"He always treated his mother perfectly," Buffett says. "It was the hardest thing in the world for her to accept that she was giving up control. And she was angry at the world for having to give up the thing that she loved most."

After two years, Mrs. B's Warehouse, while still small, was growing at such a rate that pound for pound, it was trouncing the Mart. Finally Louie intervened again. "Mother," he said, "you've got to sell this thing back to us. There's no sense competing one against the other."69 And so Rose called Buffett. She missed the Mart. She missed her family. She was lonely in her house, separated from her family. "I was wrong," she said; family meant more than pride and more than business. Mrs. B told Buffett that she wanted to come back. With a box of See's Candies under his arm and holding a huge bouquet of pink roses, Buffett went out to see her. He offered her $5 million simply for the use of her name and her lease.

He added one catch: This time she must sign a noncompete agreement, a contract designed so that she could never again compete with him. This was something he wished he'd done before. The absurdity of imposing a noncompete agreement on a ninety-nine-year-old woman was far from lost on him. Nevertheless, Buffett was realistic. The agreement was cunningly written to outlast Mrs. B. If she retired, or quit in a rage or for any other reason, no matter how old she was, for five years afterward she could not compete with Buffett and her relatives. Even if she lived to be 120 years old, Buffett was taking no chances. "I thought she might go on forever," he says. "I needed five years beyond forever with her."

Mrs. B still could not read or write English. Nevertheless, she signed the noncompete, which had been explained to her, with her characteristic mark. The truce made headlines. "And then I made sure she never got mad," Buffett says. He set about flattering his new employee unctuously to make her so happy that she would never, ever quit and start the clock running on her noncompete.

On April 7, 1993, the Greater Omaha Chamber of Commerce put her in the inaugural class of its business hall of fame, alongside Buffett, Peter Kiewit, and several others. Then Buffett, knees trembling slightly, got up on a stage at the Highland Club and sang in public, for the first time in his life, to Mrs. B on her hundredth birthday. He also donated a million dollars to a local theater she was renovating.

Nobody could believe it. Warren Buffett had given away a million dollars.

And through all of the hosannas, none of it ever went to Rose Blumkin's head. Not even the million dollars that Warren Buffett had given her. She felt she owed everything, all her good fortune, to this country for the opportunities it had given her. At family events, she insisted that her favorite song, "God Bless America," be played every time, sometimes even more than once.

"I don't think I deserve it," she said, over and over, of the accolades.70 But she did.

45.

Call the Tow Truck Omaha * 19821989 Once disembarked from the QE II, Susie Buffett listened to her husband's tales of Mrs. B or whatever his latest fixation might be from a distance, just like everybody else. She and Warren talked nearly every day on a special "hotline" installed in her apartment. When the phone rang, she jumped up instantly. "That's Warren!" she would say, and run away from whatever conversation she was having with a friend to answer it. He was still her number one obligation. But unless he needed her, her life was under her own control.

Susie had moved out of her minuscule apartment at Gramercy Tower and into another cubbyhole on the Washington Street cable-car line with a splendid view over the bay. She chose the building because Peter was living there with his wife, Mary, and her two daughters. He was still pursuing his musical career and had started renting out studio time to pay the bills, while writing music for anyone who would pay him-student films, the production company Video West. 1 In the past few years, Susie had lost both of her parents. Doc Thompson had died in July 1981; Dorothy Thompson followed only thirteen months later. Susie was so close to her parents that their deaths left a wrenching hole in her life. Afterward, her hyperkinetic tendencies did not abate; if anything, they increased. Warren had stopped taking her for granted, and his desire to please the woman he now idolized more than ever found expression partly through the money he gave her. In her younger days, Susie's idea of a shopping spree had been buying a basketful of greeting cards.2 That had gradually expanded to an annual attack on Bergdorf's shoe department. Warren's tightfistedness began to let up in light of the unspoken but inexorable reality that he now controlled the money by Susie's grace and favor. At any time she could take it back and use the money herself. Torn between two fur coats, she wanted to know, "Why do I have to choose?" The answer was, she didn't.

But mostly the looser purse strings fueled Susie's penchant for generosity to a ragtag collection of colorful friends that grew and grew. Nobody ever left the beguiling Buffetts. Even Peter's college girlfriend had gone to work for Susie as a secretary several years earlier, despite Susie having been the one to break off the relationship before it became an engagement after Peter started having second thoughts. The rising tide of old friends, family dependents, and her new San Franciscan entourage would have overwhelmed almost anyone, but Susie Buffett was not just anyone. Unleashed from the confines of Omaha, with buckets of money at her disposal, she sprang to life as if powered by magic, like the Sorcerer's Apprentice's broom. How much do you need for Christmas? Warren said. Oh, seventy-five thousand would do it, Susie replied.3 He wrote the check.

Her special cause was artists, creative types, anyone who had potential or whose talents she felt were not being recognized. She became the sponsor of artist Edward Mordak, who painted the kind of brightly colored contemporary canvases she preferred and wove brilliant feathery wall hangings. But of all the people she aided, her nephew Billy Rogers was her greatest challenge. A brilliant jazz guitarist, Rogers had played with different groups, backing up B. B. King and achieving his greatest success performing as one of the Crusaders. He was married, with a son, and living in Los Angeles. But he had bounced around the West Coast for several years, never staying clean for long before relapsing. Susie remained an optimist and refused to give up on him. No matter how squalid his life when he acted out his addiction, she always treated him like another son.

By 1984, when AIDS had claimed over two thousand American victims and infected two thousand more, Susie had found her next great cause among the gay men of San Francisco. With the disease's transmission poorly understood and badly communicated, gay-bashing turned to hysteria,4 AIDS was referred to as the "gay cancer" people said that God must be punishing gays for their sexual deviancy.5 Already a mother figure to many men whose families had rejected them, Susie now once again dared to cross a social line, as a rich married woman who acted as a refuge for gay men during the early years of the AIDS crisis.6 Susie's own life in San Francisco was something of a high-wire act, requiring a sure sense of balance. She had remained Mrs. Warren Buffett publicly for six years now while privately teetering on the fence of divorce and remarriage. Some who were aware of her situation thought Susie chose to stay in this limbo as a way to please everyone else and avoid having to figure out what she herself wanted. Susie, they thought, was a woman who could never speak her own truth. Yet her life history suggests otherwise: that she preferred never to give all of herself to anyone, that she would rather divide her attention among more than one relationship. Susie-who had reason to be confident in her ability to manage people-on occasion could be overconfident. As the circle of those who knew Susie's secrets grew, it became harder for her to control what the two main men in her life knew themselves about the state of their relationships with her.

Susie and her former tennis coach spent part of 1983 and early 1984 traveling in Europe, where she made new friends, but also ran into people she knew from Omaha. Suddenly, her two lives had collided on the Continent. In March 1984, she came to Omaha for Leila's eightieth birthday party; during her visit she admitted to Warren for the first time that part of the reason she had moved to San Francisco involved another man. Somehow, however, Warren wound up with the impression that this relationship was in the past, and that it involved someone she had met after she left Omaha.7 Even while confessing, therefore, Susie kept her secrets. Yet she had finally committed herself to one course. By telling Warren, she had chosen his side of the fence. She would never leave him. They would stay married.

And Warren did not kill himself when he found out-as if that had ever been likely. But he did lose what appeared to be ten pounds almost overnight. Among the several shocks he had to absorb, he now knew that Susie had been spending some of the money he had dispensed to her with such a liberal hand in ways he would never have approved-had he known. His fondness for the Laguna house, never strong to begin with, also diminished noticeably.

At Leila's birthday party, he looked thin, but behaved as he always did with the family gathered around. At home, there was no change in his relationship with Astrid, who knew nothing of what had transpired. At Berkshire headquarters, he sealed himself inside his office, protected by Gladys, and immersed himself in work. He never told anyone what he felt about the end of the beautiful illusion that had been his marriage. Instead, the bathtub memory went to work.

The dream of sustaining some remnant of Berkshire Hathaway was also dying, even though the ancient spinning frames still puffed and wheezed. Looms that looked like they were made from salvaged scrap metal, antique sewing machines, and old locomotive wheels creaked wearily in the weaving room. Only four hundred workers remained. Most were of Portuguese descent, with specialized skills, many in their fifties or older, some speaking limited English, some deaf from the roar of the machines. Buffett could not squeeze another ounce of rayon out of the equipment without buying new spinning frames and looms. That was the end; in 1985 he pulled the plug on Berkshire's life support.8 The equipment would have cost as much as $50 million to replace. Put to the auction block, it sold for $163,122.9 The workers asked for severance above their contract guarantee and got a couple of months' extra pay. They wanted to see Buffett to discuss it with him. He said no. They thought he was heartless. Probably, he couldn't face them.

"Through no fault of their own, they were in a position of being a horse when the tractor arrived. The free market did them in. If you're fifty-five and you speak Portuguese, and you've been working on a loom for thirty years and your hearing is shot, you've had it. And there wasn't any answer. When you talk about retraining people-it's not like they'll all go become computer technicians by taking junior-college courses or something like that.

"But you've also got to deal with the people that are displaced. The free market does all kinds of good things in this country, but we need a safety net. Society is getting the benefits, and it should pick up the tab." Warren, of course, was not going to pick up the tab because society lacked a proper safety net. Whatever pension the workers were entitled to under their terms of employment, that was exactly what they would get. "The market isn't perfect. You can't rely on the market to give every single person a decent living."

By the time he shut it down, the textile business had become a flyspeck on the holding company that bore the Berkshire Hathaway name. Buffett's plan was that insurance would drive that Berkshire Hathaway-the one that swallowed up whole businesses like the Nebraska Furniture Mart. During the 1970s, he had cobbled together a diverse group of insurance companies and loaded them onto the back of National Indemnity to give it an extra kick. It was a brilliant strategy, but for a number of years, they had mostly been going wrong.

First, Jet Jack Ringwalt had retired. Then, the "Omni affair," when National Indemnity was swindled by a crooked agent, had threatened to explode into losses that could have cost the company $10 million or more. Although the final tab had settled into a couple of miserable millions, this was only the first of a series of problems with the insurance companies. Buffett had bought a small home-and auto-insurance company in the early 1970s that promptly skidded into a ditch, until a new manager towed it out. That was to be the pattern with all the rest of Buffett's insurance investments-straight into the ditch, then call the tow truck. It would take a mighty winch and a heavy engine to dig some of them out of the muck. Berkshire had gotten involved in California workers' compensation insurance-coverage that pays for lost wages and health benefits when people are injured on the job. By 1977, one of its two workers' comp companies was in a full-blown "disaster," with its manager taking kickbacks from brokers.10 Buffett's protege Dan Grossman, sent to L.A. to save it, quickly realized that he did not understand insurance, a complex business that is rougher than it sounds. (Verne McKenzie, for example, had once led a trip to personally repossess an agent's house and car.11) Turning your controller into a repo man was not the typical CEO's management style, but in Buffett's world, after all, a smart person could do anything. Faced with a wrecked company to salvage, Grossman's solution, therefore, was to call the tow truck and hire an experienced manager, Frank DeNardo, who began to straighten things out. Buffett larded praise on DeNardo in Berkshire's annual report.

Buffett had also started a reinsurer-a company that insures other insurers-as a sort of experiment. He hired George Young, a gentle, professorial man, to run it. Young seemed to know what he was doing, and money came in the door, but too many losses flowed back out. Buffett tried to work with Young to solve the problem, then Hail-Maryed Grossman to New York on a rescue mission. It was "kind of vague," says Grossman. "He said, go talk to Lloyd's of London, go find some reinsurance deals that you can do." Grossman figured out fast that reinsurance was a business for specialists. Given no instructions, he camped out at Ruane, Cunniff and started to learn investing.

Another of Buffett's insurance ventures was the creation of the Homestate Companies-a batch of little insurers scattered among a number of different states. The idea here was that somebody wearing the title of president would make customers feel better served than the same person as branch manager of a big national insurance company. In 1978, Buffett wrote that these companies had done a "disappointing" job. The customers liked doing business with a president, but the big national companies had certain other advantages, such as experience. The Homestate Companies needed new management. Buffett had no plans to solve this problem himself. Nor did his standard management technique of taking out all the cash and raising prices release a flood of profits in insurance (although it was a good starting point). His friend Tom Murphy liked to tell him that he "delegated to the point of abdication."12 Now he put Verne McKenzie in charge of one of these companies, until McKenzie, recognizing that he did not understand insurance either, threw up his hands and backed out.13 Meanwhile Frank DeNardo, at age thirty-seven, had died tragically from a heart attack. Now the workers' compensation business in California was rudderless again. Buffett snatched Grossman back from New York to run it.

Grossman found himself a company president at age twenty-six, in a business where fraud prevention is more important than sales. He faced customers with decades of experience cheating insurers. His calls for help only splattered against Buffett's Teflon pleasantries, adding to the already considerable mess. Grossman was one of many who learned that it was his job to figure it out. Bright and hardworking, he felt "totally unqualified" to run an insurer at his age and level of experience, and explained that he was in over his head. Buffett said he had confidence in him and was sure that he could rise to the occasion. Instead, the stress overwhelmed him, and his marriage fell apart. Finally, he told Buffett he simply couldn't handle it, moved to the San Francisco Bay Area, and began to manage investments on his own.14 Buffett, who hated to let anyone go, urged him to remain in the Buffett Group. Grossman was well liked, and various members of the group called to try to dissuade him from leaving. But he felt he was not strong enough to maintain his autonomy within the entanglements that bound people to the Buffetts-Susie with her crowd of dependent worshippers, Warren with his network of supportive protectors. Knowing what he was giving up, he cut everyone off. "He divorced the Buffetts," said one former friend, who understood why but thought it was too bad.

Now headquarters had one fewer person to support the growing insurance empire. Verne McKenzie was so overworked figuring out how to slide the Furniture Mart into Berkshire's numbers without showing Mrs. B's financial underwear that he rarely saw Buffett. During Grossman's peripatetics, Buffett had installed Mike Goldberg, a former McKinsey consultant who had once worked with Rickershauser at the Pacific Coast Stock Exchange, in Grossman's onetime office. A wiry Brooklynite of sardonic intensity and the subtlest humor, Goldberg turned out to have the so-called insurance gene, which is made up of one part knack for handicapping mixed with two parts dark skepticism about human nature. Thus he was able to teach himself the business-just as well, since it had been out of character for Buffett to spend time on one protege, let alone two.

With Goldberg's arrival, the polite, restrained Midwestern way of doing things at headquarters changed abruptly. Managers that Goldberg decided were only ninety percent of grade were swiftly sent packing. As the packing cases flew out the doors of the failing Homestate Companies, Goldberg gained a fearsome reputation. He brought in new people for workers' compensation and reinsurance. Some survived, some wearied of the high-amp atmosphere and left, and others didn't make the cut.

Goldberg's method was to call his managers and talk to them at length every day, quizzing them mercilessly to understand their attitudes and to reinforce how they should think about the business. The value of Goldberg's hands-on approach in an atmosphere of chaos was hard to overstate. One former manager referred to it as working in a "Socratic wind tunnel." People learned a lot from Goldberg if they could withstand the stress. He was the type, an ex-employee said, who "yelled when hailing a cab."

Throughout the early 1980s, Goldberg worked against the tide to right the ship. Unlike the disappointing Hochschild-Kohn or the pathetic Berkshire Hathaway-businesses that Buffett simply should not have bought-for the first time, perfectly decent businesses were unaccountably floundering on Buffett's watch. He had confidence that Goldberg would do what was necessary. However, the pleasant but unskeptical George Young, who ran the reinsurance division, had been taken by unscrupulous brokers, a problem endemic to the industry.15 Buffett by now had a clear-cut pattern: He rationalized to avoid the confrontation of firing losing managers. He gave criticism to his managers indirectly, often by withholding, sometimes resources, but especially by withholding praise. As the number of things he owned expanded, he used that technique ever more frequently. Trying to parse his shareholder letters for news about the insurance companies, one had to be Sherlock Holmes attending to the curious incident of the dog in the night-time-the dog that didn't bark.16 Having lavished individual insurance managers with praise in the 1970s, Buffett gradually ceased to cite by name any of the insurers or their managers, except the superbly performing GEICO and National Indemnity.

Buffett did not stop writing about the insurance industry, however. In fact, in the 1984 letter he wrote about it more than ever. But he lumped all of Berkshire's insurance companies together and took the blame for their poor performance himself, without naming a single company or a single manager who had been responsible for the hemorrhage of losses. He went on like this for an excruciating seven pages, citing the "walking dead" competition and the losses coming back to haunt him like bill collections for the man who was "buried in a rented suit." Although it was appropriate for him, as CEO, to feel accountable, he seemed almost to be trying to forestall criticism through self-flagellation.

And he was writing these things even as he knew that, underlying the terrible numbers, substantial improvements were already taking place. By the next year, the insurers began coming together into the powerful engine that Buffett had envisioned. They started to produce the cash flows that would be the raw material to fuel the rest of his career.

By 1985 the unique business model that Buffett had designed began rising to its potential. No other business resembled it, and this structure would enable the dramatic compounding effect that propelled the shareholders' wealth.

Then there came the moment when Goldberg found the capstone to the structure. Afterward, the numbers would gush blacker than an oil well.

One day, says Buffett, "I was down here on a Saturday, and Mike Goldberg walked in with Ajit."

Ajit Jain, born in 1951, had an engineering degree from the prestigious Indian Institute of Technology in Kharagpur and had worked for IBM in India for three years before getting his business degree from Harvard. Ajit was skeptical and hard-nosed like Buffett and Munger. Nobody would ever put one over on Ajit. Buffett saw himself in Ajit, who quickly rose in his esteem to share Mrs. B's pinnacle. "He had no background in insurance. I just liked the guy. I would love to glue myself to Ajit. You can argue that Ajit was when we discovered the electric light. It was huge. It was huge compared to anything we'd ever done at Berkshire."

Buffett claimed that he "added nothing" to the quality of Ajit's decisions. But he was far from a passive participant in those phone conversations, and if there was any job at Berkshire Hathaway he would have liked to do himself, it was Jain's. He loved the handicapping aspect of the deals, the tough negotiating in which temperament mattered and huge sums of money were won or lost based on pure intellect and will. This supremely rational business in which psychology gave the right person an edge drew together all of Buffett's skills. Buffetting by proxy through Ajit was as close to the old "under-the-counter" market way of trading as he could get these days, and he loved doing it.

With Buffett glued to Ajit, and the chaos sorted out, Goldberg's job was finished. He soon moved over to start a credit and real estate business for Berkshire.

Ajit did not seem to need much sleep; when he got up around five or six a.m., he apparently asked himself, "Who's awake? Who can I call?" His colleagues learned to be prepared for lengthy predawn talks about reinsurance deals on Saturdays and Sundays. He and Buffett followed a routine of nightly ten o'clock phone calls, which Ajit maintained in every time zone throughout a ceaseless routine of globe-trotting.

Ajit had arrived at an opportune time. Insurance prices were peaking. He took an ad in Business Insurance magazine: "We are looking for more-more casualty risks where the premium exceeds one million." The ad combined the showmanship and sharp thinking that were Buffett hallmarks. "We didn't have a reputation, we didn't have the distribution system," says Buffett. But business came pouring in the door after that ad, and Ajit did deals, deals, deals.17

46.

Rubicon Omaha * 19821987 The 1980s would be an era of deals, deals, deals-most financed with debt, debt, debt. The Dow hadn't budged in seventeen years.1 Grinding inflation had decimated corporate profits, yet companies had eiderdowned their payrolls so that every white-collar worker but the lowliest rested on a comfy cushion stuffed with flunkies. Executives treated themselves and their employees to golf courses and hunting lodges. They dribbled away much of their earnings in sloppy operations, loose engineering, and unthinking bureaucracy.2 By the early 1980s, stocks were on sale like polyester suits. Then, under Federal Reserve Chairman Paul Volcker, interest rates, recently an astronomical fifteen percent, started to fall as inflation came under control. Astute money men noticed the bloated state of American business. With debt now cheap, would-be buyers of a company could use the company's own assets as collateral for a lender to finance its purchase-like getting a hundred percent mortgage on a house. The buyer didn't have to put up any cash; it cost no more to buy a huge company than to set up a lemonade stand.3 A rush of financiers returned to Wall Street, intent on slaughtering the fatted calves using the carving knife of borrowed money. The merger boom had begun.

"We were taking earnings or value that should've gone to the shareholders and bringing it unto ourselves," said Jerome Kohlberg, one of the first buyout financiers. "Corporate America was responsible for a lot of this. You have to ask the question, Why didn't they do it [cost-cutting] themselves?"4 In 1984, the burner under managements turned up another notch when "junk bonds" became respectable. More politely called "fallen angels," these were the bonds of companies like the Penn Central Railroad that were climbing out of the bankruptcy dustbin or teetering on its edge.5 Only occasionally did a company issue junk bonds on purpose, paying a high interest rate because it was considered a dicey credit risk. Junk bonds were sort of shady, a little desperate.

The people who worked in the junk-bond departments on Wall Street were junk peddlers or ragpickers-the few bankers who scouted for hag-ridden executives willing to issue junk bonds, and "distressed debt" analysts who spent their careers grading papers in the gloomy school of hard knocks, looking over picked-clean balance sheets and scuttlebutting bankruptcy lawyers, angry investors, and desperate managements.

Everything changed when Michael Milken, chief junk peddler of the upstart investment bank Drexel Burnham Lambert, rose to become the most influential man on Wall Street through a simple proposition: that while individual "fallen angel" junk bonds were risky, buying a bushel of them was not, because on average, the higher interest rate more than compensated for the risk. In other words, junk bonds in the aggregate had a margin of safety-like cigar butts.

Soon, money managers no longer looked as though they were playing roulette with investors' money by putting high-paying junk bonds in their portfolios. Indeed, it quickly became more respectable to issue new junk bonds-quite a different thing. Another short hop and takeovers of strong, well-financed companies could be financed with junk, turning formerly sound balance sheets into debt-riddled Swiss cheese. Corporate raiders armed with junk bonds, intent on "hostile takeovers" whose goal was to pluck a company clean, suddenly stalked companies that had been waddling along complacently. Their targets lunged toward any buyer who might conceivably be more friendly; in the end the target company was usually sold to someone or another and financially gutted. The bankers' fees became so staggering that, instead of waiting for deals to present themselves, the bankers went a-huntin' on their own, flipping through the ranks of the S&P 1000 the way Buffett had once used his Moody's Manuals to find cigar-butt stocks. This orgy of mergers that often took place with the consent of only one party riveted the public; the clashes of titanic egos filled the daily papers. Michael Milken's annual junk-bond conference, the Predators' Ball,6 lent its name to the entire era.

Buffett scorned the way these deals transferred riches from shareholders to managers and corporate raiders, helped by a long, long line of toll-taking bankers, brokers, and lawyers.7 "We don't do hostile takeovers," he said. The deals of the 1980s repelled him above all because they were loaded with debt. To those reared during the Depression, debt was something to be used only with a careful eye for the worst-case scenario. In the 1980s, however, debt became mere "leverage," a way of boosting profits using borrowed money. "Leverage" arrived at the same time that the U.S. government began running large deficits courtesy of "Reaganomics"-the "supply-side" idea that cutting taxes would ultimately increase tax revenues by stoking the economy. Fierce debates raged among economists over whether tax cuts could actually pay for themselves and, if so, by how much. The economy was heating up at the time from consumer spending, also fueled by debt; John and Jane Q. Public had gradually been accustoming themselves to buying everything with credit cards, building up a balance that they would never pay off until from their plastic death did them part. The Depression-era culture of hoarding and saving had turned turtle, into a culture of buy now, pay later.

Buffett still paid cash and chose the role of the white knight in takeovers. Early one morning in February 1985, while he was in Washington, Tom Murphy called and woke him to say he had just bought the ABC television network.

"You've got to come and tell me how I'm going to pay for it," Murphy said.8 ABC was caught in the crosshairs of the corporate raiders. The company had hung a lure out to see whether Murphy would save it by doing a friendly deal-and Murphy bit.9 "Think about how it will change your life," Buffett said. Murphy was a devout Catholic who never wasted money on anything-and this was Hollywood. Buffett may well have been thinking about the incongruity between the modest, retiring Murphy and the glamorous world of television, as Murphy believed10-but Buffett's next move signaled that he wouldn't mind such a change himself. Or so it seemed, since he recommended to Murphy that Cap Cities/ABC recruit a "gorilla" investor who could protect it if its turn came to be gobbled up by the corporate raiders. To no one's surprise, Murphy suggested that this investor should be Buffett himself. Likewise, Buffett had no trouble quickly agreeing to spend $517 million of Berkshire's money for fifteen percent of Cap Cities.11 By saving Cap Cities from prospective raiders, Buffett had now become a player in the biggest media deal in history; Berkshire's share alone was six times the size of the Nebraska Furniture Mart. At a total of $3.5 billion, he and Murphy had also paid a fancy price for ABC,12 which was struggling and had slipped to third place in the ratings. "The network business is no lollapalooza," Buffett would later say.13 Yet he had watched the awesome ascendance of television from its infancy and knew well both its power to shape public opinion and its business potential. The combined assets were formidable: Together ABC and Cap Cities would own nearly a hundred publications, twenty-four radio stations, twelve major TV stations, and more than fifty cable systems.14 Buffett wanted Cap Cities/ABC so much that he was willing to leave the board of the Washington Post, as was required by FCC regulations because of the potential conflict between the two companies' television interests.15 He did so, however, knowing that Kay and Don Graham would need only permission, not encouragement, to call on him informally for advice. He went to bed that night a happy man.

The year 1985 would be a humdinger. During the same week that Buffett's investing yielded Berkshire $332 million from a single stock-General Foods, when it was taken over by Philip Morris-Forbes caught on to how rich he was and added him to its list of America's 400 richest people. At the time, it took $150 million to make that list. But Buffett, at age fifty-five, was now a billionaire, one of only fourteen ranked by Forbes. His favorite childhood book could be retitled One Thousand Ways to Make a Million Dollars. The cascading, compounding slew of pennies from weighing machines and other ventures had never, in his boyhood dreams, looked like this.

Berkshire Hathaway, its first few shares originally bought for $7.50, was now trading at more than $2,000 a share. But Buffett refused to "split"*29 the stock into smaller pieces, citing the way brokerage fees would multiply needlessly along with the number of shares. While this was certainly true, there was also no denying that this policy made Berkshire more like a partnership-or even a club, and the high stock price drew attention to Berkshire like nothing else.

His fame ascended with Berkshire's stock price. Now when he entered a room of investors, an energy filled the air as all attention gravitated toward him. The purchase of ABC by Cap Cities did indeed begin to change his life, adding a Hollywood sheen to the elephant-bumping of Kay Graham. Meeting soap opera impresario Agnes Nixon at a dinner with Murphy, he got invited to do a gig on the show Loving. A lot of CEOs would have feigned a mortal illness before doing something so undignified, but Buffett loved doing his cameo on Loving so much that he showed off the paycheck from his show-business debut. It was all of a piece with the Buffett who loved to play dress-up and would soon be appearing costumed as Elvis at his friends' parties. This same Buffett reveled in putting on black tie to take Susie Jr. to a state dinner at the Reagan White House, where Sylvester Stallone and fashion designer Donna Karan were seated at the same table. Jetting off to the Academy Awards with Astrid-who made a rare public appearance, proudly wearing a thrift-shop gown-he dined with Dolly Parton. But Buffett, who found Parton likable as well as hugely attractive, failed to make the lasting impression on her that he managed with most other women.

At the Kay Parties, where Graham always seated him between the two most important or interesting women, he did better. Still, he had never grown to love small talk, and found it challenging-or just plain tiresome.

"The truth is, you're sitting next to two people that you've never seen before and you're never going to see again. It's kind of strained, no matter what. Whether it was Babe Paley, or Marella Agnelli, or Princess Di, Kay always saw in these women what she aspired to be. I didn't have the faintest idea what to talk about. Princess Di was not as easy to talk to as Dolly Parton. What do you say to Princess Di-'How's Chuck? Anything new at the castle?'"

Still, by 1987 a billionaire commanded a certain cool respect; Buffett had become something of an elephant himself, no longer so dependent on Graham for invitations to bump. And Graham no longer needed him so much as a regular escort, for their mutual obsession had cooled. Now her attraction to powerful men had heated up her longtime friendship with the recently widowed, paper-dry, encyclopedically brilliant, alpha-squared Robert McNamara, who had been defense secretary during the Kennedy and Johnson administrations. McNamara was the onetime architect of the military's "war of attrition" strategy; many people considered Vietnam "McNamara's War." It was also he who had ordered the study of U.S. government involvement in Southeast Asia known as the Pentagon Papers-the very same Pentagon Papers that had catapulted Graham and her newspaper into journalism textbooks for their courageous reporting. Before long, McNamara became Graham's "Husband Number Three," as one of her board members referred to him. True to form, she put him on the Post board. From the beginning, McNamara and Buffett "were not the best of friends," though over time, their relationship resolved into a sort of mutually respectful truce.

Buffett could handle people like McNamara through diplomacy; a greater-and unanticipated-problem was the physical danger he found himself in because of his fame. Two men arrived at Kiewit Plaza, one waving a chrome-plated replica of a .45, intending to kidnap Buffett and hold him for $100,000 ransom, which the kidnapper later explained would be a "loan" to buy a ranch.16 The security guards and police handled it, and Buffett, unharmed, started jokingly referring to the man as "Billy Bob" to Gladys. He would not hear of hiring a bodyguard, for that would restrict his cherished privacy and freedom, but he did have a security camera installed, along with a three-hundred-pound security door to shield the office.17 Strangers called often now, insistent, wanting to speak with him. They'd only take a minute, nobody else could help them, they knew he'd be interested in what they had to say. Gladys told them in crisp tones to write a letter spelling out their requests.18 Buffett started getting letters asking for Berkshire stock-in exchange for advice to take hawthorn herbal remedies-or requesting funding to create an unspecified new type of ice cream. People wrote to say: Mr. Buffett, I am tired of living an average life. I have a burning desire to be rich. You have money, give me some.19 And a lot of letters said, I've gotten in over my head with credit cards or gambling debt.20 Buffett the collector kept so many of the letters that they began to fill up his files. Many of them confirmed the way he thought of himself, as a role model, as a teacher. Occasionally, something touched him and struck him as real. If he thought it would do some good and he had time, he wrote a debtor or gambler back with firm but kind insistence that they take responsibility for their problems. As if they were his kids, he suggested they buy time to bail themselves out by telling their creditors how broke they were and negotiating easier payment terms. He always added a little soliloquy about the perils of too much debt-especially debt from credit cards, the junk bonds of the personal-finance world.

His own kids had received little training about how to handle large sums of money, but one thing they had learned was the peril of debt-a fortunate lesson, because their father was almost as inflexible about requests for money from them as he was from strangers. He was still willing, however, to make financial deals with family members to manage their weight.

With her shoulder-length brown bob and heart-shaped face, the thirty-something Susie Jr. could pass for twenty-five, but she struggled with a few extra pounds. Her father made a deal in which, for losing a certain amount of weight, she could shop for clothes for a month, no limit. The only catch was that she had to pay him back if she regained the weight in a year. This deal was better than the proverbial win/win: It was also a no-risk deal in which Buffett won either way. He was out the money only if Susie Jr. did as he wanted and kept the weight off. She got the clothes. So Susie Jr. dieted, and when she got down to the goal weight, Big Susie mailed credit cards to her daughter with a note-"Have fun!"

Susie Jr. dared not spend a dime at first, frightened by the thought of asking her father to pay the bills. Bit by bit she worked herself up, until finally she shopped in the blind daze induced by having unlimited money for the first time in her life, tossing the receipts unread each day on the dining-room table, too afraid to add the total. "Oh, my God!" said her husband, Allen, each night as he returned home to his wife's mounting pile of sales slips. After thirty days, she added them up. She had spent $47,000.

"I thought he was going to die over how much it was," she says of her father. Susie Jr. went for reinforcement. Her mother was powerful, but she knew who had even more leverage with Warren when it came to money. While Kay Graham barely knew Peter and was an "unreachable" figure to Howie-he was always afraid he would sit in the wrong place or break something in her house-Susie Jr. had developed a warm, close relationship with her.21 She called Graham, who agreed to parachute in as backup if needed.

But since a deal was a deal, Buffett paid the bill without strong-arming. Then he immediately started polling his friends in shock, asking, "If your wife spent that much, what would you think?" The men all agreed it was outrageous, while their wives agreed that he should count his blessings because it could have been so much worse.22 The deal that Buffett made with Howie concerning the rent for Howie's farm was similarly linked with weight; the amount rose and fell with Howie's poundage. Warren thought his son should weigh 182.5 pounds. When Howie was over the limit, he had to pay twenty-six percent of the farm's gross receipts to his father. When he was under, he paid twenty-two percent. "It's the family version of Weight Watchers," Howie said. "I don't mind it, really. He's showing he's concerned about my health. But what I do mind is that, even at twenty-two percent, he's getting a bigger paycheck than almost anybody around."23 So Warren couldn't lose on this deal either. He got either more money or a thinner son.24 All of this was classic Buffett. As one of his friends put it, "He's the master of win/win...but he never does anything that isn't a win for him."

Peter and his family had moved from their apartment on Washington Street, in the building where his mother now lived, to a house on Scott Street. Peter got a gig writing music for some fifteen-second animated spots for a new cable channel, MTV. Success led to a business scoring commercials. Even though he was the least financially savvy of the Buffett kids, he had managed to tether his Berkshire stock to his musical talent and thus establish a career and a life that freed him from the money games. But by the mid-eighties, Peter pondered his father's homily: "Nobody goes to the supermarket to buy Howie Buffett's corn." Nobody ever hired an ad agency because of Peter Buffett's music either, he realized. If he wanted to pursue his own art, he needed to free himself from corporate lackeyship, whatever the cost. While he continued doing commercial work, he cut a demo record and signed with the New Age label Narada to do an album.25 His mother, who still dabbled in music, was often at Peter's studio; she liked to sing with Billy Rogers when he was in town from Los Angeles. Billy was trying to get his life in order; he wrote his uncle saying that he had "blown many chances" in life but was now ready for the next time that opportunity knocked.26 He asked Warren to help him with a down payment on a house that he wanted to buy as a new start for his family. The letter was carefully prepared and showed unusual financial sophistication, considering that it was written by a jazz guitarist who was a heroin addict. Big Susie would not dare give out such a large sum herself without Warren's permission, but her hand was clearly behind it.

In a lengthy but kindly worded reply, Buffett said no. He quoted Munger's saying that liquor, drugs, and debt are the main things that cause "smart fellows to go astray." Borrowing the down payment for a house, he said, provided no margin of safety.

"If you are going to drive 10,000-pound trucks across a bridge repeatedly, it is well to build one that can withstand 15,000-pound loads rather than one that can withstand 10,001 pounds.... It is a big mistake to have lots of financial obligations and no cash reserve.... Personally, I have never used more than twenty-five percent borrowed money in my life, including when I had only $10,000 and had ideas that made me wish I had $1,000,000." 27 Rogers soon sent another letter, chaotically handwritten, again asking for a loan, saying he was "pulling his life together piece by piece" and "trying to get custody of his son."28 Again the answer was no. Buffett not only had boundaries of iron when it came to money but was realistic about relying on the promises of addicts. Susie, who always wanted to believe the best of people, was too soft-hearted to give up on anyone. She would not defy Warren to give Rogers the money, but she continued to support her nephew and his troubles with large amounts of energy and small handouts from time to time.

Susie's work as a "mobile Red Cross unit," as one family member put it, had expanded after she had made her confession in 1984 and she and Warren reached a new understanding about their marriage. That year, she had suffered a painful abscess between the spleen and pancreas, and was hospitalized for exploratory surgery. Her doctors could find no cause, and she recovered without incident. Her self-image was as the healthy person whose role was to care for others, so she ministered to her usual collection of the ill, the needy, and the heartsick. She also threw masquerade parties in her tiny place on Washington Street, tried to learn to ride a bicycle, and gathered her impromptu family of gays and strays at large dinner parties and Thanksgiving celebrations. She wore jeans and sweatsuits and put away the wigs she had once worn, her hair now a lighter brown, released into a corona around her beaming face.

Warren-who would give his wife almost anything she asked for these days-let her expand and redecorate the Laguna house, which had never stopped looking like the rental it once was. Tom Newman, Rackie's son, introduced Susie to Kathleen Cole, an interior designer who was also an exercise instructor and former nurse, and together they began to give it the bright-colored contemporary look that Susie favored. Cole also took over the job of buying gifts for Susie's ever-expanding list.29 Susie and Warren continued to spar over money, but these spats had become almost scripted; Susie's allowance expanded at an accelerating pace-although never at quite the rate she wanted. She could afford Cole's services and those of a full-time secretary to manage her schedule, which freed her to extend herself further while also spending more time with the family. Howie remained the magnet who drew more of her support and energy than anyone else. She commuted back and forth to Nebraska to help with this and that and to lavish affection on Howie's children, her adopted granddaughters Erin, Heather, Chelsea, and Megan, and grandson Howie B. When Susie Jr., who lived in Washington, D.C., became pregnant with her first child, Big Susie began making more trips to the East Coast.

Susie and Allen needed to remodel their little Washington house, which was all staircases, had a kitchen the size of a baby blanket, and an inaccessible back garden. She had plans drawn up for a new kitchen big enough to accommodate a table for two, with a back door opening to the garden. It would cost $30,000. She considered how to pay for it, since she and Allen didn't have the money; she knew better than to ask her billionaire father to give it to her. Fortunately, her pregnancy had activated the one loophole in her weight deal with her father. Buffett was not getting his $47,000 back. Nevertheless-despite her father's belief that clothing holds its value better than jewelry-she and Allen could not hock her new wardrobe to pay for the kitchen. So she asked her father for a loan.

"Why not go to the bank?" he asked, and turned her down. He explained that a football player on the Nebraska football team shouldn't inherit the starting quarterback position from his father, a former star quarterback. Unearned position, inherited wealth drove Buffett crazy, offended his sense of justice, and disturbed his sense of the universe's symmetry. But applying such strictly rational rules to his own children was a chilly way to look at the world. "He won't give it to us on principle," said Susie. "All my life, my father has been teaching us. Well, I feel I've learned the lesson. At a certain point, you can stop."30 Before long, her doctor confined Susie Jr. to bed rest for a tedious six months. She lay in a tiny bedroom watching a small black-and-white television set. An appalled Kay Graham brought over meals prepared by her chef and sat at Susie's bedside, then shamed Buffett into buying his daughter a larger color TV. When Big Susie caught wind of what was happening, she dropped everything and flew in to care for her daughter, spending months in Washington. As soon as she saw the condition of the place, she turned it upside down and renovated it. "It's just terrible that Warren won't pay for this," she complained. But everything she was spending had been dunned out of him. Their endless money game enhanced Warren's reputation for thriftiness, and Susie's reputation for generosity. Since they had both signed up for this arrangement, obviously they both wanted it this way.

With the birth of Emily in September 1986, the Buffetts now had eight grandchildren and stepgrandchildren in three cities: San Francisco, Omaha, and Washington, D.C. As the Emerald Bay house renovation reached habitability, Susie slowed the pace to a steady tinkering and began to use it as a base to entertain friends and, especially, her grandchildren. In San Francisco, she hop-scotched into an apartment in Pacific Heights, close to Peter's new home on Scott Street. This large condominium on Broadway sat at the top of four dizzying flights of stairs and had a glorious view over the bay from the Golden Gate Bridge to Alcatraz.

Now she hired her decorator, Kathleen Cole, as a personal assistant to help manage her life. "You can just work part-time," she told Cole, "and you'll have all this time for your two kids." The next thing Cole knew, she was working for the Buffett Foundation, planning Susie's travel arrangements, overseeing entertainment, and hiring and managing a staff that included housekeepers, errand-runners, and friends employed partly as a favor. The gift-giving grew every year: Cole ordered catalogs, chose gifts, wrapped them, shipped them, kept track of what was coming in and going out, and maintained records so that nothing was ever duplicated.31 She found herself managing two houses, including the ongoing renovation of the Laguna house and the two-year renovation project that Susie had launched on her new place on Broadway. Cole's husband, Jim, a fire-fighter, stepped in as a favor to work as Susie's part-time handyman. Another friend, Ron Parks, a CPA whom Susie had met while traveling in Europe, managed the disbursements and taxes-out of kindness and without pay-for what he jokingly called "STB Enterprises," or, as another friend put it, Susie's "payroll and give-away roll."32 Parks was the partner of Tom Newman, her friend Rackie's son; Susie had become close friends with the couple. Newman, a chef, occasionally helped out with her parties, but mostly tried unsuccessfully to improve her nutritional style. By now, Susie's paid and unpaid staff had far outgrown that at Berkshire Hathaway headquarters.

While the renovation of Susie's new Broadway apartment was under way, Billy Rogers, apparently drug-free, moved from Los Angeles to San Francisco and started collaborating with Susie on an album. One day when he was working on music at Peter's studio, he borrowed twenty dollars from Peter and left around lunchtime. After a couple of days with no word from Rogers, Susie, Peter, and Mary Buffett decided to go to his rooming house and check on him. They found his door locked from inside. When he didn't answer their knock, they were worried enough to go to the manager to ask her to let them in. As they waited in the hallway for her to return with the key, they could hear drifts of music from other apartments. "Oh, say that you'll be true, and never leave me blue, Suzie Q," came from one doorway. From another, "Que sera, sera," floated through the air. Whatever will be, will be.

Finally the manager arrived and unlocked the door. The three of them stepped in to see Billy sitting cross-legged on the floor with his back to the door. He was tied off and a needle stuck out from his forearm beneath the tourniquet. Nearby, an LP spun silently on a turntable. The last song on the album had finished playing two days before. Billy was stone dead. Susie covered her eyes and began to wail as Peter took off down the hallway to find a pay phone so he could call an ambulance.33 The autopsy revealed that Billy had died of "acute cocaine and morphine poisoning."34 "He was such a sweet guy," says Buffett, "and he killed himself with drugs." The shock of losing a family member in a sordid overdose at a rooming house would reverberate for years. When Rogers died, Doris says, "That was the worst sorrow that Susie ever went through." She had not only lost the nephew she had loved like a son. After so many years, all her efforts to try to save him had come to naught. She had never suffered such a defeat.

Warren admired his wife's desire to rescue people and her skill in helping those in need. Billy Rogers was only one of many she had befriended through the years. Some of them had done damage to themselves through terrible choices, others were victims of bad luck-though few came to such a terrible end. As "Mama Susie," she made it her mission to help people one at a time. Warren called her a "retailer." The emotional opening-up of this one-on-one work was beyond him. Rather, he chose to leverage his brains and money to affect as many lives as possible; he considered himself a "wholesaler." His way of connecting to people was through his role as a teacher. But he was no longer teaching his courses at the University of Omaha, and his most attentive students, Kay and Don Graham, had become thoroughly Buffettized. His most important seminar, the Buffett Group meetings, took place only in odd-numbered years. Buffett enjoyed teaching so much that he actually went looking for an audience.

In 1980, he agreed to testify in a major antitrust lawsuit against IBM, the most famous case of its era. Another witness, Arjay Miller, a fellow Post director, testified reluctantly; he found being grilled by lawyers, before a judge who impressed him as hating IBM, a miserable experience. Buffett, however, enjoyed showing his expertise; he relished putting it to the test before lawyers. He put his all into the testimony. "He's a great testifier," says Miller.35 Buffett was especially pleased that his testimony became part of the record in a landmark case in American business history.

Buffett's earliest teachings had been preserved in the letters he had written to his former partners in the 1960s, letters that were photocopied and passed hand to hand around Wall Street until the copies became blurry and hard to read. Ever since 1977, with the help of Carol Loomis, his unusual chairman's letters to his shareholders in the Berkshire annual reports-carefully crafted, enlightening, eye-opening letters-had grown more personal and entertaining by the year; they amounted to a crash course in business, written in clear language that ranged from biblical quotations to references to Alice in Wonderland and princesses kissing toads. Much of their acreage was devoted to discussions of matters other than Berkshire Hathaway's financial results-how to think about investing, the harm the dismal economy was doing to business, how businesses should measure results. These letters brought out both the preacher and the cop in Buffett, giving people a sense of him as a man. And the man was charming, he was attractive; his investors wanted more of him. So he gave it to them at the shareholder meetings.

The earliest meetings had taken place in Seabury Stanton's old loft above the New Bedford mill. Two or three people with Ben Graham connections came because of Buffett. One was Conrad Taff, who had taken Graham's class. Buffett wanted his shareholder meetings to be open and democratic, as unlike the old Marshall-Wells meeting as possible. Taff peppered Buffett with questions, and Buffett enjoyed it, as if he were sitting in an armchair at a party with people gathered round listening to his wisdom.

The meetings carried on like this for years, with only a sprinkling of people showing up to ask questions, even after the meetings moved to Nebraska and took place in the National Indemnity cafeteria. Buffett still enjoyed them, despite the sparse attendance. As recently as 1981, only twenty-two people attended. Jack Ringwalt actually had to recruit employees to stand in back of the National Indemnity cafeteria so as not to embarrass his boss with an empty room. When the meeting was adjourned after fifteen minutes of routine legalizing and half a dozen perfunctory questions, the stenographer whom Conrad Taff had flown in to take notes for him had written nothing down. She looked frantically at Verne McKenzie, who just shrugged.36 Then in July 1983, coincident with the Blue Chip merger, a little crowd of people suddenly showed up at the cafeteria to hear Buffett talk. He answered as many questions as they asked in his plain-spoken, unpretentious style: He was teaching, and he came across as democratic, Midwestern, and refreshing, just as he did in his letters to the shareholders.

Buffett spoke in metaphors the audience understood, using the emperor's new clothes and the bird in the hand versus the two in the bush. He told plain-spoken truths that other businessmen would not acknowledge, and routinely burst the bubble of corporate double-speak. He developed a memorable way of fabulizing life and businesses into instructive tales that rang familiar-Rose Blumkin as the Cinderella of Berkshire Hathaway, or Ajit Jain as Buffett's Rumpelstiltskin, who ran his reinsurance division by spinning straw into gold. His style was so engaging and his meaning so illuminating that word began to spread. The way he expressed himself made people see old problems in new ways. The meetings took on a quality associated with almost everything that Buffett touched. They began to snowball.

In 1986, Buffett moved the meeting to the Witherspoon Auditorium of the Joslyn Art Museum. Four hundred people came, then five hundred the next year. Many of them worshipped Buffett, who had made them rich. In between questions, some people read poems of praise from the balcony.37 Buffett's anomalous success, and the fame it had brought him, was putting him on the road to becoming a brand just as surely as Skippy peanut butter. Inevitably, therefore, he became the target of a group of finance professors who were at that very moment attempting to prove that someone like Buffett was a mere accident who should not be paid attention, much less worshipped.

These academics had started by positing the reasonable but not necessarily obvious truth that if a whole lot of people were trying to be better than average, they would become the average. Paul Samuelson, an MIT economist, revived and circulated the 1900 work of Louis Bachelier, who observed that the market is made up of speculators who cohere into a whole that operates according to a "random walk."38 A professor from the University of Chicago, Eugene Fama, took Bachelier's work and tested it empirically in the modern-day market, which he described as "efficient." The scrabbling efforts of legions of investors to beat the market made those very efforts futile, he said. Yet an army of professionals had sprung up who charged everything from modest fees to the soon-to-be-legendary hedge-fund cut of "two-and-twenty"(two percent of assets and twenty percent of returns) for the privilege of managing an investor's money and trying to predict the future behavior of stocks. Stockbrokers raked their cut from all the individuals who were encouraged by TV shows and magazines to pick the next hot stock and compete with the pros. Every year, the sum of all these people's labors added up to exactly what the market did (less the fees).

Charles Ellis, a consultant to professional money managers, blew the whistle on the market's pickpockets in 1975 in "Winning the Loser's Game," an article that showed that professional money managers failed to beat the market ninety percent of the time.39 Ellis's work also had disheartening implications for individual investors and the readers of books and attendees of seminars like "Invest Your Way to Millions." He said the best way to make money in the market was to simply buy an index of the market itself without paying the high fees that the toll-takers charged. Over the long term, the market tended to outperform bonds, so investors would receive the payback from the entire economy's growth. So far, so good.

The professors who had discovered this efficient-market hypothesis (EMH) kept hacking away at their computers over the years, however, to turn these ideas into an even tighter version, one that had the purity and rigor of physics and mathematics, one to which there could be no exceptions. They concluded that nobody could beat the average, that the market was so efficient that the price of a stock at any time must reflect every piece of public information about a company. Thus, studying balance sheets, listening to scuttlebutt, digging in libraries, reading newspapers, studying a company's competitors-all of it was futile. The price of a stock at any time was "right." Anybody who beat the average was just lucky-or trading on inside information.

Most people who actually worked on Wall Street could cite examples of stocks that had traded inefficiently.40 But it was certainly true that exceptions to the efficient market had grown rarer-and the people who exploited them generally had a steady pulse and deep knowledge based on long study, and the willingness to put in full-time concentrated effort. Yet the proponents of EMH denied all exceptions, and to them Buffett-the most visible exception of all-and his lengthening and increasingly acclaimed record became an inconvenient fact. They saw him as like a man who could sail blindfolded through a sea of icebergs: in theory impossible; it was only a matter of time before he would drown. The "random walkers"-Samuelson at MIT, Fama at the University of Chicago, Michael Jensen at the University of Rochester, William Sharpe at Stanford-kicked around the Buffett conundrum. Was he a one-off genius or a freak statistical event? A certain amount of derision was heaped on him, as if such an anomalous stunt were not worthy of study. Burton Malkiel, a Princeton economist, summed the whole thing up by saying that anyone who outperformed the stock market consistently was no different from a lucky monkey that had a winning streak at picking stocks by throwing darts at the Wall Street Journal stock listings.41 Buffett loved the Wall Street Journal; he loved it so much that he had made a special deal with the local distributor of the paper. When the batches of Journals arrived in Omaha every night, a copy was pulled out and placed in his driveway before midnight. He sat up waiting to read tomorrow's news before everybody else got to see it. It was what he did with the information the Wall Street Journal gave him, however, that made him a superior investor. If a monkey got the Wall Street Journal in its driveway every night just before midnight, the monkey still could not match Buffett's investing record by throwing darts.

Buffett made sport of the controversy by playing with a Wall Street Journal dartboard in his office. The efficient-market hypothesis invalidated him, however. Furthermore, it invalidated Ben Graham. That would not do. He and Munger saw these academics as holders of witch doctorates.42 Their theory peddled bafflemath, teaching a whole generation of students something disprovable. They offended Buffett's reverence for rational thinking and for the profession of teaching.

Columbia held a seminar in 1984 to celebrate the fiftieth anniversary of Security Analysis. Buffett was by then so identified as Ben Graham's intellectual heir that Graham himself had asked him to revise and update The Intelligent Investor. The two were not able to agree on certain things-principally Buffett's belief in concentration versus Graham's devotion to diversification-and in the end Buffett wrote only the introduction. Nevertheless, Columbia invited Buffett to represent the Grahamian point of view at the seminar, which was actually more of a debate over EMH. Convening in the auditorium at Uris Hall, his opponent on the panel, Michael Jensen, stood up and said he felt like "a turkey must feel at the beginning of a turkey shoot."43 His role in the morality play was to cast withering comments at the antediluvian views of the Grahamian value investors. Some people could do better than the market for long periods, he said. In effect, if enough people flip coins, a few of them will flip heads over and over. That was how randomness worked.

Sitting in the first row alongside Buffett, the frail, aged David Dodd leaned over and whispered, "Take his pants off, Warren."

Buffett had spent weeks preparing for this event. He'd anticipated the coin-flipping argument. When he got up for his turn, he said that while this might be so, the row of heads would not be random if all the successful coin-flippers came from the same town. For example, if all the coin-flippers who kept flipping heads came from the tiny village of Graham-and-Doddsville, something specific that they were doing must be making those coins flip heads.

He then pulled out a chart with the track record of nine money managers-Bill Ruane; Charlie Munger; Walter Schloss; Rick Guerin; Tom Knapp and Ed Anderson at Tweedy, Browne; the FMC pension fund; himself; and two others.44 Their portfolios were not similar; despite a certain amount of coattailing in the early years, they had largely invested on their own. All of them, he said, came from the village of Graham-and-Doddsville, had been flipping straight heads for more than twenty years, and for the most part had not retired and were still doing it. Such a concentration proved statistically that their success could not have come by random luck.

Since what Buffett said was obviously true on its face, the audience broke into applause and lobbed questions at him, which he answered gladly and at length. The random-walk theory was based on statistics and Greek-letter formulas. The existence of people like Buffett had been waved away using bafflemath. Now, to the Grahamites' relief, Buffett had used numbers to disprove the absolutist version of the efficient-market hypothesis.

That fall, he wrote up "The Superinvestors of Graham-and-Doddsville" as an article for Hermes, the magazine of the Columbia Business School. Firing a flamethrower at the edifice of the EMH, this article did much to cement his reputation among investors. And over time, the random walkers revised their argument into "semi-strong" and "weak" forms that allowed for exceptions.45 The one great service EMH would have performed, if anybody listened, was to discourage the average person from believing they could outwit the market. Nobody except the toll-takers could object to that. But the tendencies of humankind being what they are, EMH became de rigueur in business school classrooms, yet the number of individual investors and professional money managers who assumed that they were smarter than average only grew, the toll-takers kept taking their cut, and the market went on as before. Thus the main effect of "The Superinvestors of Graham-and-Doddsville" was to add to the growing legend, even the cult, that was building around Warren Buffett.

Meanwhile, EMH and its underpinning, the capital asset pricing model, drove extraordinary and deep roots into the investing world; it launched a view of the stock market as an efficient statistical machine. In a reliably efficient market, a stock was risky not based on where it was trading versus its intrinsic value, but based on "volatility"-how likely it was to deviate from the market average. Using that information and newly unleashed computing power, economists and mathematicians started going to Wall Street to make more money than they ever could in academia.

Knowing every stock's volatility allowed investment managers to shape and carve portfolios using stocks of greater and lesser volatility built around a core list of stocks that made up a near-replica of the market index and acted as ballast in the middle. Knowing a stock's volatility allowed portfolio managers to pair up stocks and arbitrage them while considering their "betas" (the Greek letter assigned to volatility) to refine these bets.46 Arbitrage was the idea behind a "hedge fund" in its simplest form: Its manager sold a group of stocks short to help cushion results if the market went down.47 That was less risky than buying a stock or bond outright.

But to make big money on arbitrage-buying and selling two nearly identical things to profit from their difference in price-required scaffoldings of debt, in which more and more assets were sold short to buy more and more assets on the "long" side.48 This expansion of leverage from hedge funds and arbitrage was related to the rise of junk bonds and takeovers occurring at the same time. The models that supported the argument for leveraged buyouts using junk bonds were, like the models used by arbitrageurs, variations of the efficient-market hypothesis. Leverage, however, was like gasoline. In a rising market, a car used more of it to go faster. In a crash, it was what made the car blow up.

This is why Buffett and Munger considered defining risk as volatility to be "twaddle and bullshit," as Munger would later put it. They defined risk as not losing money. To them, risk was "inextricably bound up in your time horizon for holding an asset."49 Someone who could hold an asset for years could afford to ignore its volatility. Someone who was leveraged did not have that luxury-leverage costs; moreover the lender's (not the borrower's) time horizon defines the length of the loan. Thus a risk of leverage is that it takes away choices. The investor may not be able to wait out a volatile market; she is burdened by the "carry" (that is, the cost) and she depends on the lender's goodwill.

But betting on volatility seemed to make sense when the market rose as predicted. When enough time passes and nothing bad happens, people who are making a lot of money tend to think it is because they are smart, not because they are taking a lot of risk.50 Throughout these profound changes in Wall Street's ways, Buffett's own habits had changed little.51 What still made his pulse race was buying a company like Fechheimer, which made prison-guard uniforms. People like Tom Murphy had to worry about whether they would be targeted by corporate raiders wielding junk bonds, but Berkshire Hathaway was impregnable because Buffett and friends of Buffett owned so much of its stock; his reputation made Berkshire a fortress where others could shelter. Berkshire had made $120 million on Cap Cities/ABC in the first twelve months it owned the stock; now the very mention that Buffett had bought a stock could, all by itself, move its price and revalue a company by hundreds of millions of dollars.