11. Based on its profile in Moody's Industrial Manual, Rockwood traded between $14.75 and $85 in 1954 and between $76 and $105 in 1955. Buffett held on to the shares through 1956. Profit on the trade is estimated. Rockwood traded above $80 a share during early 1956, based on the Graham-Newman annual report.

12. In the letter to David Elliott noted above (February 5, 1955), Buffett explains that Rockwood is his second-largest position (after Philadelphia & Reading, which he did not disclose) and writes that Pritzker "has operated quite fast in the past. He bought the Colson Corp. a couple years ago and after selling the bicycle division to Evans Products sold the balance to F. L. Jacobs. He bought Hiller & Hart about a year ago and immediately discontinued the pork-slaughtering business and changed it into a more or less real estate company." Pritzker, he writes, "has about half the stock of Rockwood, which represents about $3 million in cocoa value. I am quite sure he is not happy about sitting with this kind of money in inventory of this type and will be looking for a merger of some sort promptly." He had studied not just the numbers but Jay Pritzker.

13. Initially he had bought the stock from Graham-Newman when he was a stockbroker, after a minor mistake on an order from them caused them to DK ("don't know," or repudiate) the order. Warren kept the stock.

14. Before 2000, investors and analysts routinely sought and received nonpublic information that would be an advantage to them in trading stocks. This gradual flow of information, which benefited some investors at the expense of others, was considered part of the efficient workings of the capital markets and a reward for diligent research. Warren Buffett and his network of investor friends profited significantly from the old state of affairs. Ben Graham was questioned extensively about this practice before Congress in 1955. He commented that "a good deal of information from day to day and month to month naturally comes to the attention of directors and officers. It is not at all feasible to publish every day a report on the progress of the company...on the other hand, as a practical matter, there is no oath of secrecy imposed upon the officers or directors so that they cannot say anything about information that may come to their attention from week to week. The basic point involved is that where there is a matter of major importance it is generally felt that prompt disclosure should be made to all the stockholders so that nobody would get a substantial advantage in knowing that. But there are all degrees of importance, and it is very difficult to determine exactly what kind of information should or must be published and what kind should just go the usual grapevine route." He added that all investors may not be aware of the grapevine, but, "I think that the average experienced person would assume that some people are bound to know more about the company [whose stock they are trading] than he would, and possibly trade on the additional knowledge." Until 2000 that was, in effect, the state of the law.

While a full discussion of insider trading is beyond the scope of this book, the theory of insider trading was promulgated with SEC Rule 10b-5 in 1942, but "so firmly entrenched was the Wall Street tradition of taking advantage of the investing public," as John Brooks puts it in The Go-Go Years, that the rule was not enforced until 1959, and it was not until the 1980s that anyone seriously questioned the duties of people other than insiders under insider-trading laws. Even then, the Supreme Court affirmed, in Dirks v. SEC, 463 U.S. 646 (1983), analysts could legitimately tell their clients this type of information, and the Supreme Court also noted in Chiarella v. United States, 445 U.S. 222 (1980), that "informational disparity is inevitable in the securities markets." To some extent, there was understood to be some benefit to the market of a gradual leakage of inside information; in fact, how else was the information to get out? The practice of business public relations and conference calls had not developed.

In these 1980s cases, however, the Supreme Court defined a new "misappropriation" theory of insider trading, in which inside information that was misappropriated by a fiduciary could lead to liability if acted upon. Then, largely in response to the Bubble-era proliferation of "meeting and beating consensus" earnings and the "whisper numbers" that companies began to suggest to favored analysts that they were going to earn, in 2000, through Regulation FD (Fair Disclosure), the SEC broadened the misappropriation theory to include analysts who selectively receive and disseminate material nonpublic information from a company's management. With the advent of Reg. FD, the "grapevine" largely ended, and a new era of carefully orchestrated disclosure practices began.

15. At the end of 1956, after the dividend was paid, Warren owned 576 shares trading at $20, worth $11,520.

16. He registered the securities in his own name, rather than his brokers', so the checks came straight to his home.

17. Interviews with George Gillespie, Elizabeth Trumble, who heard this story from Madeline. Warren heard it for the first time at his fiftieth birthday party, from Gillespie. Apparently Susie had never mentioned it to him.

18. More than five decades later, Howie recalls this as his first memory. While that may seem improbable, in "Origins of Autobiographical Memory," Harley and Reese (University of Chicago, Developmental Psychology, Vol. 35, No. 5, 1999) study theories of how childhood memories are recalled from the earliest months of life and conclude that this phenomenon does occur. One of the explanations is parents who repeat stories to their children. A gift from Ben Graham-probably significant to Warren-might plausibly be recalled by Howie from infancy because at least one parent helped him imprint it solidly in memory by discussing it so much.

19. Interview with Bernie and Rhoda Sarnat.

20. This story also is cited in Janet Lowe's Benjamin Graham on Value Investing: Lessons from the Dean of Wall Street. Chicago: Dearborn Financial Publishing, 1994.

21. Interview with Walter Schloss.

22. Warren Buffett letter to the Hilton Head Group, February 3, 1976.

23. Schloss was starting the partnership with $5,000 of his own capital, a risky arrangement that left him nothing on which to live. Buffett got him help with housing from Dan Cowin. Ben Graham put in $10,000 and had some of his friends do so too; eight of Schloss's friends put in $5,000 each. Schloss charged 25% of profits, "but that's it. If the market went down, we would have to make up the loss until my partners were whole."

24. Knapp was a security analyst at Van Cleef, Jordan & Wood, an investment adviser.

25. Interview with Tom Knapp.

26. Interview with Ed Anderson.

27. Ibid.

28. Graham was born May 9, 1894. He decided to shut down Graham-Newman when he was sixty-one, but the last Graham-Newman shareholder meeting was held on August 20, 1956.

29. Jason Zweig says in a July 2003 Money article, "Lessons from the Greatest Investor Ever," that "From 1936 to 1956, at his Graham-Newman mutual fund, he produced an average annual gain of more than 14.7% vs. 12.2% for the overall market-one of the longest and widest margins of outperformance in Wall Street history." This record does not reflect the impressive performance of GEICO, which was distributed to the shareholders in 1948.

Chapter 22.

1. At times he had said he wanted to be a millionaire by age thirty.

2. Interview with Ed Anderson.

3. "Newman and Graham predated A. W. Jones, which everybody thinks is the first hedge fund," Buffett says. A.W. Jones is best known as the first promoter of the concept of hedging the risk in stocks with short sales. However, its fee structure, partnership arrangement, and flexible investing approach-that is, the classic hedge fund as the term is technically defined-were pioneered much earlier, by Graham if not others as well.

4. Interview with Chuck Peterson.

5. The first partnership agreement provided: "Each limited partner shall be paid interest at the rate of 4% per annum on the balance of his capital account as of December 31 of the immediately preceding year as shown by the Federal Income Tax Return filed by the partnership applicable to said year's business, said interest payments to be charged as expenses of the partnership business. In lieu of a separate computation of interest for the period ending December 31, 1956, each limited partner shall be paid 2% of his original capital contribution, said payments to be charged as expense of the partnership business for said period. In addition each of the limited partners shall share in the overall net profits of the partnership, that is, the net profits of the partnership from the date of its formation to any given point of time in the proportions set opposite their respective names." The total interest of the partners added up to 21/42 or 50% of the total interest in the earnings (Certificate of Limited Partnership, Buffett Associates, Ltd., May 1,1956). The agreement to share in the losses was an amendment to the partnership agreement on April 1, 1958.

6. According to Joyce Cowin, both Buffett and her own husband, Dan Cowin, who had been introduced to Buffett by Fred Kuhlken, ran money separately for Gottschaldt and Elberfeld.

7. Interview with Chuck Peterson.

8. Some of these remarks were made at the 2003 speech to Georgia Tech students, the rest in interviews with the author.

9. Hartman L. Butler Jr., "An Hour with Mr. Graham," March 6, 1976, interview included in Irving Kahn and Robert Milne, Benjamin Graham: The Father of Financial Analysis. Occasional Paper No. 5, The Financial Analysts Research Foundation, 1977.

10. Interview with Tom Knapp.

11. "Tourist Killed Abroad, Portugal-Spain Highway Crash Fatal to Long Island Man," New York Times, June 23, 1956. Kuhlken had been on a yearlong trip. The other passenger, Paul Kelting, was listed in critical condition.

12. Sloan Wilson, The Man in the Gray Flannel Suit. New York: Simon & Schuster, 1955.

13. Interview with Susie Buffett Jr.

14. From Headliners & Legends, MSNBC, February 10, 2001.

15. Interview with Charlie Munger.

16. Or thereabouts.

17. Interview with Ed Anderson.

18. According to Tom Knapp, one thing Dodge and Buffett had in common was their tightfistedness. Even when he later became one of Buffett's richest partners, Homer Dodge would angle for a free canoe from a canoe maker. He knew every route into New York City from both La Guardia and JFK airports, and took convoluted trips by bus and subway and on foot rather than hire a cab.

19. The Dodges chose a slightly different deal. Buffett's share of the profits would be only 25%, but the amount he could lose was limited to his capital, initially only $100. Certificate of Limited Partnership, Buffett Fund, Ltd., September 1, 1956.

20. Cleary split profits over 4%, while Buffett was exposed to the extent of any arrears. Certificate of Limited Partnership, B-C Ltd., October 1, 1956. In 1961, B-C Ltd. was folded into Underwood Partnership, Ltd.

21. Buffett Partnership files, "Miscellaneous Expense" and "Postage and Insurance Expense," 1956 and 1957.

22. Warren Buffett's first letter to partners, December 27, 1956.

23. During the war, people bought Liberty Bonds, which paid low interest rates, as a patriotic duty. When rates subsequently rose, the bonds traded "below par"-face value. Stock promoters offered shares to Liberty Bond owners in exchange for the par value of the bonds. Thus bondholders thought they were getting $100 worth of stock for a bond selling in the market for, say, $85, when in fact the stock was worth little if anything. Salesmen also promised some buyers board seats, according to Hayden Ahmanson, who told Buffett this.

24. From 1928 to 1954, the manual was published in five volumes annually as Moody's Manual of Investments, one volume each for government securities; banks, insurance companies, investment trusts, real estate, finance and credit companies; industrial securities; railroad securities; and public-utility securities. In 1955, Moody's began publishing Moody's Bank and Finance Manual separately.

25. Buffett says Hayden Ahmanson gave him this version of events.

26. Buffett: "He was my partner in National American insurance. Dan didn't have a lot of money, so he was using his money that he had originally planned to put in the partnership, and borrowed some money too."

27. Under the Williams Act, passed in 1968, you could not do this today, nor could Howard Ahmanson buy back the stock piecemeal. The act requires buyers to make a "tender offer" that puts all sellers on a level playing field under the same price and terms.

28. According to Fred Stanback, when Buffett had "bought all he could pay for," he also let Stanback start buying.

29. A year later, Buffett sold the National American stock for around $125 (to the best of his memory) to J. M. Kaplan, a New York businessman who had reorganized and headed Welch's Grape Juice in the 1940s and '50s and was later known for his philanthropy. Kaplan eventually sold the stock back to Howard Ahmanson.

30. See, for example, Bill Brown, "The Collecting Mania," University of Chicago Magazine, Vol. 94, No. 1., October 2001.

31. Interview with Chuck Peterson. This was insurance proceeds from her husband's estate. By then, Buffett had decided to offer his partners several choices of risk versus reward. Mrs. Peterson chose a fee structure that shifted more of both to Warren. He had to beat the market by 6%, not 4%, before earning anything. But he got one third of everything he made above that. Under this structure, only Warren's capital was at risk for the 25% payback-of-losses provision. Certificate of Limited Partnership, Underwood Partnership, Ltd., June 12, 1957.

32. Arthur Wiesenberger, Investment Companies. New York: Arthur W. Wiesenberger & Co., released annually from 1941.

33. United States & International Securities Corp. was formed amid much fanfare in October 1928 by Dillon, Read & Co. and promptly sank into ignominy, becoming a cigar butt by 1950. Clarence Dillon, the founder of Dillon, Read, was called before the Pecora hearings in 1933 to explain how Dillon, Read obtained control of US&IS and US&FS, which were capitalized at $90 million, for $5 million.

34. Quote is from Lee Seeman. Buffett confirms the substance of the statement. The intriguing question is who or what prompted Wiesenberger to make the phone call.

35. Lee Seeman's recollection in an interview is that Dorothy Davis made the comparison.

36. Buffett, recalling a conversation with Eddie Davis.

37. Dacee resembled the Buffett Fund. Buffett was credited 25% of any profits over a 4% hurdle rate. Certificate of Limited Partnership, Dacee Ltd., August 9, 1957.

38. Congressional records note a Washington, D.C., furniture store was giving away shares of uranium stock with any purchase for a Washington's Birthday sale. (Stock Market Study, Hearings before the Committee on Banking and Currency of the United States Senate, March 1955.) 39. Monen had also invested in a small real estate partnership with Warren and Chuck Peterson. The money from this, a profit from National American, and likely some personal savings had, in short order, made him one of Buffett's largest partners.

40. Above a 4% to 6% "bogey." He benchmarked himself against the rate of long-term government bonds, telling his partners that if he could not do better than that, he should not get paid. The wide range of profit-sharing reflected the varying level of risk Warren was taking. In the partnerships that paid him the most, he also had unlimited liability to pay back losses.

41. Buffett was charging 25% of the partnership's appreciation in excess of 6%.

42. Meg Mueller, in an interview, recalls its size relative to other houses on the street at the time.

43. Reynolds was a city councilman. "Sam Reynolds Home Sold to Warren Buffett," Omaha World-Herald, February 9, 1958. "Buffett's Folly" was referred to in a letter to Jerry Orans, March 12, 1958, cited in Roger Lowenstein, Buffett: The Making of an American Capitalist. New York: Doubleday, 1996.

44. Interview with Susie Buffett Jr.

45. Interview with Howie Buffett.

46. Pyelonephritis, sometimes associated with pregnancy.

47. As quoted in Lowenstein, Buffett. Billig is now deceased.

48. Interview with Charlie Munger.

49. In interviews, Dr. Marcia Angle recalls the TV being acquired in the late 1950s and how much it impressed her father. Kelsey Flower and Meg Mueller recall its impact on the neighborhood.

50. Interviews with Howie Buffett, Peter Buffett, Susie Buffett Jr.

51. Interview with Thama Friedman. Laurette Eves was the third partner.

52. Interview with Howie Buffett.

53. Kuhlken had introduced Cowin to Buffett in 1951 on one of Buffett's trips back to New York after his graduation from Columbia.

54. From Buffett's eulogy for Cowin.

55. From Joyce Cowin's eulogy for Cowin.

56. Marshall Weinberg, Tom Knapp, Ed Anderson, Sandy Gottesman, Buffett, and others contributed to this portrait of Cowin.

57. "He lent me unsecured. A dollar of short-term loss offset two dollars of long-term gain for tax purposes, and you could buy a mutual fund that was going to pay a long-term capital-gains dividend and redeem it immediately thereafter to offset a long-term gain going into the end of the year. I bought a combination of long-term gain and short-term loss, which, though equal in amount, had different effects on your tax return. It was all legit then; you can't do it anymore. It probably saved me a thousand dollars. Boy, it was huge," says Buffett.

58. Interview with Joyce Cowin.

59. This was an experimental town built to house 1,800 families in low-cost units. Numerous government properties were auctioned off after World War II. "House Passes Bill to Speed Greenbelt Sale," Washington Post, April 14, 1949; "U.S. Sells Ohio Town It Built in Depression," New York Times, December 7, 1949; "Greenbelt, Md., Sale Extended for 30 Days," Washington Post, May 31, 1952.

60. Chuck Peterson paraphrased this quote from the version of the story he heard. It is probably correct in substance, but, as with all quotes recalled from memory, the exact wording is in doubt.

Chapter 23.

1. "A. C. Munger, Lawyer, Dies," Omaha World-Herald, July 1, 1959.

2. The obituary of Henry A. Homan, son of George W. Homan, in the Omaha World-Herald, March 22, 1907, mentions that Homan, who was twelve years older than Judge Munger, was a close friend of the judge. The Homan and Buffett sides of the families, however, were not close.

3. "33 Years a Federal Judge," Omaha World-Herald, March 12, 1939.

4. Charles Munger letter to Katharine Graham, November 13, 1974. When Judge Munger died, this same aunt Ufie (Ruth) reportedly made the bizarre claim that he must have been taken by God's grace because of a mistake he'd made recently in arithmetic. She said she knew "he couldn't stay on after that."

5. Lowe, Damn Right!: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger. New York: John Wiley & Sons, 2000. Lowe's biography, which is based on extensive family interviews, was the author's principal source for the Munger family history.

6. Said approvingly in Lowe, Damn Right!

7. Interview with Lee Seeman.

8. Interview with Mary McArthur Holland.

9. Interview with Howard Jessen, a friend of the Buffetts'.

10. His grandfather, a prominent Omaha lawyer, was a friend of Dean Roscoe Pound, the dean of Harvard Law School.

11. Munger made no effort to burnish a resume by, for example, joining the Law Review. In an interview, he described himself as relatively aloof.

12. His father also gave him this advice.