. That was my introduction to Washington."

Yet while it was true that the formal, glittering society that surrounded the powerful Mrs. Graham may have unnerved Buffett and made him ill at ease, he had never been one to hide his enthusiasms. And so it must have soon become obvious to Susie Buffett that her husband wanted more of this world.

38.

Spaghetti Western Omaha * 19731974 By the time he dined with Katharine Graham in 1973, Buffett was no longer just an investor who was buying newspaper stocks. He was becoming a business mogul on a small scale. Berkshire Hathaway and Diversified were his bailiwick. Charlie Munger was the czar of Blue Chip Stamps.

The interlocking ownership of these three companies had tightened the business relationship between Buffett and Munger, and resembled the embryo of an empire built by another investor whom Buffett in particular admired, Gurdon W. Wattles.1 His company, American Manufacturing, was like a Russian doll; open it and inside was another company and another and another: Mergenthaler Linotype, Crane Co., Electric Auto-Lite. These stocks were all publicly traded, because though Wattles controlled them, he did not own one hundred percent of any of them. From early in his investing career, Buffett admired the Wattles model. He considered how best to profit from the same stocks Wattles was buying. He talked about Wattles all the time to his friends. "The only way to go is coattail-riding," he would say.2 "Wattles had this little closed-end investment company called Century Investors, which had to report to the SEC. He did this chain thing where he would be buying stock in a company at a discount, which would be buying stock in another company at a discount, which would be buying stock in another company at a discount. The big company at the end of the thing was Mergenthaler Linotype, which was two-thirds owned by American Manufacturing. In those days, you didn't have to file with the SEC to publicly reveal that you were buying, so nobody knew and he just would keep buying until he got control. He bought control of Electric Auto-Lite, partly through Mergenthaler, and he was doing the same thing with Crane Co., not the stationery but the plumbing supply. Somewhere in the chain was Webster Tobacco. They were all cheap statistically. Everything sold at a discount, and you could just keep buying all of them and make more money every time you made a purchase. Usually I would buy some of all of them. I owned Mergenthaler, I owned Electric Auto-Lite, I owned American Manufacturing.3 What would cause the value to come out, that was always the question. But you just had a feeling you were with a smart guy and eventually it would."

Early on, he went to see Wattles at his office at White, Weld & Co. in Boston.4 "I was a little apprehensive and said something like, 'Mr. Wattles, I hope I can ask you some questions.' And he said, 'Shoot.' Right away, I had to start thinking of questions. He was very good with me. For ten or fifteen years I followed him. He was very Graham-like. Very Graham-like. Nobody paid any attention to him except me. He was sort of my model as to what I hoped to do for a while. It was so understandable and so obvious and such a sure way of making money. Although it didn't make you huge money necessarily, you knew you were going to make money."5 What interested Warren about the Wattles model: the way one company could legitimately buy cheap stock in another. "You don't have to think of everything, you know. It was Isaac Newton who said I've seen a little more of the world than others because I stand on the shoulders of giants. There's nothing wrong with standing on other people's shoulders."6 Eventually Wattles had merged his empire into one company, Eltra Corporation, created through the merger of Mergenthaler Linotype and Electric Auto-Lite. This stock was now a favorite of Bill Ruane's, because the company's earnings were compounding at fifteen percent a year.7 The Buffett-Munger companies were beginning to look a little like Eltra before its combination: Berkshire Hathaway was Diversified's largest shareholder and also owned Blue Chip stock. Each of them also acted as a holding company for businesses that were not traded publicly. Most notably, Blue Chip owned See's Candies, which was so profitable that it more than offset the losses from the rapidly shrinking trading-stamp business. Munger now followed up by buying twenty percent of a near-defunct investment firm, Source Capital, for Blue Chip. "We bought it at a discount from its asset value," says Munger. "And there were two assholes who were the sellers. We had a no-asshole rule very early. Our basic rule has always been that we won't deal with assholes. And so Warren, when he heard about Source Capital, said, 'Now I understand the two-asshole exception to the no-asshole rule.'"8 Twenty percent is influence, not control. Munger went on the board of Source Capital with a new set of talented managers who were not assholes, Jim Gipson and George Michaelis, and started straightening out its portfolio.

Source Capital, however, was small change. Buffett and Munger were both always on the lookout for anything new they could acquire, especially something bigger that would give Blue Chip the kind of boost that See's Candies had. They had found a sleepy West Coast savings-and-loan company, Wesco Financial. When a broker called Buffett offering some cheap Wesco stock, after a brief conversation with Munger, they grabbed it-and bought the shares for Blue Chip Stamps.9 Then Wesco announced that it was going to merge with Financial Corporation of Santa Barbara. Santa Barbara was a hot stock, with an aggressive approach that Wall Street liked. Analysts thought Santa Barbara was paying too much for Wesco.10 Yet Buffett and Munger saw the opposite. They thought Santa Barbara's stock was overpriced, and Wesco was handing over its stock too cheap.11 Buffett went nuts. He read the terms and couldn't believe them. "Have they lost their minds?" he asked.12 Founded by the Casper family, Wesco was located in Pasadena, Munger's hometown. It owned Mutual Savings, a savings and loan that had prospered when the GIs came home from the Asian theater during the post-WWII building boom. Even so, Wesco had never exploited its opportunities for growth. But it was extremely profitable because it kept its costs so low.13 Betty Casper Peters, the only member of the founding family both interested and able to serve on the board, felt that Wesco's managers condescended to her and dismissed her suggestions that they could grow the company. Instead, they used her family's legacy as a ticket to ride at the head of the Rose Bowl parade.14 Peters, an elegantly dressed, high-cheekboned former art history student, had school-age kids, no business background, and spent much of her time tending the family vineyard in Napa. Now she drove back and forth to Pasadena on Wednesdays to attend board meetings. Running a savings and loan, she found, was hardly a black art. She subscribed to everything relevant she could get her hands on and sat down and read and figured it out.

As Peters's frustration grew, she pushed for a merger. She knew the Santa Barbara offer wasn't great, but all of the company's executives were in their mid-forties and they were bright and aggressive. Although they hung around the country club too much for her taste, they were vigorous, acquiring branches and doing things that she thought should be done.

Blue Chip already owned eight percent of Wesco when the merger was announced. Munger thought that if it kept buying Wesco, it could accumulate enough stock to defeat the Santa Barbara deal. But then he discovered that it would take fifty percent of the stock, a much higher obstacle. Munger had a greater incentive than Buffett to keep going, since Blue Chip was his partnership's most important investment. He urged going ahead; Buffett thought fifty percent was too high a threshold and held back. 15 Soon thereafter, Munger went to see Wesco's CEO, Louis Vincenti, and tried to persuade him to abandon the Santa Barbara deal.16 And Vincenti brushed Munger off like a flake of dandruff-not an easy thing to do.

Munger and Buffett had no intention of launching a competing hostile bid, however. Further, Munger could not imagine that such a thing might be necessary. He wrote Vincenti, appealing to his higher values.17 Surely his superior reasoning could bring Vincenti around. It was wrong that Wesco should sell itself too cheap; Vincenti should simply see that. So Munger told Vincenti that he liked Wesco's management and that Vincenti was Buffett and Munger's sort of fellow. He told Vincenti something like, "You're engaged to this other girl, so we can't talk to you, but if you were free, you're the kind of man we would like."18 Munger's old-fashioned, Ben Franklinesque sense of ethics and his noblesse oblige notion that gentlemen in business should agree upon the right conduct among themselves must have sounded like Sanskrit to Vincenti. But at least Vincenti did let slip that Betty Peters was the shareholder pushing for the merger.

Munger sent Don Koeppel, CEO of Blue Chip, down to see Peters. She viewed him as a minion and sent him back empty-handed.19 So it was time for the big gun. Within ten minutes of Koeppel's departure, Buffett called her. Peters had just finished reading the chapter on him in Jerry Goodman's Supermoney, which her husband had given her for Christmas. "Are you the same Warren Buffett that's in Supermoney?" she asked. Buffett admitted that he was the man who, according to Jerry Goodman, represented the triumph of straight thinking and high standards over flapdoodle, folly, and flimflam. Peters willingly agreed to meet Buffett with her three children at the TWA Ambassador Lounge at the San Francisco airport twenty-four hours later.

At the meeting, Buffett, with Pepsi in hand, underplayed his talent and record while asking questions in a warm, unthreatening manner. They talked for three hours, mostly about Omaha, where Peters's mother had grown up. They talked about politics. Peters, a lifelong Democrat, was pleased by Buffett's views. Finally he said, with considerable understatement, "Betty, I think I can do better with Wesco than this merger. Inasmuch as you're giving up the company, why don't we give it a try?"

Peters was taken with Buffett and thought he might be right about doing better than the fast young men from Santa Barbara. In fact, her concern now became that something might happen to Buffett if she swung her vote to him. He told her he had a partner, however, someone who would be in charge of Berkshire and the Buffett family's stockholdings if the proverbial truck mowed him down.

On her next trip to Pasadena, Peters sat down to breakfast with Buffett and Munger at the grand old Huntington Hotel so that she could get to know this mysterious partner. The two of them asked for a meeting with the Wesco board. Peters then did something brave, allowing herself to look capricious in front of the board rather than let the company make a serious mistake. She went to the next board meeting and asked the board to reverse course and meet with Buffett and Munger. The board waved her off, however, and voted at a special meeting to "use every effort to complete the merger with Financial Corporation of Santa Barbara."20 Forgetting who actually owned the company was their mistake. Peters now took Munger and Buffett to meet her brothers to secure their votes. By the time the board met again a week later and reaffirmed their position, Peters had made a decision and, behind the scenes, brought her whole family around to voting against the Santa Barbara deal.

"And then my task," says Peters, "was to go back into that little hermetically sealed Pasadena boardroom and tell all these buttoned-down gentlemen, including the management, that we're not going forward with the Santa Barbara savings deal." When she returned to the Spanish-style building, she was thinking about the plaza outside the boardroom windows with its tile-lined fountain. "If the windows had been open," she says, "they would have thrown me out of them. I knew that what was going on in everyone's mind was 'My God, is this what happens when you let a hormonal woman on the board?'"21 Wall Street thought so; it sent Wesco stock nosediving from a high of above $18 to $11 on the news. Wesco's management was "old and not very aggressive," one analyst said. Another claimed Santa Barbara was paying too much for Wesco, a "sleeping company for years, with old management." Another referred to it as "garbage."22 For her courage, Buffett and Munger now felt indebted to Peters.23 They had also decided they wanted to own Wesco themselves and felt it would be possible to engage Vincenti and win his cooperation. However, by then it must have been apparent that Lou Vincenti would not gambol along behind them like a lamb after its mother. Accordingly, they loosened the purse strings and told their brokers, for once, to bid liberally on the stock. Blue Chip paid $17 for Wesco shares-the price at which they had traded before the deal fell through.

"I will admit we were eccentric," says Munger. "We deliberately paid more than we had to, but we felt we'd scuttled the damn merger and we didn't like taking advantage of it by buying at the market price. We thought it was kind of the right thing to do. Well, nobody could understand that. They thought something must have been dishonorable about doing that. We really thought we'd make a better impression on Louie Vincenti if we didn't scuttle the merger, then buy the stock cheap. That would look pretty God-knows-what, and we wanted Louie to be our partner for the long term. We were trying to behave well."24 By March 1973, Blue Chip owned a quarter of the Wesco stock. And Buffett, who had never stopped buying Blue Chip, continued his drive to get hold of more. The year before, he had exchanged Diversified's Thriftimart shares for still more Blue Chip stock. Including the thirteen percent of Blue Chip he owned outright as well as his share of the stock owned by Berkshire and Diversified, which owned another thirty-five percent, Buffett was now effectively the largest Blue Chip shareholder. Blue Chip began to formally tender for Wesco's shares, this time paying $15 a share in cash, until it owned more than half.25 Within weeks, Munger outlined for Lou Vincenti a vision for the company26 that, not surprisingly, resembled the way Buffett thought about Berkshire Hathaway and Diversified. Wesco, with Munger as chairman, would be another new doll among the rest27-this one residing inside Blue Chip.

Then, no sooner had Blue Chip bought the majority of Wesco than the whole stock market fell apart.28 Buffett's stake in the Washington Post lost a quarter of its value.29 Ordinarily he would have bought more. However, he had promised Graham that he wouldn't. Instead, he recommended it to his friends.30 So instead of buying more Post stock, Buffett-who had always believed in concentration-looked for new opportunities and began filling his basket faster than an Easter egg hunt with huge quantities of a handful of other stocks: National Presto, maker of pressure cookers and popcorn poppers,31 and a huge chunk of Vornado Realty Trust, which put him on its board.32 Buffett had a set of legacy shareholders at Berkshire Hathaway who understood his investing approach and would never question his judgment. Thus he had earned the luxury of ignoring Mr. Market, which had marked down the value of his portfolio to a fire-sale price. Others were not so lucky. Bill Ruane's Sequoia Fund was headed for a terrible year, and Ruane's main financial backer, Bob Malott, was apparently unhappy. Malott knew Ruane from Harvard and they had shared an apartment when Ruane was working at Kidder, Peabody in New York. But Malott was sold on Buffett's approach and track record; he asked for Buffett's help with the pension fund of FMC Corporation, the company he now headed. So Buffett went to San Diego and spent several days interviewing investment managers and explaining his thinking to FMC's investment people. In the process, he converted them to Grahamites with what would eventually become powerful results. At first he said no to the request of managing the portfolio himself-then eventually agreed to manage a portion.33 Along with his acceptance, however, he gave a warning: FMC would come last among his priorities, after Berkshire and Diversified, and Warren and Susie Buffett. The canny Malott jumped at the opportunity anyway, not mistaking the larger point: That Buffett was willing to do it at all meant that he would do it well.34 Between his duties at FMC, Vornado, Blue Chip, and Wesco, and regular trips to New York, Buffett was now traveling much of the time. He was also busy courting Katharine Graham and had made such a good impression on her that she began to call him for advice. Susie made the rounds of Omaha, busy with the board of the Urban League, still giving out her scholarships, and taking on her latest crusade, the Future Central Committee, which was trying to save her alma mater, Central High School, from forced busing.35 As 1973 progressed, even Hamilton the dog must have noticed the silence and emptiness descending on the Buffetts' crazy, noisy home.36 Howie was two hundred and seventy-five miles away from Omaha at Augustana College. Susie Jr., unhappy with Lincoln, had transferred to the University of California, Irvine, where she was majoring in criminal justice.37 Peter, the child who had never required attention, was now a sophomore in high school. Thinking of moving to California, Susie had taken him to look at schools in Orange County. They stayed in Omaha, however, and now Peter spent much of his time in the basement, where Susie, who had gotten him interested in photography, had built him a darkroom.38 Often now Susie stayed up late at night alone, listening to music that transported her to some different place.39 She loved the jazz guitar of Wes Montgomery and great soul music, like the Temptations, who sang of a world in which it was men who felt all the longing.40 She read books like I Know Why the Caged Bird Sings, Maya Angelou's autobiographical account of overcoming the forces of racism, sexual abuse, and repression that made her early years a prison. "The idea of being confined in a place not of your choosing ran deep for her," Peter says-not surprising after her childhood shut away in a sickroom, and growing up with a sister who was disciplined by being locked in a closet. Susie longed for romance, but now knew that she and Milt were never going to get married. Nevertheless, she could not bring herself to give up her connection to Milt.

She was also spending more time with her tennis crowd of younger people at Dewey Park. One, John McCabe, a coach with a subdued personality, a sadness somewhat like her own, and a certain fragility, resembled most of her other lonelyhearts, but she seemed particularly drawn to him.41 Now that Susie had reasons to be away from the house most of the time, the hubbub began to dim, her hangers-on hung out with Susie elsewhere, and the rhythm of the house slowed from its all-day carnival atmosphere. Peter, never much attuned to his parents' lives, noticed only the growing silence, not its cause. When he got home from school, he petted Hamilton, made something for himself for dinner, and headed downstairs to the darkroom.42 Warren's conception of his marriage had never changed, even though the marriage itself was changing inexorably. When he was home, Susie still seemed just as devoted to him as ever. He saw how active and busy she was and wanted her to be fulfilled, as long as she continued to take care of him-which he assumed was fulfilling to her. As far as he knew, the balancing act that had always worked for them still did.

The "retired" Warren was investing at full throttle ahead in late 1973, in the midst of a market swoon. Between Cap Cities and the Washington Post and his growing friendship with Kay Graham, his interest in media over the past few years had permutated into a deep understanding of the subject at all levels. One night at dinner in Laguna Beach, he and Carol Loomis started strafing Buffett's friend Dick Holland, who worked in advertising, with questions about the advertising business. "Whenever he did that," Holland recalls, "I always knew something was cooking." The four of them talked business while Susie and Mary Holland, in purdah, entertained themselves. Sure enough, as a secondary way to play media, Buffett got on the phone to his trader and plunked down almost $3 million for the stocks of advertising agencies Interpublic, J. Walter Thompson, and Ogilvy & Mather, stocks so distressed he paid less than three times their earnings.

While he was buying, however, most of the stocks that Buffett had accumulated were faltering. As 1974 began, stocks for which he had paid $50 million had lost a quarter of their value. Berkshire, too, started to slide, down to $64 per share. Some of the former partners who had kept the stock began to worry about whether they had made a mistake.

Buffett saw it just the opposite way. He wanted to buy more Berkshire and Blue Chip. But "I'd run out of gas. I had used all the $16 million of cash I got out of the partnership to buy stock in Berkshire and Blue Chip. So all of a sudden I woke up one day and had no money at all. I was getting $50,000 a year salary from Berkshire Hathaway and some fees from FMC.43 But I had to start my personal net worth over again from zero."

He was now very, very rich but cash-poor. The companies he controlled, especially Berkshire Hathaway, had cash to buy stocks, however. To move some of Berkshire's money to Diversified, Buffett set up a reinsurance company-a company that insures other insurers44-in Diversified. This company, Reinsurance Corp. of Nebraska, agreed to take part of National Indemnity's business, receiving premiums and covering losses. Because National Indemnity was so profitable and generated so much "float"-premiums paid ahead of claims, i.e., cash-sending part of its business to Diversified was like sending a pipeline into a river of money. As time passed, it would give Diversified millions more dollars to invest.45 Buffett began to buy stocks for Diversified. Principally he followed the Wattles model and bought stock in Blue Chip and Berkshire Hathaway. Soon, Diversified owned ten percent of Berkshire. It was almost as though Berkshire was buying back its own stock-but not quite. Diversified's owners and Berkshire's weren't the same. Buffett still forbade his friends to buy Berkshire-whereas he, Munger, and Gottesman were partners in Diversified.46 At the time, even though the three did each other business favors and swapped stock ideas on occasion, their interests didn't necessarily align. Asked later under oath if he was Buffett's "alter ego," Munger said no. He acknowledged similar mannerisms and ways of speech. But "I've never chosen a role of being a junior partner," he said. "I like the idea of having a sphere of activity" of my own.47 On one occasion, Munger said, he had found a block of Blue Chip stock that he and Gottesman wanted to buy for Diversified. Buffett wanted to take the block away from them and buy it for Berkshire Hathaway. After "a discussion"-clearly about who needed it more-the combined strength of Munger and Gottesman had somehow overpowered Buffett, and Diversified got the stock.48 At least that way they kept a little share.

Still, Buffett did own forty-three percent of Diversified, so its purchases of Berkshire had added almost five percent to his personal ownership. Buying through Diversified was particularly attractive in that it tended not to ratchet up Berkshire's stock price. Hardly anybody was paying attention.49 But why did he want it at all?

"Berkshire was not worth more than forty bucks as a business. You couldn't have sold the textile mills and insurance business for more. And half the money was in a lousy business, I mean a really lousy business: twenty bucks a share of the forty bucks. And I didn't know what I was going to do, I literally didn't. I mean, I was rich enough already. But in effect, I was betting that I could do something. I was betting on myself. And though it sounds egotistical, anybody who might have thought it was worth more than forty bucks was purely paying for me. Because the company was not worth that."

He didn't know what he was going to do, except invest. Verne McKenzie, who had returned from New Bedford to become Berkshire's controller, thought that to Buffett, it simply "looked like an interesting game. All he was doing was solidifying his control." That he was, and doing so in the manner in which he always approached investing-as a collector, one who bought in secrecy to avoid tipping off other bargain hunters. But as the chairman of Berkshire Hathaway and Diversified, he was once again mostly buying from sellers who had been his former partners. Although perfectly legal, it was not exactly sporting conduct. But their willingness to sell, in his mind, ended his special obligation to them.

Buffett had also been buying Blue Chip Stamps all along, though so far, Blue Chip had remained primarily Munger's province. It owned the best of the businesses, however, namely See's. Now Buffett began to pursue Blue Chip stock like a great white shark after a well-fed seal. Since he had far greater financial resources, Buffett's ownership percentage of Blue Chip quickly surpassed the combined interest of his partners in that stock, Munger and Rick Guerin-Munger's associate from the Pacific Coast Stock Exchange, who now ran an investment partnership of his own.

Buffett bought Blue Chip wherever he could get it. He bought from Blue Chip's management and from other directors. One of these, Z. Wayne Griffin, asked $10.25 to Buffett's bid of $10. Reaching an impasse on the phone, Buffett recalls that Griffin suggested they flip a coin. He was taken aback by Griffin's willingness to do this, sight unseen. From that fact alone, Buffett realized not only that Griffin trusted him, but that he had already Buffetted himself. Griffin called it heads. Obviously, if he made such a bet, he was willing to take the ten bucks, which he did.

Buffett's accumulation of all these stocks, however, differed from his buying in the era of cheap cigar butts. Two large question marks hung over Blue Chip, Diversified, and Berkshire. As Buffett solidified control, all that money pouring in to both Berkshire and Diversified from the insurance business would have to be put to good use. And the bet on Blue Chip's legal problems would have to work out.

By year-end 1973, Blue Chip had settled eleven lawsuits.50 All that remained was the Justice Department's ruling that it divest one-third of its business. That would not be easy because "the President's freeze on food prices is another knee in the groin for us," Don Koeppel wrote. "The grocers are screaming, predicting huge losses, bankruptcy in some cases."51 Inflation had run rampant, President Nixon had frozen prices on commodities to try to halt it, and commerce had entered a new era of trying to match rising costs to frozen consumer prices.

The stamp business was dead, but Buffett, the implacable acquirer, had his stock. After this series of trading gyrations, Blue Chip had Wattled its way into the set of Russian dolls. "It was the same principle," Buffett says. Including all the pockets in which he had bought shares indirectly, he owned more than forty percent of Berkshire and more than twenty-five percent of Blue Chip Stamps. Even though these stocks traded at depressed prices, he could fund more deals and buy more stocks because all of the dolls had their own self-charging batteries, "float," cash that could be invested in advance of paying claims. This innovation dramatically improved the deal.

The operating businesses themselves had also improved since the dismal days of windmills and fire maps. Along with See's, Berkshire owned not only the whopping float-generator National Indemnity but also a clutch of little insurance companies that Buffett hoped would eventually turn into small power-houses, even though he was struggling to whip them into shape. Meanwhile, the deadweight of Hochschild-Kohn had disappeared and Buffett kept shrinking the textile mills.

But in the bigger picture, what Berkshire, Diversified, and Blue Chip really possessed were two things. The first was the homeostatic business model-the idea of grafting float onto a holding company so that it could respond internally to the changing environment. The second was the power of compounding, as float and investments doubled and redoubled over time.

The novelty and strength of Buffett's model cannot be overstated. Nothing else like it existed, or would for years to come. "That was the golden period of textbook capital allocation," he says.

The timing was stupendous. Capital from the insurance companies was pouring into Berkshire and DRC at the same time that the market was collapsing, the environment that Buffett liked best. While he had not yet decided exactly what to do with the collective enterprise he had built by the end of 1974, of two things he was certain. One was the business model's power, and the other his skill in using it. Above all, he had confidence in himself.

"Always," he says. "Always."

39.

The Giant Omaha and Los Angeles * 19731976 Howard Buffett was one of those rare people who prospered in the aftermath of the 1929 stock market crash. Now his son's star was rising during the second great crash of the century.1 But the world had changed; stardom, even in business, now meant fame. Buffett had closed his partnership during a media explosion in the United States in which cable had transformed television, newspaper companies were going public, and advertising was still in a golden age of selling to a monolithic audience in which virtually the whole nation sat down together on Tuesday nights and watched Happy Days.

Buffett had entered the media world as an investor drawn to the business by a natural affinity. But as he embarked on a new, post-partnership phase of life, through the publicity he got from the Forbes story in 1969 and then from the Supermoney profile, he began to enjoy the fruit of the discreet use of profile-raising press. Now he was a subject of media interest, not just a media investor; and no less a personage than Katharine Graham was paying him attention and taking him seriously, which had brought him into the orbit of one of the most important newspapers in the United States.

As was her habit with powerful men, Graham reached out to him for help. Buffett needed little encouragement.

"The first time she was going to speak to the New York Society of Security Analysts, I went over there to her apartment in New York on a Sunday morning to help her write her speech. She was a basket case. She was terrified that all these men were going to be there and she was going to have to stand up in front of them. Public speaking was something that was very hard for her always. The funny thing is, she had a great sense of humor, she was smart, but she tended to freeze in front of a crowd. Particularly if she thought they were going to question her about numbers."

As Robert Redford had said in an interview after first meeting her to discuss the Watergate movie All the President's Men, Graham had a "tight-jawed, blue-blooded" quality that demanded that her privacy not be invaded. Why, therefore, Redford asked himself, "did she keep making speeches and accepting awards?"2-particularly since it terrified her to do it.

Buffett sat down in the living room of Graham's large apartment situated on an upper floor of the modern UN Plaza, overlooking New York City's East River. Surrounded by Asian art and antiques from Agnes Meyer's collection, they started to work.

"She kept imagining these questions they were going to ask, like how much are you paying for your newsprint per ton? She thought it was a quiz. And I said it doesn't make any difference. You're paying what other people are paying for newsprint, so what? But that was a big thing. She was just convinced. I kept trying to get her away from trying to remember facts. Just have a theme." Graham wanted to say that good journalism makes good profits. Buffett snorted to himself over this notion and refocused her. "You know, good journalism is not inconsistent with good profits, or something like that. The hell with all the other stuff. I just tried to convince her that she was a hell of a lot smarter than all those dumb males that were out there. That's what really sort of bonded us initially."

In an ironic turnabout, Buffett became Kay Graham's personal Dale Carnegie instructor. He, of all people, could sympathize with someone who tended to freeze in front of a crowd. Moreover, thanks to Susie's gentle tutelage over the years, he had learned a subtler way of dealing with people. He knew how to anticipate their reactions and to phrase things in a nonthreatening way. His letters, which had always been self-conscious, were now more deftly worded and empathetic. He had learned to listen and show interest in other people and to converse on topics other than stocks. It helped that he was genuinely fascinated by Graham.

After they finished preparing and rehearsing, Graham said she was going to a party at the Agnellis' that night. "You might find the sightseeing entertaining," she said. "Why don't you come with me?" Buffett always stressed how uncomfortable and out-of-place he felt at glamorous events and how uninterested he was in attending them. So he told Graham that, yes, he would go. That evening he left his room at the Plaza to pick up Graham and ride to the Upper East Side.

"We were this very improbable couple-her mid-fifties, me early forties, and we got to this apartment, which was more than an apartment, it was like a triplex, it was huge. And everybody was bowing and scraping to Kay. There was every character from the party scene in the film La Dolce Vita. I was the required walk-on, the potted plant. You wanted it to go in slow motion so you could see everything. Gianni Agnelli, the head of Fiat, and his wife, Marella, weren't there. It was almost like a costume party, except it wasn't."

Buffett returned to Omaha afterward having seen a new side of Graham. As he continued getting to know her on a personal level, he saw her as a bundle of paradoxes. "Fearful but willful. Patrician but democratic. Wounded by the people she cared most about." He was surprised how much she still talked about her former husband a decade after his suicide.

"When you first met her, she would often get off on the subject of Phil very quickly, almost like Charlie getting off on a subject. And she described him in terms that were sort of hard to believe, considering how badly he treated her. But after I got to know her better, she told me everything about him and the relationship. She had found it impossible to conceive of herself as being in the same league as him. She felt she was a fraud, almost, even pretending to be in the same room with him. They used to hang out a lot with the Kennedys, and she just felt that she shouldn't be there. Anything he said was funny, anything he did was right. When he used to chop up the children right in front of her, she wouldn't stop him-I mean, the whole thing."

That he and Graham-who showed the aftereffects of an upbringing by a cruel, neglectful mother and years of abuse by a sadistic husband with untreated bipolar disorder-would be mutually attracted seems almost a foregone conclusion given Buffett's own childhood experiences. He knew how to behave around her in a way that wasn't threatening. By the spring of 1974, she began to switch her allegiance from her other advisers to him. In turn, he seized the chance to tutor the CEO of the Washington Post Company about business as if he had been waiting to play Pygmalion all his life: his very own Eliza Doolittle. More patient than Henry Higgins, he coached her gently and sent helpful, interesting articles to Kay and to her son Don.

As Buffett's influence grew stronger, Graham noticed that the words "Warren says" brought shudders from some of her board members.3 But Buffett himself was hoping to be invited onto that board. When Tom Murphy had approached him to join the Cap Cities board, Buffett told him no, he was holding out for the Post.4 Murphy dutifully spilled this news to Graham, who "felt dense" for not having figured it out herself.5 Susie thought that instead of taking on more business responsibilities, her husband should sell some of their stock and use it for a higher cause. Riding with him in a taxi in Washington, D.C., she pointed out philanthropist Stewart Mott, who was running the Stewart R. Mott Charitable Trust, which gave money to peace, arms control, and population and family-planning causes. The Buffetts were now richer than Mott, who had started with $25 million. "Why don't you quit?" Susie said. "Stewart Mott is doing all these other things now and he doesn't have to work every day." But Warren was incapable of quitting; he fell back on his philosophy that $50 million today would be worth $500 million someday. Nonetheless, he was not entirely disengaged from his family nor insensitive to his wife. He had picked up some vibrations from Susie, a sense that she wanted more from her life. With Peter moving along in high school, Warren told her, "Susie, you're like someone who has lost his job after twenty-three years. Now what are you going to do?"

Photo Insert Two

Image 24

In 1945, Warren and Lou Battistone "lusted after" Abbye "Pudgy" Stockton, the pioneer in women's weight-lifting.

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Warren sang and played the ukulele every morning before work at an employee "pep rally" in the basement of JC Penney's, where he sold menswear and men's furnishings in 1949.

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