Image 43

Astrid Menks in 1974, age 28. Four years later Susie Buffett encouraged her to take care of Warren, and she ended up moving in with him.

Image 44

Russian immigrant Rose Blumkin overcame hardship to build the largest furniture store in North America. She worked until age 103, a benchmark Warren often cites for himself.

Image 45

Buffett at home in his kitchen, wearing a favorite threadbare sweater.

Image 46

Buffett playing bridge with George Burns in 1991, at Burns's 95 birthday at the Hillcrest Country Club in Los Angeles. Not shown: Charlie Munger and a sign reading: "No smoking by anyone under 95."

Image 47

Throwing out the first pitch before the Omaha Royals' home opener, April 11, 2003.

The answer, she said, was sing. Her nephew Billy Rogers had made her some instrumental guitar tracks so that she could tape herself and listen to her performances. Rogers had been playing jazz guitar at Mr. Toad's, Spaghetti Works, and other clubs in Omaha, and along with him, Susie was now a familiar face in the local music scene. But when she first started practicing, "I was scared, really scared," she said. "I was bad." The last time she had performed in public was ten years before at a charity benefit at Central High. So she got coaching and worked on contemporary love songs and ballads. Susie first debuted as a chanteuse that July, before a friendly audience at a private party at Emerald Bay. "People seemed to like it pretty well," she said.6 And it thrilled her husband to see his friends applauding his wife's talent.

While the Buffetts were in Emerald Bay that summer, Warren invited Graham for a visit in connection with a trip she was making to speak to an analysts' meeting in Los Angeles. Sensing that Graham was going to talk to him about joining the Post board, Buffett had been dancing around his office at Kiewit Plaza for days ahead of time, happy and excited as a kid on Christmas Eve.7 The Buffetts' house at Emerald Bay, down a steep driveway set well back from the beach, still had the feeling of a modest rental house; it lacked most of the personal touches that spoke of a family. Warren had no sense of what kind of impression the place might make on Graham, who owned several enormous, impeccably decorated and maintained mansions, including the farm at Glen Welby and a vast, shingle-style waterfront estate on Martha's Vineyard.

Apparently, however, he must have impressed upon his wife that they would have to make an unusual effort for Graham. The first morning after Kay arrived, Susie rose at an unheard-of hour and feigned domesticity: She cooked a full breakfast for the three of them, which both of the Buffetts pretended to eat. Her husband spent the rest of the day wrapped up in Graham, talking to her about newspapers, journalism, politics, and bringing up every opportunity for her to invite him on the board.

At some point, he put down his newspapers, donned a bathing suit purchased specially for the occasion, picked up a brand-new beach umbrella bought in Graham's honor, and left the house with Graham to walk the hundred or so yards down a steep path to the shore to join the family. Previously, his attitude toward the ocean had been: "I think having the ocean nearby is an attractive feature, and fun to listen to at night, and all that kind of stuff. But actually getting in it-I feel I'll save that for my old age." But now, after sitting on the sand for a bit, looking at the water, he waded gamely into the Pacific. By all reports, Susie and the Buffett kids "went into convulsions of laughter" at the odd sight.

What Susie thought about this extraordinary gesture is not known. But Warren's explanation of it is on record: "Only for Kay," he says. "Only for Kay."

On Sunday morning, they dropped their company manners and Susie sleepwalked through cooking bacon and eggs for Graham, eating nothing herself, while Warren sat nearby spooning chocolate Ovaltine from a jar.8 After breakfast, he and Graham resumed their tte--tte. At some point, Graham told him that she wanted him to join her board but was waiting for the right time. She knew that some of her board members, such as Andre Meyer, would not welcome Buffett. But he asked, "When is the right time?" thus forcing her to make up her mind. And so in short order it was done; they agreed that Buffett would join the board of the Washington Post Company. He was elated.

That afternoon, Buffett left his family at Emerald Bay and drove Graham to the Los Angeles airport. "On the way, all of a sudden, she looked at me like a three-year-old kid. Her voice changed, and her eyes, and she said, basically pleading, 'Just be gentle with me, please don't ever assault me.' I learned later that Phil and some people at the paper, to get their own ends or for sheer enjoyment, would push her buttons just to watch her fall apart. It was cruel on the part of Phil; it was manipulative on the part of the rest. It was very easy to do; the button still worked."

At summer's end, on September 11, 1974, Buffett officially joined the board, which catapulted him from a star investment manager from Omaha to official adviser at one of the most important media companies in the world. Even at that first meeting he could see that Graham had a habit of pleading with the board for help. Buffett thought, This won't do. You can't put yourself in that position as a CEO. But he didn't yet know her well enough to say anything. Instead, he educated himself about the Post board, which was full of many prominent and influential people, and began to tiptoe his way through the powerful, jockeying men who were used to dominating Graham. He was a quiet board member, however, and used his skills behind the scenes.

Buffett at the time was preoccupied with far more than just Kay Graham and the Washington Post. The market, which investors had expected to rally in 1974, instead was in the full throes of collapse. Pension-fund managers had cut back their stock purchases by more than eighty percent. Berkshire's own portfolio looked as though someone had given it a severe hedge trimming, shearing off nearly one-third in the second Great Crash, the kind that comes along only a few times in a century.

Munger had kept his partnership open after Buffett had shuttered his. Now its value was plunging. His performance had always been more volatile-in both directions-than the market's. For the past couple of years he had managed decent though unspectacular returns. But by 1974 Munger found himself in trouble, his partners losing nearly half of their money.9 Like Ben Graham half a century earlier, he felt obliged to make their money back.

"If you're put together properly, you have a fiduciary gene like Warren and me," he says, "and if you've told people, 'I think I can get you extraordinary results,' then you really hate the idea of not delivering for them."

As for himself, "Certainly the quoted value of my capital went down. I didn't like it, but just think about how many years could go by-what difference does it make at the end whether I have X dollars, or X minus Y? The only thing that bothered me was that I knew how hard it was on the partners. That was what killed me-the fiduciary aspect of my position."10 Munger still had about twenty-eight limited partners, including some family trusts. To earn back losses of half his capital, he would have to more than double the remaining stake. The value of Blue Chip Stamps would have a significant bearing on whether he could accomplish that.

Bill Ruane's Sequoia Fund was also in trouble. It had started with $50 million from Buffett's former partners and invested its money well by taking large positions in undervalued stocks like Tom Murphy's Capital Cities Communications. This was not the kind of stock that money managers who had piled into glamour television and electronics stocks a few years earlier were buying now. They had galloped all at the same time straight the other way, into the arms of the "Nifty Fifty," a small group of the largest, best-known companies.11 "In this business," Ruane said, "you have the innovators, the imitators, and the swarming incompetents." The imitators and the swarming incompetents were now at the wheel, and the stocks that Ruane and his partner Rick Cunniff had bought in 1970 had been cut in half. Compounding their problems, they had bought a seat on the New York Stock Exchange just before prices for seats fell over a cliff.12 The timing of Sequoia's opening was obviously inauspicious-Ruane had agreed to start up just as Buffett was shutting down due to lack of opportunities. Sequoia had underperformed the market every year-cumulatively by a dramatic amount.13 The Sequoia Fund's worst year yet was 1973; it had lost twenty-five percent, compared to the market's loss of fifteen percent. It was on its way to another terrible year in 1974. Ruane's largest backer, Bob Malott, was incensed. He was already known as a "ballbuster" around the halls of Ruane, Cunniff for his habit of calling to complain about minor discrepancies in his family's accounts. Now, he berated Ruane for buying a seat on the exchange and for his poor performance with such persistence that Ruane feared he would pull his capital out of the firm.14 Buffett, however, remained serene in the knowledge that Mr. Market's opinion of a stock's price at any time had no bearing on its intrinsic value. He knew which stocks Ruane and his partners had bought and was confident that they had made good decisions.

If not exactly an ego booster, because of the snooty staff, Buffett's 1969 meeting of the Grahamites at the Colony Club had at least provided mutual support in a challenging market. Since then Buffett had named them the Graham Group; Ed Anderson had planned the third outing in Williamsburg; Charlie Munger the fourth in Carmel, California. In 1971, Buffett made the meetings biennial. Out of loyalty, he let Ruane invite Malott-a favor normally verboten-and Malott and his wife, Ibby, became members for the next meeting in Sun Valley in 1973, planned by Rick Guerin.

Malott, mightily impressed by the whole affair, stayed in Ruane's fold, even though his complaints continued at a frequency and volume that still made Ruane fear his defection. By the end of 1974, however, while the market was down by more than twenty-five percent, the Sequoia Fund had at least managed to produce a smaller loss than the market's.

Nonetheless, the market's cumulative toll on the Sequoia Fund was such that Henry Brandt and John Loomis, Carol's husband, both of whom had gone to work there, feared the worst and cast off from what seemed a sinking ship.15 Forbes captured Buffett's attitude in an interview that November, which opened with a juicy quote: Asked how he felt about the market, "Like an over-sexed man in a harem," Buffett replied. "This is the time to start investing."16 He went on to say, "This is the first time I can remember that you could buy Phil Fisher [growth] stocks at Ben Graham [cigar butt] prices." He felt this was the most significant statement that he could make, but Forbes didn't include it; a general audience wouldn't understand the references to Fisher and Graham.17 When Forbes asked for specific stock ideas, instead of mentioning what he was buying or had bought, Buffett turned impish and did one of his little experiments to see how well the reporter had researched him via other Forbes articles. "A water company is pretty simple," he said, adding that Blue Chip owned five percent of...San Jose Water Works. The reporter took the bait; San Jose Water Works went in the story with no reference to the earlier piece insinuating he'd bought it using insider information.

But despite his enthusiasm for the market so far in 1974, he had invested at a trickle, and mostly moved money around into Studebaker-Worthington, Handy & Harman, Harte-Hanks Newspapers, and Multimedia, Inc., and added to his Coldwell Banker position. He bumped up a few of his other shareholdings by ten or twenty percent. He had also bought 100,000 shares of Blue Chip from Rick Guerin. "He sold me at five bucks because he was getting squeezed," Buffett says. "That was a brutal period."

The "harem" comment had a double meaning: While it was, indeed, the time to start investing, Buffett, for the most part, could look but not touch. One of National Indemnity's business partners, an aviation broker, had run amok, selling money-losing aviation-insurance policies. The company had tried to stop the agent by revoking its authority but for several months was unable to shut it down.18 The accounting records were a shambles and the losses were unclear. National Indemnity had no idea how high the bill for the "Omni affair" would run, but worst-case estimates ran as high as tens of millions of dollars. The hope was that they were much less, because National Indemnity did not have tens of millions. Buffett was sweating.19 Within a couple of months-by early 1975-his problems compounded monumentally. Chuck Rickershauser, a partner from Munger's law firm, now renamed Munger, Tolles & Rickershauser, called him and Munger to say that the Securities and Exchange Commission was considering pressing charges against them for violating securities laws. What had seemed like a brewing but manageable problem had now exploded into a full-scale emergency.

Rickershauser had first started doing legal work for Buffett and Munger during the See's transaction. More recently he had been fighting a rear-guard action, ever since an SEC staff lawyer had called him and said he had some questions. Under the assumption that the matter was routine, Rickershauser had directed the man to Verne McKenzie, Berkshire's controller.

When McKenzie's phone rang in Nebraska, he picked it up to find the head of the SEC's Enforcement Division, Stanley Sporkin, the much-feared "tough cop" of the business world, on the other end of the line. Sporkin looked as though he spent his evenings hunched droopy-eyed under a desk lamp, personally drafting the charges against large corporations that for the first time in American history had frightened a remarkable number of them into settling with the SEC without ever setting foot in court.20 On the phone, he interrogated McKenzie on a wide range of subjects, from Wesco to Blue Chip to Berkshire and beyond. His tone was not friendly, but this, McKenzie had assumed, was simply his modus operandi. On the other hand, McKenzie did get the impression that Sporkin thought if you were rich, you must have done something wrong.21 When Rickershauser heard that Sporkin, rather than a staff lawyer, had personally called and grilled McKenzie at length, he nearly had a heart attack. Sporkin's batting average had made his jowly profile among the most recognizable in American business. In a practical sense he had more power than his boss, the chairman of the SEC.

What seemed to have drawn the SEC's attention was a project of nearly two years in which Buffett and Munger were trying to delicately untangle the many strands of spaghetti that connected the several companies they owned. Their first step had been to try to merge Diversified, the least essential piece, into Berkshire Hathaway. By 1973, Diversified had become little more than a vehicle for buying Berkshire and Blue Chip stock. But the Securities and Exchange Commission-whose approval was required-had delayed the Diversified deal. Munger had told Buffett that this was not anything serious. He directed Rickershauser to "invite anyone in the SEC" who had questions to call him directly, "if this will expedite his work and clearance of our papers."22 Instead, over the next eighteen months, the SEC staff seemed to have nosed around looking at Blue Chip Stamps and other investments; it concluded that Buffett and Munger had smashed up the WescoSanta Barbara deal deliberately by offering a high price for a quarter of the stock for the purpose of taking over the rest. At least, that must have been how it looked to Santa Barbara, for it had apparently turned in Blue Chip to the SEC.23 For the first time they all realized that Blue Chip was in trouble.24 No sooner had Buffett achieved the glory of joining the Post board than his and Munger's need for legal services was about to grow with stunning rapidity. Rickershauser, who already knew what it was like to work with Buffett, had once explained to a colleague that "The sun is nice and warm, but you don't want to get too close to it."25 He would spend the next couple of years testing what could be called Rickershauser's Law of Thermodynamics.

In February 1975, the SEC issued subpoenas and launched a full-blown investigation of Blue Chip's purchase of Wesco: "In the Matter of Blue Chip Stamps, Berkshire Hathaway Incorporated, Warren Buffet [sic], HO-784." The commission staff speculated that Buffett and Munger had committed fraud: "Blue Chip, Berkshire, Buffet [sic], singly or in concert with others...may have engaged in acts which have, directly or indirectly, operated as a device, scheme, or artifice to defraud; or included an untrue statement of a material fact or omitted..."

The commission's lawyers zeroed in on a theory that Blue Chip had planned from the beginning to take over Wesco Financial but had not disclosed that fact; that Blue Chip's purchases of stock after the Santa Barbara deal dissolved must have been "tender offers" that were never registered with the SEC.26 This latter charge was most serious and carried with it the risk that the SEC would file, with great fanfare and publicity, civil fraud charges not only against Blue Chip but also against Buffett and Munger personally.

In considering action against a target, Sporkin had a choice. He could prosecute or settle. A settlement was a way of allowing the target to say sorry without having to officially admit guilt; it neither consented to nor denied the charge of fraud but agreed to accept a penalty. And in agreeing to a settlement, the SEC could also choose whether to name the individuals involved or simply to make a deal with the company itself without naming anybody. Being named in a settlement might not be the literal end of someone's career, but there would be no elephant-bumping afterward. Having so recently been elevated into the high and mighty through Supermoney and Forbes and the board of the Washington Post, Buffett began to fight desperately to save his reputation.

Instead, the investigation widened. Under subpoena, Buffett had to open his files-which, naturally, represented a huge and comprehensive collection of documents, just as huge and comprehensive as everything he had ever collected. In violation of his cherished privacy, lawyers from Munger, Tolles sifted out trade tickets, information about recent stock purchases, memos to bankers, letters to See's Candies, notes to Verne McKenzie at the textile mill, and the like and shipped them off to investigators in Washington, D.C. Buffett felt persecuted. He and Munger were being chased in a nightmare by a huge, lumbering giant. To survive, they would have to outrun it.

Letters flew back and forth like shuttlecocks between Munger, Tolles and the SEC. Buffett maintained a veneer of calm, but his back problems were plaguing him. Munger did not hide his agitation.

By March 1975, the investigation had wound its way to a command performance at the SEC. Betty Peters was hauled in. "Is your lawyer here?" they asked. "No. Do I need a lawyer?" she replied. "Well, everybody comes with a lawyer," they told her. "Don't you just want to know what happened?" she asked. They interviewed Peters without a lawyer.

Munger was summoned. For two days-also unaccompanied, for what additional legal counsel could Charles T. Munger possibly need?-he tried to defend Blue Chip against the charge that it was trying to bust up the Santa Barbara merger and to explain why Blue Chip had paid more than was strictly necessary for Wesco's stock. Yes, Blue Chip had thought about getting control, he said, but those plans were only "remote and contingent" until the Santa Barbara merger blew up. This discussion became somewhat circular given his and Buffett's role in talking to Vincenti and their admitted "wooing" of Betty Peters and the Casper family's votes. Munger had a regrettable tendency to interrupt and lecture the SEC staff lawyer, Larry Seidman. "We wanted to look very fair and equitable to Lou Vincenti and Betty Peters," he said.27 But the SEC lawyers had never met the intractable Lou Vincenti. They could not possibly understand. What about your Blue Chip shareholders? Seidman asked. Seidman saw no reason for Blue Chip to be so generous to Wesco shareholders; Wesco's stock by then was largely in the hands of arbitrageurs.

These were people who had bought Wesco's stock knowing it would rise to the price that Santa Barbara had offered once the deal closed. They partly hedged their bets by shorting Santa Barbara's stock, much as Graham-Newman had once bought Rockwood stock in exchange for cocoa-bean warehouse receipts. But when the Wesco deal blew up, it was as if the price of cocoa beans had collapsed.28 Why do the arbs a favor by propping up the price?

Munger reached for his ultimate weapon-Benjamin Franklin. "We didn't feel our obligation to the shareholders was inconsistent with leaning over backward to be fair. We have that Ben Franklin idea that the honest policy is the best policy. It had a sort of shoddy mental image to us to try to reduce the price."29 Seidman seemed a little baffled by this argument, and even Munger admitted that the details of what had been done did not look good. He begged Seidman to look at the big picture. "As you look at the overall records, we go way beyond any legal requirement in trying to be fair with people to observe the niceties of fair-dealing; I simply hope that you will reach the conclusion that this averages out as not an appropriate case for any sort of prosecution.... If there's any defect at all, it's not intentional."

When Buffett appeared, they asked him why he and Munger hadn't let Wesco go into the tank so they could buy it cheap. "I think the general business reputation of Blue Chip would not have been as good," Buffett said. "I think someone might have been sore about it." But why should he care? Because, said Buffett, it was "important how Wesco management feels about us. You can say, well, we own the controlling interest, so it doesn't make any difference. But Lou Vincenti doesn't really need to work for us.... If he felt that we were, you know, slobs or something, it just wouldn't work."

Now Buffett-who, like Munger, startled the enforcement lawyers by showing up alone-made himself helpful, venturing back to Washington several times, patiently explaining how Blue Chip worked, expounding on his investment philosophies, and talking about his childhood years in Washington. He made a favorable impression on Seidman, but not on the senior SEC staff lawyer who was in charge of the investigation, and who was known as a "tiger" whose motto was "They shall not pass." He found these arguments unconvincing.30 The senior investigator's attitude was that nobody who did anything close to the line would ever get by him.31 The SEC staff kept delving. It seemed fascinated by the intricacies and complications of Buffett's empire. It even started looking into whether he had traded on inside information about San Jose Water Works.32 The staff started kicking around Source Capital, the closed-end investment fund that Munger had bought a twenty percent interest in as a cigar butt and helped turn around. By then, the stock market had recovered. Ruane's Sequoia Fund had made a huge comeback in 1975, up almost sixty-two percent compared to thirty-seven percent for the market. Munger had just about made back his partners' money, with a seventy-three percent gain in 1975. He took no fees for himself, and was winding his partnership down. Explaining why their convoluted empire made sense based on the cheap prices paid for stocks at the time grew harder as the market recovered. The investigation kept growing hairy legs like a tarantula.

Rickershauser had been studying a chart that showed all of Buffett and Munger's complex financial interests. Buffett sat at the center, buying Blue Chip, Diversified, and Berkshire, Wattling them into so many pockets that it made Rickershauser shudder.33 Everyone knew Buffett, the great white shark, was virtually helpless to stop himself from acquiring these stocks. If he found ten bucks and spied a share of Blue Chip, Berkshire, or Diversified, he charged, grabbed, and threw the stock in the nearest drawer. After he and Munger had bought the first twenty-five percent of Wesco, Rickershauser had finally advised Buffett to buy stock only through formal tender offers to avoid the appearance of impropriety.34 The complex cross-holdings that Buffett had created made it seem as though he was trying to hide something. Rickershauser looked at the crazy diagram and fretted, "There's got to be an indictment in there somewhere."35 He didn't think the SEC would have enough evidence to convict, but it would be awfully easy to accuse.

In the greater sense, Munger was a two-bit player, his financial stake minute compared with Buffett's. He had been snared as a petty accomplice. But since Blue Chip was his territory, he was a principal in the Wesco saga and thus played a central role in the SEC's questioning.36 He admitted to Seidman, "We do have a very complicated set of business affairs, and I think we have learned, to our regret, that that may not be too smart. But we tried to keep all the balls in the air and properly sequenized with the other balls and handle them honorably."

Despite the pair's protestations and the fact that it could find nothing wrong with the San Jose Water Works or Source Capital deals, the SEC kept going. The tiger of a prosecutor now recommended to Sporkin that the SEC file charges against Buffett and Munger personally. He was unswayed by Buffett's and Munger's testimony and believed that they had intentionally quashed the Santa Barbara merger by overpaying for Wesco's stock. He was unsympathetic to the "who was harmed?" explanation for paying more for the stock and thought the pair was splitting hairs too fine in its explanations of events.37 Rickershauser wrote Sporkin directly. He pleaded with him not to prosecute Buffett and Munger, "individuals who value their good names and reputations as their most priceless possessions," because "many people, probably most people, assume evil conduct on the part of anyone civilly prosecuted by the commission." Even if Buffett and Munger consented to a settlement without admitting or denying the charges, merely filing them would cause "terrible, irreversible damage" because "the good reputation of the commission automatically and inexorably destroys the good reputation" of the defendants. "A giant's strength should be used with great discretion," he urged. "The risk from inadvertent oversights in business should not become so onerous that people who value their reputations are deterred from participation."38 He begged to save Buffett's and Munger's reputations by offering to consent to an order on minor, technical disclosure violations on behalf of Blue Chip only, as long as the consent decree did not name any individuals.

The panic inside Buffett's mind can only be imagined. Within the office, he did his best to maintain an imperturbable facade so as not to alarm his office staff, any of whom might be interviewed by the SEC.

Rickershauser worked like a stevedore to portray his clients as upstanding citizens from the perfect model families. He sent in biographies of Munger and Buffett to the SEC, stressing their charitable work, the many boards on which they served, Howard Buffett's tenure as a Congressman, and the millions of dollars of taxes that Buffett had paid to the government since filing his first tax return at age fourteen. Buffett obviously had been grinding away at this document as if his life depended on it.

Munger was resigned. "If a policeman follows you down the road for five hundred miles," he said to Buffett, "you're going to get a ticket."

Then Rickershauser made a further proffer to Sporkin, put delicately: "The complex financial interests of Mr. Buffett and Mr. Munger...have apparently raised the impression that compliance with various legal requirements is becoming difficult," he wrote, noting the pair had tried to comply with both the spirit and the letter of the law. "They now wish to simplify their holdings as rapidly as they can."39 In their interviews, the SEC lawyers had already explored what simplifying would mean. "Sometime in the future, it is certainly possible that we would merge Blue Chip with Berkshire," Buffett had responded to their question, "but Blue Chip has a lot of legal problems, and until some of those are resolved, it might be hard to arrive at what we would feel reasonably sure would be a fair exchange ratio. If I had my preferences, it would be that someday they would be merged. So hopefully we would have more or less the same businesses we have now, but less complications. I don't really like these complications. It may look like I like these complications. I don't have a great staff to handle it all. It seemed fairly simple while we were doing it," he said, "but not simple now."40 Asked by an SEC investigator if Buffett had "contingency plans" to simplify things, "Oh, does he ever," said Munger. "He has about twice as big a contingency plan as before this investigation started."41 In considering the proffer, says Sporkin today, much depended on Rickershauser. He "was one of those few lawyers that I've met in life that, whatever he told you, you could go to the bank on." Sporkin viewed Rickershauser as not only a brilliant lawyer but truthful, straightforward, and upright, incapable of being disingenuous. Rickershauser told Sporkin that Buffett was "going to be the greatest person that Wall Street has ever seen" and that "he was the most decent, honorable person you would ever meet." Coming from almost anyone else, Sporkin would have dismissed this as rhetoric, but coming from Rickershauser, he took these statements to be both sincere and probably well-judged.42 Sporkin felt he had as great a duty to absolve as to convict. He thought that a prosecutor had to differentiate between a fundamentally honest person who had made a misstep and a crook. When it came to crooks, his job was to put 'em away. His view of Buffett and Munger was that they had certainly misstepped, but that they were not crooks.43 And so the giant tapped Blue Chip gently on the wrist.44 The company consented to an SEC finding in which it neither admitted nor denied that it failed to notify investors it was trying to bust the Santa Barbara merger in buying Wesco's stock and that Blue Chip had artificially propped up Wesco's market price over the course of three weeks.45 Blue Chip promised never again to do what it had not admitted it had done.46 The consent decree named no individuals. The publicity over the event had been trivial and would fade. Buffett's and Munger's records and reputations stayed clean.

Two weeks later, the SEC named Buffett to a blue-ribbon panel to study corporate disclosure practices. It was forgiveness and, above all, a fresh start.47

40.

How Not to Run a Public Library Washington, D.C. * 19751976 One day in early 1975, Susie Buffett's friend Eunice Denenberg came over to the house and sat on the dog-hair-covered sofa in the family room. Susie turned her back so she wouldn't have to face her friend and turned on the tape deck. Then she sang. Denenberg pronounced approval. They talked about Susie's dream of singing professionally, which she was too diffident to do anything about herself. Denenberg went home; then she called back the next day and said, "This is your agent." She enlisted Bob Edson, an assistant music professor at Midland College, to create a backup band and got Susie a gig at the Steam Shed, a nightclub in Irvington, the tiny town on Omaha's outskirts where she and Dottie had once formed the choir in her father's church. Susie was nervous, but the rest of the family was enthusiastic. Only Doc Thompson, who said, "I don't know why you want to sing in bars," had any doubts.

The night of Susie's first public performance, before a crowd made up of about thirty-five friends, she was so anxious that she asked Warren not to come. Talking and greeting people in a long sequined dress, she stalled until Denenberg pushed her out onto the stage. From Aretha Franklin's "Call Me," to Sinatra's "You Make Me Feel So Young," to Blood, Sweat & Tears's "You've Made Me So Very Happy," to what she said was one of her favorites, Roberta Flack's "The First Time Ever I Saw Your Face," her choice of music was soulful, passionate, and romantic. Susie found that the audience responded to and returned her warmth.1 The same pulse and flow she got from connecting with people individually came through in a wave when she sang to a group in an intimate space. This was her special gift, transmuted and magnified. She wanted to become a cabaret singer.

A few weeks later, however, Susie was pulled away from rehearsals for her next performance to go to Carmel, California, to help her sister-in-law Bertie, whose youngest daughter, Sally, was dying of a brain tumor. Bertie's marriage to Charlie Snorf was crumbling at the same time.

When Sally died, Bertie discovered that the tragedy had unlocked her frozen emotions. "Sally was a wonderful person, amazing and intuitive and so strangely insightful about people and feelings for a seven-year-old," Bertie says. "Once she told me, Mom, you and Dad are lonely together. I think when someone dies who's very close to you, they will you something. When Sally died, what she willed to me was that I couldn't deny my feelings to myself anymore. It was like a copper wire went straight into my heart, and I couldn't cover up my feelings from then on."

Bertie had always had a special relationship with Susie, but when her heart opened after Sally died, suddenly they connected on a different level. "Susie was somebody I loved who was so important to me," says Bertie. "She was the only person I could talk to about my feelings when there was nobody else in my family whom I could do that with."

Her brother, however, reacted differently to his niece's death. He called some friends who had visited the Buffetts in Laguna and told them about Sally. "We were so shocked because we'd all been together a week or two before," says Mary Holland. "I asked him what happened, and he said, 'I can't talk anymore,' and got off the phone."

Warren at the time had many distractions to assist him in evading his feelings. He was finishing up the SEC investigation. He was so fascinated with Kay Graham that he literally could not get enough of her. When Warren got obsessed with something-especially someone new-he could not stop thinking about it or them; this came across to a new person as a wholehearted, flattering, and even overwhelming attentiveness. When business arose, however, he snapped back to it in a split second with all the fierce intensity his steely mind could muster. As Munger put it, Buffett "never let his minor obsessions interfere with his major obsession."2 Katharine Graham, however, was no minor obsession. Some time earlier, he had decided to see what sparks would fly when she brushed up against Munger, the greatest smart-ass he knew. "Kay was the kind, if I gave topics of things for her to do, she was very dutiful. If I told her to read some terribly complicated financial statements, she was going to follow my instructions, no matter what. I told her, 'You have to meet Charlie.' I was laying it on thick. Finally, she was out in Los Angeles and went to meet Charlie.

"So she sat down in that scrubby office of Charlie's, and immediately she pulls out a yellow pad so she can take notes on what he's saying. Charlie just loved it-the idea that everything he was saying was so important that the most powerful woman in the world had to be taking it down as fast as he could talk."

Munger could not resist this encouragement to show off. He had been corresponding with Graham, and wrote to her, "You are taking me back thirty years or more and making me behave like Tom Sawyer with Becky Thatcher, and I figure that Warren is silly enough for both of us."3 But however giddily she might be making Warren behave, he was also taking Kay to business school in a serious way. "Kay had had me trying to explain accounting to her on the side. I'd bring these annual reports to Washington. And she'd say, 'Oh, Warren, lessons.' There I was, teaching again." He considered her son Don "unbelievably smart," with "as close to a photographic memory as anyone I've ever run into." As a sign of reassurance to the family, Warren had signed the voting proxy on his shares over to Don. He now stayed at Kay's house when he came to Washington for monthly board meetings. She didn't approve of the way he dressed, but "I told her, 'I'll dress as well as Don dresses,'" Buffett says. "He and I had a sort of united front."

Buffett felt that Kay was "very, very smart, and in many ways wise, as long as you didn't go into those areas where the wounds were. But she understood people well." As they grew more intimate, he felt he could say something to her about the way she presented herself to her board. He knew she was less needy than she herself realized. One day he took her aside and said, "You can't plead for help anymore from the board. It's just not the position you want to be in." And so, he says, she quit.

The business and personal ties between the Grahams and Buffett had become close enough that Warren invited Katharine and Don to join the Graham Group at their 1975 meeting, at Hilton Head. Don made an immediate impression with his unpretentious manner, while raising its already high average IQ. Many people quickly saw beneath Kay's brittle, patrician veneer to the vulnerability and humility that had endeared her to Warren. Thus she fit easily with most of the group despite her queenly presence, worldliness, and connections. She made a sincere effort to get along with everyone-although her deep belief that men were far superior to women wasn't lost on the women at the meeting. The beautifully dressed, perfectly coiffed Graham, an icon among them, would slide casually into a chair amid the men with a cocktail in her hand; somebody would utter a political opinion, and she would respond "Henry thinks thus-and-so"-speaking of Kissinger. It was impossible not to be impressed.

Susie Buffett sang for the group for the first time at Hilton Head. Bill Ruane brought a chart showing the price of gold, which for five years had surged past Berkshire Hathaway's. He asked, the others thought jokingly, whether he should be buying metal. It would turn out that he had, in fact, been buying gold coins, and made a nice bit of money on it.4 Henry Brandt pulled Buffett into a separate room and asked him to promise that Berkshire stock wouldn't drop below $40. By October 1975, the stock had been cut in half after trading at $93 just two years before. "Look, I love you," Buffett recalls saying, "but I can't promise you that." "The world is ending," said Brandt, or words to that effect. "I've got every dollar I own in this stock."

The world continued to end. Even though the rest of the stock market was recovering, Berkshire was not. Brandt panicked and called Buffett, who offered him $40 a share. Then Brandt called Walter Schloss and said, "Warren will pay me forty dollars and I want fifty. What should I do?"

Schloss was the last champion of cigar butts. At the Graham Group meetings, the others razzed him about his "buggy-whip" portfolio of bankrupt steel companies and destitute auto-parts makers. "So what," said Schloss. "I don't like stress and I sleep well at night." He filled out the simple checklists, applying Graham's philosophy in its purest form. He went home from his desk in the closet at Tweedy, Browne at five o'clock every evening, and his results were phenomenal.

Now Schloss was dismayed to hear Brandt telling himself he was better off without Berkshire stock in a way that contravened this whole cigar-butt philosophy. Schloss worked on him for two hours, saying, You've got the smartest guy in the world managing your money, in effect, and Warren doesn't charge you anything, you're making a big mistake to sell. "I thought I convinced him," says Schloss. But the U.S. economy by then was in so much trouble that New York City was almost bankrupt; the country was in a mood of such profound pessimism that it affected people's judgment. "On Monday he called his broker," says Schloss, and began selling-his wife's shares, not his own-until half their shares were gone.5 Immediately afterward, President Ford refused a bailout of the New York City economy; the New York Daily News captured the feeling of the times in a huge headline: "Ford to City: Drop Dead."6 The partners who had been given Berkshire stock in 1970 when it was trading around $40 seemed no better off five years later. "To anybody who held our stock," says Munger, "it looked like not much was happening favorably for a long, long time. And that was not the way our partners, by and large, had previously experienced things. The paper record looked terrible, yet the future, what you might call the intrinsic record, the real business momentum, was gaining all the while."

Buffett's own net worth, based on where the stock was trading, had likewise been sliced to the level of when he closed the partnership. Yet despite this apparent destruction of wealth-which would have frightened almost anyone else-his pulse never seemed to flutter. He just had the companies he controlled keep buying, and buying, and buying. In 1974, before the SEC investigation began, Berkshire owned twenty-six percent of Blue Chip. Although he put the brakes on at Berkshire during the 1975 Omni aviation affair, through Diversified, he bought Berkshire stock. By 1976, he was buying both Berkshire and Blue Chip through Diversified. When all was said and done, Berkshire would own more than forty-one percent of Blue Chip-so much that he and Susie owned, personally and through Berkshire Hathaway, thirty-seven percent of the stock all by themselves.

And as long as Berkshire was cheap in 1976, he thought of another way to capitalize on the situation, getting his mother, "who cared nothing about money," to sell her 5,272 shares of Berkshire to Doris and Bertie. For $5,440 plus a $100,000 note, they each got 2,636 shares of Berkshire-paying the equivalent of $2 a share in cash.7 Buffett, who viewed debt as almost sinful, thought Berkshire was so cheap at $40 a share that he was willing to have his sisters borrow an extraordinary ninety-five percent of the purchase price to buy it. At the rate he obviously thought he could compound the stock's value, buying on these terms would make his sisters rich.8 And it would also avoid an enormous estate tax bill.

"It's what my mother wanted to do, but it was the perfect time. That was probably the greatest move of all time. It will never happen again. That was a once-in-a-lifetime situation."

Valuable properties were being sold everywhere for a pittance. Around the same time, Tom Murphy came to Warren with the chance to buy a television station. Buffett realized it would be a terrific deal but that he couldn't buy it because it would conflict with the Washington Post Company, which also owned television stations. Since he sat on the Post board, it would put the Post over the limit the FCC allowed.9 "What am I involved with that I don't own?" he asked himself. He actually had to think about it to find something. Then he remembered that he didn't own Grinnell College. The first station they looked at had already sold, but at Buffett's recommendation, Grinnell bought a Dayton, Ohio, station for $13 million, putting down only $2 million. Sandy Gottesman arranged debt financing for the rest. The broker who sold it to Grinnell called it the best deal he had seen in the past twenty years.10 There were some good reasons, however, why stocks were cheap and cities like New York were close to bankruptcy. Along with rampant inflation, out-of-control labor costs and unstable labor relations were strangling the economy. Newspapers were among the most severely affected businesses. Right after the Hilton Head meeting, on October 1, 1975, at four a.m., the Washington Post's union contracts expired. Some of the Post's pressmen disabled the fire extinguishers, drained the oil, stripped the gears, and ripped electrical wiring and operating machinery out of the presses. They slashed the rolls of newsprint, set fires, and left one pressroom foreman bleeding from a gaping head wound.11 Graham arrived within an hour to a building glaring under the lights of television cameras and engulfed with fire engines, police, and hundreds of picketers.

The Post's relations with some of its unions "were almost literally on a drunk," recalls Don Graham.12 The militant workers viewed management as "incompetent," Kay was to later write, "yet able enough to deviously make them scapegoats for all of the problems that could more clearly be laid at management's own door."13 After years of surrendering to sabotage and work slowdowns, with nine union contracts set to expire at once, management negotiators armwrestled with labor in an atmosphere of tension and frustration.

Most of the unions other than the pressmen had stayed at work, especially the all-important Newspaper Guild of journalists. Using borrowed printing plants and helicopters to move key people past picket lines, the Post started getting out an attenuated paper after only one day's disruption. But as the strike ground on, Graham became paralyzed with fears that her paper was committing suicide. The managers and scab workers could produce only half the number of papers at a quarter of their normal size, and advertisers marched steadily over to the Post's archrival, the Evening Star. Within days, the Star was "so thick with advertising that we could hardly lift it."14 "They called me back because they were actually afraid Kay would fall apart. We crossed the picket line together. Kay was gutsy about that. But I saw her burst into tears when she picked up the Star. The Star was trying to out-Post the Post, copying their format, hiring their people. She'd wake up and call me in the middle of the night."

When she felt threatened, the woman that her editor Howard Simons called the "Bad Katharine" flew down the chimney.

"It wasn't really the Bad Kay. It was the Insecure Kay. If she got feeling insecure, she could get pretty shrill. Occasionally some incident would set her off, and then she would react like an animal. It was as if she felt nobody was on her side. She felt cornered. And nobody would quite know what to do. That's when they would call for me. Phil hadn't been on her side, and her mother hadn't been on her side. The executives at the company hadn't always been on her side. And so she always had this sense in the back of her mind that she was in an unfriendly environment and it could be triggered by some incident.

"But she always knew that I was on her side. That didn't mean I agreed with her on everything or ate everything she wanted me to eat. But I was on her side. And I always would be."

The Bad Katharine bore some similarities to Leila Buffett. And Warren took an obvious pride in being the one person who could win Kay's trust and keep the Bad Katharine at bay.

Buffett had developed so much discernment about people's motivations by now that he understood what was driving everyone around Graham and helped her gain perspective. It was a measure of what Susie had done for him that he could transmit some of her discernment to others. His antennae for people's reactions were sharp. He could help a person who felt threatened tell the difference between somebody who was actually dangerous and someone who was simply acting from fear.