Warren understood Doc Thompson’s concern about how he would support a family, even though he had no such doubts himself. Since he couldn’t work for Graham-Newman, he had decided to become a stockbroker, and to do it in Omaha, far from the canyons of Wall Street. If you wanted to make money in the stock market, went the common wisdom, the place to do it was New York, so his decision was an unusual one. But he felt free from the conventions of Wall Street; he wanted to work with his father; Susie was in Omaha; and he was never happy far from home.
At almost twenty-one, Warren was supremely confident in his own investing abilities. By the end of 1951, he had already boosted his capital from $9,804 to $19,738. He had earned seventy-five percent in a single year.1 As a matter of course, however, he consulted his father and Ben Graham. To his surprise, both said, “Maybe you should wait a few years.” Graham—as always—thought the market was too high. Howard, pessimistic, favored mining stocks and gold stocks and other investments designed to protect against inflation. He didn’t think any other kind of business would be a good investment, and he worried about his son’s future.
That didn’t make sense to Warren. Since 1929, the value of businesses had grown substantially.
“It was absolutely the reverse effect of what you saw in other times, when the market was staggeringly overvalued. I had looked at companies. I just couldn’t see why you wouldn’t want to own them. It was on a micro level, not an assessment of the growth of the economy or anything like that, and I was working with micro money. But it just seemed to me that it was crazy not to own them. On the other hand, here’s Ben, with his two hundred IQ, telling me to wait. And my dad, who, if he told me to walk out a window, I would have done it.” To make this decision to defy the advice of his two great authorities—his father and Ben Graham—was an enormous step for Warren. It required him to consider the possibility that his judgment might be superior to theirs. Yet he was certain he was right. He might have walked out a window if his father told him to—but not if it meant leaving a Moody’s Manual full of cheap stocks behind.
In fact, the opportunities he saw were so plentiful that they justified borrowing money for the first time. He was willing to take on debt equal to a quarter of his net worth. “I was already running short of money to invest. If I was enthused about a stock I would have to sell something else to buy it. I had an aversion to borrowing money, but I got a loan for five thousand dollars or so from the Omaha National Bank. I was under twenty-one and my dad had to cosign the loan.”
Howard probably felt both proud and a little silly cosigning a loan for his son, who had been a full-fledged businessman for at least a dozen years. Since Warren had made up his mind, Howard was also willing to take him on at his own firm, Buffett-Falk—though only after suggesting that he interview at a prominent local firm, Kirkpatrick Pettis Co., to see what the best of Omaha stockbroking had to offer.
“I went to see Stewart Kirkpatrick and said during the interview that I wanted intelligent customers. I was going to try to look for people who could understand things. And Kirkpatrick said, in effect, don’t worry about whether they’re intelligent, worry about whether they’re rich. Which is okay, you can’t knock him for that. But I wouldn’t have wanted to work anyplace but at my dad’s firm.”
At Buffett-Falk, Warren was installed in one of its four private unair-conditioned offices, next to the “cage,” a glassed-in area where a clerk handled the money and securities. He started out selling his favorite stock to the safest people he knew, his aunt and his college friends, including his first roommate at Wharton, Chuck Peterson, who was now in the real estate business in Omaha and with whom he’d reconnected.
“My aunt Alice was the first call I made, and I sold her a hundred shares of GEICO. She made me feel good about myself. She was interested in me. And after that Fred Stanback, Chuck Peterson, and anybody I could get to buy it. But mostly I got myself to buy it, because when other people didn’t buy it, I’d just figure out a way to buy five more shares myself. I had this big ambition. I was going to own one-tenth of one percent of the company. It had 175,000 shares outstanding, and I figured if the company would become worth one billion dollars someday and I owned that much, I would be worth a million dollars. So I needed 175 shares.”2
Yet in the meantime, his job was to sell on commission, and beyond this narrow circle, Warren found that almost insurmountably difficult. He got a taste of the obstacles his father had faced to build his brokerage business back when the grand old families of Omaha peered down their noses at the grandson of a grocer. Alone in Omaha now, with his parents back in Washington, Warren felt that he got no respect.
These were the days when all stocks were sold by full-service stockbrokers, and most people bought individual stocks rather than mutual funds. Everybody paid fixed commissions of six cents a share. Transactions took place as part of a relationship. Every trade was preceded by a few minutes of chat with “your broker,” part salesman, part adviser, part friend. Your broker might live in your neighborhood, and you saw him at parties, you golfed with him at your country club, and he came to your daughter’s wedding. General Motors brought out new models of its cars every year, and a businessman might trade his car more often than his stocks. That is, if he owned any stocks.
Important accounts didn’t take Warren seriously. “I was twenty-one. And I’d go around to all these people to sell them stocks, and when I’d get all through they’d say, ‘What does your dad think?’ I got that all the time.” Warren, who looked like a “dork,” struggled to make sales.3 He didn’t know how to read people, couldn’t make small talk, and his mode of conversation was to broadcast rather than receive. When nervous, he sprayed forth information about his favorite stocks like a fire hose. Some potential clients listened to his pitch, checked with other sources, and used his ideas, but bought the stocks through other brokers, so he didn’t get the commission. He was shocked at this perfidy from people he’d spoken to face-to-face and would be seeing again around town. He felt cheated.
“Generally speaking, I was not getting reinforcement. When I first started selling GEICO to people, Buffett-Falk had this little office downtown, and the stock certificates would come in and Jerome Newman’s name would be on those certificates. He was the seller I was buying from. And the guys at Buffett-Falk said, ‘What the hell. If you think you’re smarter than Jerry Newman…’ ”
In fact, Graham-Newman was forming a new partnership, and some of the investors had given the firm GEICO shares to fund money into the partnership. So in effect, it was they who were selling, not Graham-Newman. Warren didn’t know that.4 But when it came to GEICO, he didn’t care who was selling. It did not occur to him to ask anyone at the firm why they were selling. He was unshakeably certain of his own opinion. Nor did he hide that fact.
“I was sort of a wise guy, with this graduate degree, among people who hadn’t gone to college. One time an insurance agent, Ralph Campbell, came in to see Mr. Falk and said, ‘What’s this kid doing going around promoting this company?’ GEICO was a company that didn’t use insurance agents. And I said, like a wise guy, ‘Mr. Campbell, you better buy this stock for unemployment insurance.’ ”
The full import of Dale Carnegie’s first rule, don’t criticize, hadn’t sunk in. Warren used what would later become the trademark Buffett wit to show that he knew more than everybody else, but why would anyone have been willing to believe that of a twenty-one-year-old? And yet he did. It must have stunned people at Buffett-Falk to watch him, morning through night, ripping through the manuals, adding to his file cabinets of knowledge.
“I went through the Moody’s Manuals page by page. Ten thousand pages in the Moody’s Industrial, Transportation, Banks and Finance Manuals—twice. I actually looked at every business—although I didn’t look very hard at some.”
And Warren wanted to be more than an investor, more than a salesman. He wanted to be a teacher, to emulate Ben Graham. He signed up to teach a night course at the University of Omaha.
At first he partnered with his stockbroker friend Bob Soener, who taught the first four weeks of “Profitable Investing in Stocks.” While Soener explained to the class basics such as how to read the Wall Street Journal, Warren stood in the hallway listening for any good investment ideas. Then he took over for the next six weeks.5 Eventually he taught the whole course and gave it the more cautious name of “Sound Investing in Stocks.” In front of his classroom, he lit up, pacing the floor as if he couldn’t get the words out fast enough, even though the students had to struggle not to drown in the flood of information he threw at them. But despite his deep vein of knowledge, he never promised the class they would get rich or that taking his class would give them any particular result. Nor did he brag about his own success at investing.
His students ranged from stock-market professionals to people who had no head for business—housewives, doctors, retirees. They symbolized a subtle shift: Long-absent investors were starting to come back for the first time since the 1920s—part of why Graham thought the market was overvalued. Warren adapted his teaching to the range of their knowledge and skills. He modeled his teaching style after Graham’s, using the “Company A, Company B” method and some of his mentor’s other little teaching tricks. He handed out grades with the strictest fairness. His aunt Alice took the course and sat in the classroom gazing at him with adoring eyes.6 He gave her a C.
People were always throwing out the names of stocks, asking him whether to buy or sell. He could speak from memory for five or even ten minutes about any stock they named: its financial data, its price/earnings ratio, the volume of shares that traded—and from all appearances, he could do this for hundreds of stocks, as if he were quoting baseball statistics.7 The students remarked on his unusual conservatism when responding to their questions about how to invest.
Meanwhile, Warren was going to be taking care of a family soon, which would divide his income into two streams. Part of what he made—his stream—would go back into the mill and continue to grow. And part he would spend for him and Susie to live, a significant change in his circumstances. Until now, he had been able to pare his expenses by living in the maid’s room at Columbia, eating cheese sandwiches, and taking his dates to lectures or playing the ukulele for them instead of escorting them to the posh “21” Club. Now that he was back in Nebraska, he was able to cut his costs even further by living in his parents’ house, even though it meant occasional contact with Leila when they came back from Washington.
He had never needed motivation to try to work his capital as hard as possible, and now he sat in the office at Buffett-Falk with his feet on his desk, searching systematically through the Graham and Dodd book for more ideas.8 He found a stock, Philadelphia and Reading Coal & Iron Company. He bought Philadelphia and Reading Coal & Iron shares himself and sold them to his aunt Alice and Chuck Peterson. When the stock immediately dropped to $9 a share, he saw that as a reason to buy even more.
He bought a textile company called Cleveland Worsted Mills. It had current assets* of $146 per share, and the stock was selling for less than that. He felt the price did not reflect the value of “several well-equipped mills.”
Warren wrote a short report on the stock. He liked the fact that the company was paying out a lot of what it earned to shareholders—giving them a bird in the hand. He thought Cleveland Worsted Mills had enough earnings to cover its dividend. That proved less than prescient.
“I called it Cleveland’s Worst Mill after they cut off paying the dividend.” Warren was so mad that he decided to spend some money to find out what was wrong. “I went to an annual meeting of Cleveland’s Worst Mill, and I flew all the way to Cleveland. I got there about five minutes late, and the meeting had been adjourned. And here I was, this kid from Omaha, twenty-two years old, with my own money in the stock. The chairman said, ‘Sorry, too late.’ But then their sales agent, who was on the board of directors, actually took pity on me, and so he got me off on the side and talked to me and answered some questions.” The answers, however, changed nothing. Warren felt awful; he had gotten other people to buy Cleveland’s Worst Mill too.
There was nothing he hated more than selling people investments that lost them money. He couldn’t stand disappointing people. This was what it had been like back in the sixth grade when the Cities Service Preferred stock he’d gotten Doris to invest in was clobbered. She hadn’t hesitated to “remind” him about it, and he’d felt responsible. Now he would do anything to avoid the feeling of letting someone down.
Warren began looking for any way to make himself less dependent on the job he was starting to hate. He had always enjoyed owning businesses, and decided to buy a gas station with a friend from the National Guard, Jim Schaeffer. They bought a Sinclair station that was next to a Texaco station “that consistently outsold us, which drove us crazy.” Warren and his brother-in-law Truman Wood, who had married Doris, even worked at the station themselves on weekends. They washed windshields “with a smile“—despite Warren’s aversion to manual labor—and did everything they could to attract new customers, but instead drivers continued to pull in to the Texaco station across the street. Its owner “was very well established and very well liked. He beat us every month. That’s when I learned the power of customer loyalty. The guy had been in business forever and had a clientele. Nothing we could do was going to change that.
“My service station was the dumbest thing—I lost two thousand dollars, and that was a lot of money for me at the time. I’d never had real damage in a loss. It was painful.”
It seemed to Warren that nearly everything he did in Omaha reinforced his sense of youth and inexperience. He was no longer a precocious boy who was acting like a man, but a young man—about to get married—who looked and sometimes acted like a boy. Kaiser-Frazer, the stock he had shorted two years before in Bob Soener’s office, still hung stubbornly around five dollars a share instead of going to zero as he had expected. Carl Falk was always giving him funny looks and questioning his judgment. And Warren felt more and more queasy about the very nature of his job. He started to think of himself as being like “a prescriptionist.” “I had to explain to people who didn’t know enough about whether they should take aspirin or Anacin,” and people would do anything the “guy in the white coat”—the stockbroker—told them to do. The stockbroker got paid based on turnover instead of advice. In other words, “he’s getting paid based on how many pills he sells. He gets paid more for some pills than others. You wouldn’t go to a doctor whose pay was totally contingent on how many pills you took.” But that’s how the business of being a stockbroker worked at the time.
Warren felt there was a conflict of interest inherent in the business. He’d recommend a stock like GEICO to his friends and family, and tell them that the best thing to do was to hold it for twenty years. That meant he didn’t get any more commissions from them. “You can’t make a living that way. The system pits your interests against your clients.”
Nevertheless, he had begun to develop a small clientele of his own through his network of graduate school friends. But he still felt conflicted. He had turned Buffett-Falk into a “market maker,” a firm that acted as a middleman, buying and selling stocks as a dealer.9 The firm made a profit by selling a stock to clients at a slightly higher price than it paid, and buying stock from clients at a lower price than it sold the stock for. The difference, or “spread,” was its profit. The spread was invisible to the customers. Acting as a market maker lifted a brokerage firm from being a mere order taker to being a player in the Wall Street game. While Warren was proud that he had the know-how to set Buffett-Falk up as a market maker, the conflict bothered him.
“I don’t want to be on the other side of the table from the customer. I never was selling anything I didn’t believe in myself or own myself. On the other hand, there was a markup that was undisclosed. If anybody asked me about it, I told them. But I don’t like anything like that. I want to be on the same side of the table with the people who are my partners, everybody knowing what’s going on. And a promoter, by his nature, doesn’t do that.”
No matter how Warren thought about his job as a stockbroker, there was always a potential conflict of interest, and always the possibility that he would lose money for his clients and open himself up to disappointing them. He would much rather manage people’s money instead of selling them stocks, with his interest on the same side as the customer’s. The problem was, there were no such opportunities in Omaha. But in the spring of 1952, he wrote an article about GEICO that attracted the attention of a powerful man, and with that, his luck seemed about to change. The article, “The Security I Like Best,” which appeared in the Commercial and Financial Chronicle, was not just an advertisement for Warren’s favorite stock, but an explanation of his ideas about investing. It caught the attention of Bill Rosenwald, who was a son of Julius Rosenwald, a philanthropist and the longtime chairman of Sears, Roebuck & Co. The younger Rosenwald ran American Securities, a money management firm launched with family stock in Sears10 that sought high returns while minimizing risk and preserving capital. After contacting Ben Graham, who gave Warren a strong recommendation, Rosenwald offered Warren a job. Few jobs in money management were as prestigious, and Warren was dying to accept it, even though that meant moving back to New York City. To do so, however, he had to get permission from the National Guard to leave Omaha.
“I asked my commanding officer whether it would be possible to transfer to New York to take this job. He said, ‘You’ll have to go down and see the commanding general.’ So I went down to Lincoln, sat there in the state capitol, waited awhile, went in to see General Henninger, and said, ‘Corporal Buffett reporting.’ I’d written him ahead of time explaining and asking permission.
“And right away he said, ‘Permission denied.’
“That was the end of it. That meant I was in Omaha as long as he wanted to keep me captive.”
Thus Warren was stuck at Buffett-Falk, writing prescriptions for a living. The main comfort he had during the challenges of his first year back in Omaha was his fiancée. He had begun to lean on Susie. All the while, she was working at figuring Warren out. She began to understand the damage Leila Buffett’s rages had done to her son’s self-worth, and she started trying to repair it. She knew that the main thing he needed was to feel loved and never criticized. He also needed to feel that he could succeed socially. “People accepted me more when I was with her,” he says. Even though she was still at the University of Omaha while he had been working, he was like a toddler gazing up at a parent when it came to his relationship with his future wife. Both were still living in their parents’ homes. Over time, Warren had developed a way of dealing with his mother, which was to avoid being alone with her, while making use of her dutiful nature when in her presence by besieging her with demands and requests. Yet the long stretches that he had spent away from her while attending college had lowered his tolerance for Leila’s company instead of raising it. When she and Howard came back from Washington for Warren and Susie’s wedding, Susie noticed that her fiancé avoided his mother as much as he could. When forced to be in her company, he would turn his face away from her and clench his teeth.
It was time for Warren to move out. He called Chuck Peterson, saying “Chas-o, I haven’t got a place for us to live,” and Chas-o rented him a tiny apartment a couple of miles from downtown. When Warren gave Susie, who had a strong sense of self-expression, an allowance of $1,500 to furnish their first apartment, she and her future sister-in-law Doris took off for Chicago to shop for furniture in the colorful modern style she liked.11
As the wedding date, April 19, 1952, approached, the question arose whether the ceremony would take place at all. The week before, the Missouri River flooded upstream of Omaha. With the waters heading south, officials predicted they would crest above the riverbank and flood the city during the weekend. This made it likely that the National Guard would be called out.
“The whole town turned out with sandbags. I had all these buddies coming in for the wedding—Fred Stanback was going to be best man, and various ushers and guests. They were all kidding me because I was in the National Guard. They said, ‘Well, don’t worry about it, because we’ll substitute for you on the honeymoon.’ Jokes like that. This was going on all week.
“Saturday came, and we were getting married about three in the afternoon. Around noon, the phone rang. My mother said, ‘It’s for you.’ I picked up the phone. The guy at the other end said, ‘C-C-C-Corporal Buffett?’ I had a commanding officer who had a really distinctive stutter. ‘This is C-C-C-Captain Murphy,’ he said.
“If he hadn’t stuttered, I’d have said something that’d probably have gotten me court-martialed, because I would have thought it was the guys pulling a trick on me. But as it was, he said, ‘We’ve been activated. What time c-c-c-can you show up at the Armory?’ And I said, ‘Well, I’m getting married at three o’clock.’ I said, ‘I could probably be there by five.’ He said, ‘Report for d-d-d-duty. We’re going to be p-p-p-patrolling East Omaha d-d-down by the river.’ I said, ‘Yes, sir.’
“I got off the phone totally depressed. Then I get a call an hour later. And this guy had a perfectly normal voice. He says, ‘Corporal Buffett?’ I said, ‘Yes, sir.’ He said, ‘This is General Wood.’12 That was the commanding general of the Thirty-fourth Division, who lived way out in west Nebraska. General Wood said, ‘I’m countermanding Captain Murphy’s order. Have a good time.’ ”
He had two hours left before the biggest event of his life. Warren showed up at the soaring Gothic sanctuary of Dundee Presbyterian Church well before three o’clock. The wedding of a Congressman’s son and Doc Thompson’s daughter was a major event in Omaha. Several hundred guests, including many of Omaha’s top-drawer people, were expected.13
“I was so nervous that I just figured—well, I didn’t wear my glasses so that I wouldn’t be able to see all those people out there.” Warren also asked Fred Stanback to distract him by talking so he wouldn’t have to focus on what was happening.14
After the ceremony, the guests drank nonalcoholic punch and ate wedding cake downstairs in the linoleum-floored church basement. Susie smiled wide as an ivory fan. Warren glowed, incandescent, and wrapped his arm around her waist as if trying to keep them both from sailing off into the air. After photographs, they changed into their going-away clothes and ran through the crowd of cheering guests to duck into Alice Buffett’s car, which she had lent them for the honeymoon. Warren had already loaded the backseat with Moody’s Manuals and ledgers. All of a sudden, Susie saw the writing on the wall.15 And from Omaha, the newlyweds set off on their honeymoon—a cross-country automobile trip.
“On my wedding night, I had chicken fried steak at the Wigwam Café in Wahoo, Nebraska,” Buffett says.16 The Wigwam was a tiny hole-in-the-wall less than an hour from Omaha, with a few booths and cowboy decor. From there, Warren and Susie drove thirty miles to the Cornhusker Hotel in Lincoln to spend the night, “and that’s all I’ll say on that subject,” Buffett says.
“The next day I bought a copy of the Omaha World-Herald and it had run an article that said, ‘Only love can stop the Guard.’ “17 The 1952 flood was the worst in modern times in Omaha, the effort spent to avert it Herculean. “The other guys were sandbagging for days, patrolling in the flood, with the snakes and rats. I was the only guy that didn’t get called out.”
The newlyweds traveled all over the western and southwestern United States. But, “We did not stop to visit companies and look at investments, as has been reported,” Buffett insists. On the way back they stopped in Las Vegas, which was full of ex–Omaha people who had moved there shortly before and bought into the Flamingo Hotel and casinos from the Flamingo to the Barbary Coast. All these characters had shopped at the Buffett grocery store; Vegas felt almost homey, carrying echoes of the racetrack and full of people who knew his family. So he was not afraid of the house. “Susie won a jackpot on the slot machine. She was only nineteen. They wouldn’t pay her because she was underage. I said, ‘Lookit, you took her nickels.’ And they paid her.”
After Vegas, the Buffetts headed back to Omaha. Warren could not stop chortling over his luckless colleagues in the Guard. “Oh, the honeymoon was great. It was great. Three weeks. And all the time, these guys in the Guard were sloshing it up.”
* Current assets are a measure of liquidity—how fast a company can raise cash. They include cash, easily saleable investments, inventory, and money due from others. They exclude items like real estate, equipment, debt, and pensions, which cannot be readily liquidated or are owed to others.