I had about $174,000, and I was going to retire. I rented a house at 5202 Underwood in Omaha for $175 a month. We’d live on $12,000 a year. My capital would grow.”
In retrospect, it would strike people as odd that at the age of twenty-six, Warren used the term “retire.”
True, mathematically speaking, Warren could retire on his own money and still reach his goal of being a millionaire by age thirty-five.* Since entering Columbia with $9,800, he had grown his money by more than sixty-one percent a year. But he was in a hurry, and it would require a very aggressive compounding rate to meet his goal.1 Therefore he had decided to start a partnership like Graham-Newman’s sister hedge fund, Newman & Graham.2 He would have no boss, could invest from his house, and could put friends and relatives into the same stocks that he would have bought for himself. If he took a quarter of every dollar he earned for these partners as a fee and then reinvested that in the partnership, he could be a millionaire much faster. Armed with Ben Graham’s method of buying stocks and a Graham-like hedge fund, he had every reason to think of himself as a rich man.
There was only one problem with his idea. He couldn’t tolerate it if his partners criticized him because the stocks went down. But Warren planned to invite only his family and friends—people he was sure trusted him—into the partnership. On May 1, 1956, he started Buffett Associates, Ltd., a partnership based on the Newman & Graham model,3 with seven partners.
Doc Thompson invested $25,000. “Doc Thompson was the kind of guy, he gave me every penny he had, basically. I was his boy.” Warren’s sister Doris, with her husband, Truman Wood, put in $10,000. His aunt Alice Buffett put in $35,000. “I had sold securities to other people before that, but now I became a fiduciary, and for people who were enormously important to me. These were the people who believed in me. There’s no way in the world I would have taken my aunt Alice’s or my sister’s or my father-in-law’s money if I had thought that I’d lose it. At that point I didn’t think I could lose money over time.”
His Wharton roommate Chuck Peterson, who put in $5,000, became his fourth partner. Chuck had been one of the first to let Warren dispense him scrips as a prescriptionist, buying stocks from him before he went to New York City. Peterson’s mother, Elizabeth, invested $25,000 of the money she had inherited when her husband died the year before.
The sixth partner, Dan Monen, was a quiet, stocky, dark-haired young man who used to play with Warren as a child, digging up dandelions in Ernest Buffett’s backyard. Now Warren’s lawyer, he put in what he could: $5,000.
Warren was the seventh. He put in only $100. The rest of his share would come from future fees he earned by managing the partnership. “In effect, I got my leverage from managing the partnership. I was brimming with ideas, but I was not brimming with capital.” Actually, by most of the country’s standards, Warren was brimming with capital. But he viewed the partnership as a compounding machine—once money went into it, he did not intend to make withdrawals. So he needed to earn the $12,000 a year his family would live on from the rest of his funds. He invested that money separately.
He devised a formula to charge his new partners. “I got half the upside above a four percent threshold, and I took a quarter of the downside myself. So if I broke even, I lost money. And my obligation to pay back losses was not limited to my capital. It was unlimited.”4
At the time, Warren was already managing money for Anne Gottschaldt and Catherine Elberfeld, the mother and aunt of Fred Kuhlken, a friend from Columbia. When Fred left for Europe the year before, he had asked Warren to look after part of his aunt’s and mother’s money.5 Ever since, Warren had been investing it with utmost caution in government bonds under a different, more modest fee arrangement.
He could have invited Gottschaldt and Elberfeld into the partnership, but he felt that it was unfair to charge them a higher fee than they were already paying. Of course, if the partnership was the sure thing he thought it was, that meant he was depriving them of a golden opportunity. If something went wrong with the investments, however, his aunt and his sister and Doc Thompson would never condemn him. He wasn’t so sure about anybody else.
Acting as a “fiduciary” meant to Warren that any responsibility he took on would be unlimited. To lay out the ground rules for his partners, he called the first official meeting of Buffett Associates on the very day he founded the partnership. Chuck got them a reservation for dinner at the Omaha Club, the best place in town if you wanted a private room. Warren meant to carefully define and limit his responsibilities; one responsibility he was not assuming was picking up the check for dinner. He told Chuck to pass the word that everyone was going dutch.6 He then used the dinner as an opportunity to talk not just about the partnership’s ground rules, but about the stock market. Already he viewed the partnership as a teaching exercise.
The partners quickly split into two camps: the teetotalers and the rest. From his end of the table, Doc Thompson suggested, in a paternal way, that the other faction was going to hell. It was Warren, however, who was the preacher that night; they were there for him to hold forth.
“I started with an agreement with the investors, which has not needed to be changed much as we’ve evolved. All kinds of good things have flowed out of that, you know. It is the least complicated thing I can imagine.
“I gave them a little summary of the ground rules: Here’s what I can do. Here’s what I can’t do. And here are some things I don’t know whether I can do or not. Here’s how I’ll judge myself. It was fairly short. If you don’t feel this way you shouldn’t join, because I don’t want you unhappy while I’m happy or vice versa.”7
After Warren launched the partnership, the Buffetts returned to New York for their final summer. Mickey Newman was now the CEO of Philadelphia & Reading, a full-time job. With neither he nor Warren available to serve as general partner, Graham had decided to shut down the firm.8 Warren was helping Graham wind the partnership down. He rented a rustic seaside cottage on Long Island for his family from his friend Tom Knapp. The house, part of a group built for people fleeing an influenza epidemic many years before, sat on West Meadow Beach, near Stony Brook on Long Island’s North Shore, and faced Connecticut, across Long Island Sound.
During the week, Warren saved money by bunking in the city with his stockbroker friend Henry Brandt, whose wife and children were also summering on Long Island. On the weekends he joined his family at the shore and worked in a tiny bedroom in the house. The neighbors told the Knapps they never saw him.9 While Warren worked, Susie, who was afraid of the water and never swam, beachcombed with the kids along the bluffs near the water’s edge. Since the cottage had minimal plumbing facilities, the Buffetts fetched drinking water from a spring across the street, and Susie bathed Little Susie, now almost three, Howie, eighteen months old, and herself in the unheated outdoor shower.
That summer brought them two pieces of shocking news. The father of Warren’s boyhood friend Bob Russell had committed suicide. And Anne Gottschaldt and Catherine Elberfeld, the mother and aunt of Fred Kuhlken, Warren’s friend from Columbia, called to say that Fred had been killed in Portugal after his car skidded eighty feet and rammed into a cork tree.10
As the summer ended, the Buffetts made their plans to return to Omaha. The extreme caution Warren displayed in trying never to disappoint anyone stood in sharp contrast with his risky decision to pursue an investing career working on his own outside of New York City. The market was composed of relationships, people who lunched together at the Stock Exchange or played poker once a week. It hummed along on tips and rumors, gossip passed on by personal contacts and connections made at investor luncheons, in bars, on squash courts, at chance meetings at university-club coat checks. While every small regional city had its little brokerage firms—like Buffett-Falk—these were not important players. The hinterlands were staffed by stockbrokers—prescriptionists who filled the scrips written by the Manhattan money doctors. At that time, no serious American money man worked anywhere but New York City. To leave all this, to go it alone, to think of getting really rich anywhere farther than a limo ride from Wall and Broad, was a truly bold and venturesome stroke.
Indeed, for a college graduate to become self-employed, to work at home, to work alone, was strikingly unusual in the 1950s. The Man in the Gray Flannel Suit was the guy who got ahead.11 Businessmen joined a big organization—the bigger the better—then competed with polished ferocity for the best-paying job on the steady climb up the ladder of success, trying not to break a sweat or a golf club along the way. They competed to amass not riches but power—or at the very least to buy the right kind of house in a good suburban neighborhood, to get a new-model car every year, and to pave the way for a lifetime of security.
Well aware of her husband’s unusual qualities—if not of the apparent riskiness of the course he was charting—Susie flew to Omaha with Little Susie and Howie and moved them all into the house on Underwood Avenue Warren had rented from Chuck Peterson. He had chosen an inviting gray two-story Tudor with picturesque half-beams, a big stone chimney, and a cathedral ceiling. Even the decision to rent a home had been unconventional; owning a home was the quintessence of what most young Americans aspired to in the mid-1950s. The hopelessness of the Depression and the dreary wartime days of making do were fading into memory. Americans stocked their new houses with all the exciting new features and appliances that were suddenly available: washer-dryers, freezers, dishwashers, electric mixers. The Buffetts had plenty of money to buy all these things. But Warren had other plans for his capital, so they rented. And the house they were renting, while attractive, was just barely big enough for them. Howie at almost two would have to sleep in a largish closet.
As Susie began to settle her family in Omaha, Warren closed out his affairs in New York. He sent out notices to the companies whose stocks he owned to ensure that the dividend checks followed him to Omaha. Then he got in his car and started driving back to Nebraska, visiting companies along the way.
“I did this zigzag across the country. I just thought it was a great time to hit these companies. I drove through Hazleton, Pennsylvania, and visited the Jeddo-Highland Coal Company. I went through Kalamazoo, and saw the Kalamazoo Stove and Furnace Company. This little odyssey went through Delaware, Ohio, and I visited Greif Bros. Cooperage. That was a company selling at a ridiculously cheap price”—a company he had first discovered in 1951 by flipping through the Moody’s Manuals. He and his father had each bought two hundred shares and put them in their little partnership.
Warren arrived in Omaha toward the end of the summer and found that he was needed at home. Little Sooz, calm and timid, sat watching while her brother’s inexhaustible demands vacuumed up her mother’s energies.12 But in the evenings she wanted her father; she was now afraid to go to bed. When they arrived at the house on Underwood, a moving-company man wearing glasses had spoken to her, and though she did not remember his saying anything untoward, she was now convinced that the “glasses man” lurked just outside her bedroom, next to a wrought-iron balcony that overlooked the living room. Warren had to inspect the balcony every night and reassure her that it was safe to go to sleep.
After he had taken care of the “glasses man,” he went down the hall to the tiny sunporch off his and Susie’s bedroom and got down to business, either partnership work or preparing his lessons—for the first thing he had done when he returned to Omaha, besides forming a partnership, was to take on two classes for the fall semester at the University of Omaha: Investment Analysis for Men Only, and Intelligent Investing. Before long he would add a third course, Investing for Women. The terrified boy who so recently couldn’t even strike up a conversation in a Dale Carnegie class had vanished. In his place was a still-awkward young man who nonetheless made a striking impression as he moved restlessly around the room, exhorting the students and spouting an inexhaustible series of facts and figures. Dressed as usual in a cheap suit that looked a couple of sizes too large, he seemed more like a youngish preacher from some missionary sect than a college lecturer.
Despite his brilliance, Warren was still very immature. For Susie, his helplessness at home meant that he was like having a third child to care for. His personality and interests also shaped their social life. In Omaha, a midsize Midwestern city with relatively few important cultural institutions, weekends were filled with weddings, parties, teas, and charity events. The Buffetts lived a much quieter life than most young married couples of their class and era. Most of their social life took place at dinner with other couples or at occasional dinner parties where Warren could talk about stocks. It was always the same: Warren entertained, either holding forth to an audience on stocks or playing the ukulele. Under Susie’s tutelage, he could now exchange remarks about other subjects more easily than before, but his mind remained fixated on making money. During meals and parties at home, he often fled small talk by leaving the table to go upstairs. But unlike Ben Graham, he was not upstairs reading Proust; he was working.
All Warren’s recreations remained repetitive, competitive, or, better yet, both. He found playing bridge with Susie unendurable because she wanted the other side to win, and soon sought other partners.13 His mind was like a restless monkey; to relax, he needed an active form of concentration that could keep the monkey occupied. Ping-Pong, bridge, poker, golf all absorbed him and took his mind off money temporarily. But he never lazed around a swimming pool, stargazed, or simply went for a walk in the woods. A stargazing Warren would have looked at the Big Dipper and seen a dollar sign.
All of this, plus his nonconformist streak, meant that Warren was not a “joiner,” sitting through committee and board meetings. Family loyalty did lead him to say yes when his uncle Fred Buffett came over to the house and asked him to join the Rotary Club. On the other hand, when asked to join the Knights of Ak-Sar-Ben, a more important group of civic leaders that combined philanthropy, business, boosterism, and social activities, he said no. For a budding money manager who needed to raise funds for his business, that was like thumbing his nose in the faces of the men who ran Omaha—an act of cocky self-assurance, even arrogance, which set him apart from much of his social set. His sister Doris had made her debut as a Princess of Ak-Sar-Ben. Friends like Chuck Peterson were regulars on its social circuit. As a Congressman, Howard had been obliged to join. But Warren disdained the smoke-filled backroom clubbiness and conformity of the Ak-Sar-Ben crowd. These were the people who had looked down on his father as the “son of a grocer man.” Warren reveled in the chance to spurn Ak-Sar-Ben, and disparaged it with withering comments.
Susie had her own brand of nonconformity. Since high school, she had prided herself on her openness and her commitment to inclusiveness at a time when most people chose friends who were religious, cultural, ethnic, and economic clones. Many of her friends—and by this time many of Warren’s—were Jewish. In segregated Omaha, choosing to cross these social lines was a bold, even defiant act. Susie was aware of this, just as she had been aware in high school and college that dating a Jew was considered shocking, especially to her own family. Her social status had value to her mostly as a way to make her friends feel more included. Warren, the anti-elitist, found this aspect of Susie highly attractive. And the Jewish friends he’d made at Columbia and while working for Graham-Newman had opened his eyes to anti-Semitism.
In contrast to Susie, Warren’s mother had always been obsessed with fitting in. Leila had researched her ancestry and joined the Daughters of the American Revolution and the Huguenot Society, perhaps searching the past for a stability that she could not find in the present, and certainly not in her immediate family. She had recently received word from Norfolk State Hospital that her sister Bernice had thrown herself into the river in an apparent suicide attempt. Leila, now responsible for Bernice and their mother, handled their affairs in businesslike fashion, striving to be a dutiful daughter while keeping some distance from the family’s problems. The Stahl family’s history of mental illness was a threatening and shameful topic in the Buffett family, just as it was in society as a whole at the time. The Buffetts’ perception of the family history was further muddied by uncertainty over Stella’s and Bernice’s diagnoses. The doctors could give only vague descriptions of what were clearly serious problems. Obviously, however, the mental illness was inherited, and it manifested in adulthood. Warren and Doris, who were close to their aunt Edie, knew that their mother had grown apart from her as Edie, too, had become more impulsive and moody. They had some suspicions that Leila’s own behavior and personality might be at least partly related to the family lineage. The ticking clock hung over them, and they examined themselves for any signs of abnormality.
Warren, who desperately wanted to be but had never felt “normal,” assuaged his anxiety with statistics, reasoning that the mysterious disorder seemed to affect only the family’s women. He never dwelled on the unpleasant. He would later come to think of his memory as functioning like a bathtub. The tub filled with ideas and experiences and matters that interested him. When he had no more use for information, whoosh—the plug popped up, and the memory drained away. If new information about a subject appeared, it would replace the old version. If he didn’t want to think about something at all, down the drain it went. Certain events, facts, memories, and even people appeared to vanish. Painful memories were the first to be flushed. The bathtub memory’s efficiency freed up enormous amounts of space for the new and the productive. Buffett thought of the bathtub memory as a helper that allowed him to “look forward,” rather than “looking backward” all the time like his mother. And it allowed him, at the age of twenty-six, to ruminate in depth on business to the exclusion of almost everything else—in pursuit of his goal of becoming a millionaire.
The fastest way to that goal was to raise more money to manage. In August, he went back to New York to attend the final shareholders’ meeting of the Graham-Newman Corporation. Everyone important on Wall Street seemed to be present at Graham-Newman’s wake. Investor Lou Green, his head wreathed in clouds of foul-smelling smoke from an enormous stogie, towered over them from his six-foot-four height.14 Why had Graham and Newman not developed talent? he asked. “They’d been working here for thirty years building up this business,” he declared to everyone standing nearby. “And all they would have had to run it was this kid named Warren Buffett. He’s the best they could come up with. And who’d want to ride with him?”15
Warren’s long-ago mistake of telling Lou Green that he bought Marshall-Wells “because Ben Graham bought it” had now come back to dilute Graham’s endorsement of him in front of an important audience. Yet Graham’s imprimatur had already paid him one important dividend. Homer Dodge, a Harvard-educated physics professor who was the president of Norwich University in Northfield, Vermont, until 1951, and a longtime investor in Graham-Newman, had gone to Graham and asked him what he should do with his money now that Graham-Newman was shutting down. “And Ben said, ‘Well, I’ve got this fellow who used to work with us that might be a possibility.’ ”
So one hot Midwestern day that July, Dodge had stopped in Omaha on his way to a vacation out west, a blue canoe strapped to the roof of his woody wagon. “He talked to me for a while and said, ‘Would you handle my money?’ And I set up a separate partnership for him.”
Dodge gave him $120,000 to manage in the Buffett Fund, Ltd., on September 1, 1956.16 That was more money than the original Buffett Associates partnership—an enormous step* that made Warren a professional money manager, not just a former stockbroker running a little money for his family and friends. Now he had invested for someone recommended by Ben Graham.17
With the formation of a third partnership, B-C, seeded by his father’s former associate John Cleary,18 by October 1, 1956, Warren was now managing more than half a million dollars, including his own money, which was not in any of the partnerships. He operated out of a tiny study at home that could be entered only by passing through the bedroom. He worked odd hours, a night owl like Susie, reading annual reports in his pajamas, drinking Pepsi-Cola and eating Kitty Clover potato chips, enjoying the freedom and solitude. He pored over the Moody’s Manuals looking for ideas, absorbing statistics on company after company. During the day, he went to the library and read newspapers and industry trade magazines. He typed his own letters on an IBM typewriter, carefully lining up his letterhead sheet on the carriage. To make copies he slid sheets of blue carbon paper and tissue-thin onionskin behind the first page. He did all his own filing. He did the bookkeeping himself and prepared his own tax returns. With its numbers, accuracy, and the measuring of results, the record-keeping aspect of the job pleased him.
Every stock certificate was delivered directly to him, made out in the partnerships’ names, rather than left on deposit with a broker as was the usual practice. When they arrived, he carried them—smooth cream-colored diplomas in investing, engraved with finely etched drawings of railroads and bald eagles, sea beasts and toga-clad women—down to the Omaha National Bank in his own hands and placed them in a safe-deposit box. Whenever he sold a stock, he went to the bank, riffled through the collection of certificates, and mailed off the correct ones from the post office on 38th Street. The bank would call to let him know when a dividend check came in to be deposited, and he would go there, examine the check, and endorse it personally.
He tied up the family’s single telephone line with his daily calls to the handful of brokers he used. His expenses were as close to zero as he could get. He listed them by hand on a lined sheet of yellow paper: 31¢ for postage, $15.32 for a Moody’s Manual, $4.00 for the Oil & Gas Journal, $3.08 for telephone calls.19 Except for more meticulous accounting and a great deal more thought, he ran the business much as though he were just anybody trading stocks through a broker for a personal account.
At the end of 1956, Warren wrote a letter to the partners outlining the partnership’s results at year-end. He reported that it had earned a total income of slightly more than $4,500, beating the market by about four percent.20 By then, Dan Monen, his lawyer, had joined Warren on a personal side project that he had been pursuing for some time: buying the stock of an Omaha-based insurer, National American Fire Insurance. This company’s worthless stock had been sold to farmers all over Nebraska in 1919 by unscrupulous promoters in exchange for the Liberty Bonds issued during World War I.21 Since then, its certificates had lain crumbling in drawers, while their owners gradually lost hope of ever seeing their money again.
Warren had discovered National American while working at Buffett-Falk, flipping through the Moody’s Manual.22 The company was headquartered only a block away from his father’s office. William Ahmanson, a prominent Omaha insurance agent, had originally been sucked into it unawares, set up as a local front man for what had started out as a fraud. But the Ahmanson family had gradually turned it into a legitimate company. Now Howard Ahmanson, William’s son, was feeding top-drawer insurance business into National American through Home Savings of America, a company he had founded in California, which was becoming one of the largest and most successful savings-and-loan companies in the United States.23
The defrauded farmers had no idea that their moldering paper was now worth something. Howard had been quietly buying the stock back from them on the cheap for years through his younger brother Hayden, who ran National American. By now the Ahmansons owned seventy percent of the company.
Warren admired Howard Ahmanson. “Nobody else was quite as audacious at managing capital as Howard Ahmanson. He was very shrewd in a lot of ways. Formerly, a lot of people came in to Home Savings and paid their mortgages in person. Howard put the mortgage at the farthest branch away from where you lived so that you paid by mail and didn’t spend half an hour of one of his guys’ time telling them about your kids. Everybody else had been to see It’s a Wonderful Life and felt that you should do this Jimmy Stewart stuff, but Howard didn’t want to see his customers. His operating costs were way under anybody else’s.”
National American was earning $29 per share, and Howard’s brother Hayden was buying its stock for around $30 per share. Thus, as with the rarest and most attractive of the cheap stocks that Warren stalked, the Ahmansons could pay virtually the entire cost of buying a share of stock out of one year’s profits from that single share. National American was one of the cheapest stocks Warren had ever seen. And it was a nice little company, too, not a soggy cigar butt.
“I tried to buy the stock for a long time. But none of it was getting to me, because there was a security dealer in town and Hayden had given this guy the shareholders list. This stockbroker—he regarded me as a punk kid. But he had the list. And I didn’t have the list. So he was buying the stock at thirty for Hayden’s account.”
Cash on the barrel from Hayden Ahmanson sounded good to some of the farmers compared to their worthless certificates. Though they had paid around $100 per share many years before and were only receiving $30, many of them had gradually convinced themselves that they were better off without the stock.
Warren was determined. “I looked it up in some insurance book or something. If you went back to the twenties you could see who were the directors. They made some of these bigger stockholders the directors from the towns they worked the hardest for sales. There was a town called Ewing, Nebraska, which has got no population at all. But somebody sold a lot of stock out there. And that’s how they probably got the local banker on the board thirty-five years earlier.”
So Dan Monen, Warren’s partner and proxy, went off to the countryside carrying wads of Warren’s money and some of his own. He cruised around the state in a red-and-white Chevrolet, showing up in rural county courthouses and banks, casually asking who might own shares of National American.24 He sat on front porches, drinking iced tea, eating pie with farmers and their wives, and offering cash for their stock certificates.25
“I didn’t want Howard to know because I was topping his price. He had been picking it off at thirty bucks, and I’d had to raise the price some. The shareholders had been listening for probably ten years at thirty bucks, so it was the first time the price moved.
“Finally, toward the end, I paid a hundred. That was the magic number, because it was what they’d paid in the first place. A hundred bucks, I knew, would bring out all the stock. And sure enough, one guy came in when Dan Monen was doing this and he said, ‘We bought this like sheep, and we’re selling it like sheep.’ ”26
That they were. Many had sold at less than three times the $29 a year the company was earning. Monen eventually accumulated ten percent of National American’s stock. Warren kept it in the original shareholders’ names, with a power of attorney attached that gave him control, rather than transferring it into his name. “That would have tipped Howard off to the fact that I was out there competing with him. He didn’t know. Or, if he did, he had insufficient information. I just kept collecting shares. Then, the day I walked into Hayden’s office, I plopped them all down and said I wanted to transfer them to my name. And he said, ‘My brother’s going to kill me.’ But in the end, he transferred the stock.”27
The brainstorm behind Warren’s National American coup had been more than just the price. He had learned the value of gathering as much as possible of something scarce. From license plates to nuns’ fingerprints to coins and stamps, to the Union Street Railway, and National American, he had always thought this way, a born collector.28
Alas, this voracious instinct could steer him awry on occasion. Tom Knapp, who had gone to work for a small broker, Tweedy, Browne and Reilly, after helping Jerry Newman close down the remnants of Graham-Newman, came out to visit Warren and to go hear Ben Graham give a speech in Beloit, Wisconsin. Driving through the Iowa cornfields on the way, Knapp mentioned that the U.S. government was about to take the four-cent Blue Eagle stamp out of circulation. The cash register dinged! in Warren’s head. “Let’s stop at a few post offices and see if they have any four-cent stamps,” he said on the way back. Knapp went into the first post office and returned to say that it had twenty-eight stamps. “Go buy them,” said Buffett. They talked about it some more and decided to write to post offices after they returned home, to offer to buy their stamp inventory. The stamps started coming in a few thousand at a time. Then Denver replied and said they had twenty pads. A pad is a hundred sheets of a hundred stamps. That meant Denver had two hundred thousand stamps.
“We might as well control the issue,” Warren said. They spent $8,000 and bought the pads.
“And that was our mistake,” says Knapp. “We should have let the Denver post office send them back to Washington to reduce the supply.”
Through expending enormous effort to become virtual post offices themselves—with most of the work done by Knapp—they gathered more than six hundred thousand Blue Eagle stamps, collectively spending roughly $25,000. For Warren that was a lot, considering his attitude about money and his net worth. They stored the piles of stamps in their basements. And then they realized what they had done. They had laboriously acquired basements full of stamps that would never be worth more than four cents apiece. “When you have so many stamps,” Knapp explains, “there are not many collectors.”
So the next task became disposing of the stamps. Warren expertly delegated the problem of getting rid of $25,000 worth of four-cent stamps to Tom. Then he simply put it out of his mind, except for the funny story, and instead turned back to what was actually important: raising money for the partnerships.
In the summer of 1957, Buffett got a call from Dr. Edwin Davis, a prominent urologist in town. He had been referred to Buffett by one of his patients, Arthur Wiesenberger of New York City, one of the most famous money managers of the era. Buffett was familiar with Wiesenberger because he published Investment Companies, an annual “bible” on closed-end investment funds, which were like publicly traded mutual funds, except that they did not accept new investors. Since they nearly always sold at a discount to the value of their assets, they were like mutual-fund cigar butts. Wiesenberger was a proponent of buying them.29 The summer before graduate school, Warren had sat in a chair at Buffett-Falk’s office, reading Wiesenberger’s bible while Howard worked. While at Graham-Newman, he also managed to meet Wiesenberger, who had been impressed by Buffett, “even though I wasn’t very impressive in those days.”
In 1957, Wiesenberger referred Buffett to Davis as a money manager. “I tried to hire him myself,” said Wiesenberger, “but he was forming a partnership and so I couldn’t.”30 He urged Davis to consider investing with Buffett.
Shortly after Davis called him, Warren scheduled a meeting with the Davis family on a Sunday afternoon. “I went down to their place and sat in their living room and talked to them for about an hour. I said, ‘Here’s how I manage money and the arrangement I have.’ I was probably twenty-six. I looked about twenty years old at the time.” Actually, he looked more like eighteen, according to Eddie Davis: “His collar was open; his coat was too big. He talked so very fast.” At the time, Warren went around Omaha wearing a mangy sweater—which one person observed probably should have been given to Goodwill—an old pair of pants, and scuffed shoes. “I acted immature for my age,” Buffett recalls. “The kind of things I talked about were what you would expect from a much younger person.” In fact, there was still more than a trace of the hand-drumming, “Mammy”-singing boy from Penn. “You had to overlook a lot back then.”
But Warren was not there to sell the Davises. He laid out his ground rules. He wanted absolute control over the money and would tell his partners nothing about how it was invested. That was the sticking point. Not for him was Ben Graham’s handicap of people riding on his coattails. They would get an annual summary of his performance, and they could put money in or withdraw it only on December 31. The rest of the year, their money would be locked into the partnership.
“All the while, Eddie paid no attention to me. Dorothy Davis listened very intently, asking good questions. Eddie was over in the corner doing nothing. He seemed like a very old guy to me, but he was not yet seventy. When we got all the way through, Dorothy turned to Eddie and said, ‘What do you think?’ Eddie said, ‘Let’s give him a hundred thousand dollars.’ In a much more polite way, I said, ‘Dr. Davis, you know, I’m delighted to get this money. But you weren’t really paying a lot of attention to me while I was talking. How come you’re doing it?’
“And he said, ‘Well, you remind me of Charlie Munger.’31
“I said, ‘Well, I don’t know who Charlie Munger is, but I really like him.’ ”
But the other reason the Davises were so willing to invest with Warren was because, to their surprise, he “knew more about Arthur Wiesenberger than they did.”32 They also liked the way he laid out his terms—clear and transparent, so they knew whose side he was on. He would win or lose along with them. As Dorothy Davis put it, “He’s smart, he’s bright, and I can tell he’s honest. I like everything about this young man.” On August 5, 1957, the money from the Davises and their three children seeded the Dacee partnership with $100,000.33
With Dacee, Warren’s business jumped another leg upward. He could now land bigger positions in larger stocks. In his personal portfolio, he still played with things like the “penny” uranium stocks that had been in vogue a few years earlier when the government was buying uranium. These were now fantastically cheap.34 Warren bought companies like Hidden Splendor, Stanrock, Northspan. “There were some attractive issues—it was shooting fish in a barrel. They weren’t huge fish, but you were shooting them in a barrel. You knew you were going to make good money. It was minor. The bigger stuff I was putting in the partnerships.”
Having new partners meant more money, of course, but it also meant that the number of stock certificates and amount of paperwork managing the five partnerships plus Buffett & Buffett increased substantially. He had to hustle, but it felt good. The shortfall, as always, was money—he never seemed to have enough. The kind of companies he was researching often had market values of one to ten million dollars, so he wanted as much as $100,000 to get a significant position in their stocks. Getting more money to manage was key.
At the time, Warren Buffett probably understood the potential of money management to beget more money better than anyone on Wall Street. Every dollar added to a partnership would net him a share of what he earned for his partners.35 Each of those dollars, reinvested, would generate earnings of its own.36 Those earnings, reinvested, would beget still more earnings. The better his performance, the more he would earn, and the larger his share of the partnerships would grow, enabling him to earn even more. His talent for investing could exploit that potential of managing money to the hilt. And despite Warren’s apparent awkwardness, he was indisputably successful at merchandising himself. In short order, he had formed two more partnerships: Underwood, with $85,000 more from Elizabeth Peterson, and Mo-Buff, with $70,000 from Dan Monen and his wife, Mary Ellen, thanks to the money Monen had made from the National American shares. Even though Warren was nearly invisible in the investing world, the snowball was starting to roll.
With momentum behind him, Warren realized it was time to leave a house where there was barely room for a family with two young children—one an unusually energetic three-and-a-half-year-old—and a third on the way. The Buffetts bought their first house. While the largest house on the block, it had an unpretentious and charming air, with dormers set into the sloping shingled roof and an eyebrow window.37 Warren paid $31,500 to Sam Reynolds, a local businessman, and promptly named it “Buffett’s Folly.”38 In his mind $31,500 was a million dollars after compounding for a dozen years or so, because he could invest it at such an impressive rate of return. Thus, he felt as though he were spending an outrageous million dollars on the house.
Just before the moving van left the house on Underwood Avenue, Warren took five-year-old Little Susie back up the stairs to the wrought-iron balcony. “The glasses man is staying here,” he said. “You need to say good-bye to him.” Susie Jr. said good-bye, and, indeed, the glasses man remained behind.39
Big Susie’s job was to oversee the move and lasso Howie while more than eight months pregnant with her third child. As longtime friends observed, Howie was a “hell-raiser.” The inexhaustible Buffett energy poured from him in such a whirlwind that he was nicknamed the Tornado, a cousin to Warren’s childhood nickname, Firebolt—but with a very different connotation. As soon as Howie could walk, he became peripatetic. He dug up the garden with his Tonka toys; when Susie took them away, he tore the house apart to find them. When Susie snatched away the front-loader, the battle was repeated.40
A week after arriving at Farnam Street and just a day before the Mo-Buff partnership was born, the Buffetts’ second son, Peter, arrived. From the start he was a quiet, easy baby. But shortly after his birth, Susie came down with a kidney infection.41 Since her rheumatic fever and ear infections as a child, she had always considered herself healthy. The kidney infection did not concern her as much as shielding Warren from dealing with it; his discomfort around illness was so great that she had trained the family to pay attention to him whenever somebody got sick, as if he, too, were ill and required care.
Her real focus was on having a home of her own at last. Even illness and the demands of caring for a new baby and two small children could not suppress her urge to decorate. As it sprang to life, she redid the house in cheery contemporary style, with chrome-and-leather furniture and huge, bright modern paintings covering the white walls. The $15,000 decorating bill totaled almost half of what the house itself had cost, which “just about killed Warren,” according to Bob Billig, a golfing pal.42 Since he was indifferent to visual aesthetics, all he saw was the outrageous bill.
“Do I really want to spend $300,000 for this haircut?” was his attitude.43 But since Susie wanted to spend money that he wanted to withhold, and since he wanted Susie to be happy and she wanted to please him, their personalities were gradually meshing into a system of bargaining and trades.
Susie was considered a flexible, easygoing, but attentive mother by her friends and relatives. Now that the Buffetts lived closer to both their parents, the children spent more time with their grandparents. The atmosphere at the Thompsons’, a block and a half away, was relaxed and enjoyable; they didn’t care if Howie broke a window or the kids made a mess. Dorothy Thompson got into the spirit of things, playing games, organizing Easter egg hunts, and making elaborate multilayered ice-cream cones. The children loved Doc Thompson, despite his sober self-importance and the way he pontificated. Once he sat Howie on his knee. “Don’t drink alcohol,” he said, over and over. “It will kill your brain cells, and you don’t have any to waste.”44
On Sundays, Doc Thompson sometimes came over and preached in a jellybean-colored suit right in Warren and Susie’s living room. Otherwise, Howie and Susie Jr. went to the Buffetts’, where Leila towed them off to church. Compared to the Thompsons, she and Howard seemed stiff and straitlaced. Howard remained such a Victorian throwback that when he called Doris and Warren with news about their sister Bertie, he could only choke out, “All hell’s broken loose!” They finally managed to discover, from someone else, that she had lost her baby. Howard couldn’t bring himself to say the word “miscarriage.”
With their large new house, Warren and Susie began to play host for the families. But at family gatherings when his mother was present, as soon as he could get away with it, Warren disappeared upstairs to work.
Susie had covered Warren’s new little office off the master bedroom with greenback-patterned wallpaper. Comfortably surrounded by money, he now set about buying cheap stocks as fast as his fingers could fly through the Moody’s Manuals: businesses that sold basic items or commodities that could be easily valued, like Davenport Hosiery, Meadow River Coal & Land, Westpan Hydrocarbon, and Maracaibo Oil Exploration. For the partnership, for himself, for Susie, or for all of these whenever he had money, he put it to work as fast as he could bring it through the door.
Often he needed secrecy to execute his ideas and he used intelligent, willing people like Dan Monen to act as his proxies. Another of these proxies was Daniel Cowin, who worked for the small brokerage firm Hettleman & Co. in New York. Warren had met Dan through their late friend from Columbia, Fred Kuhlken.45
Cowin was nine years older, with deep-set eyes and a penetrating gaze. When the two of them were together, it seemed, on the surface, like a grown man hobnobbing with a college boy, but they had much in common. As a teenager Cowin had supported his family. He put the money he got for a thirteenth-birthday gift into stocks.46 What attracted Buffett to him was that Cowin traded well and worked his own ideas.47 Cowin had also endeared himself to Warren early on, when he was at Graham-Newman, by lending him $50,000 for a week so that Warren could buy some mutual-fund shares to achieve a thousand-dollar tax saving.48 Over time, they collaborated, with Dan the balding senior partner: more experienced and with more money to invest, but sharing information and ideas.
Buffett and Cowin used to call each other weekly when the Pink Sheets that listed small stocks came out, and compare notes. “Did you get that one?” “Yes! I bought that, that’s mine!”—both feeling like winners when they had picked the same ones. “It was like picking a horse,” says Dan’s wife, Joyce.49
Once, Buffett says, they had even tried to buy a Maryland “town” that the Federal Housing Authority was auctioning off for peanuts: It consisted of the post office, the town hall, and a large number of rental properties that were charging below-market rents. The town had been built during the Depression. Buffett recalls that the ad for the town made them salivate with Snidely Whiplash dreams of quickly raising the rents to a market rate. But even for “peanuts,” the town was expensive and they couldn’t get together enough cash.50
Warren could never get enough cash. But the Graham connection was about to pay off again. Bernie Sarnat—a pioneer in plastic and reconstructive surgery—went to have a chat one day with Ben Graham, his wife’s first cousin. Ben had moved across the street from the Sarnats when he and Estey retired to California. Sarnat says he asked Graham what he should do with his money now. “Well,” recalls Sarnat, “he said, ‘Oh, buy AT&T,’ and he handed me shares in three closed-end funds and some stock. And then he very casually mentioned, ‘One of my former students is doing some investing. Warren Buffett.’ And that was it. So casually that I didn’t even pick it up.”
Hardly anybody knew Warren Buffett. He might as well have been a patch of moss hidden under a rock in Omaha. Sarnat’s wife, Rhoda, took a walk every day with her cousin-in-law Estey. “One day not long after,” she recalls, “Estey said to me, ‘Listen, Rhoda, people are always approaching us to invest in their partnerships, because if they can tell people that Ben Graham invests in them, they have it made. We say no to everybody. But that Warren Buffett—he has potential. We’re investing with him, and you’d better do it too.’
“ ‘Estey, I know you think he’s bright,’ ” said Rhoda, “ ‘but I’m more interested in whether he’s honest.’ Estey said, ‘Absolutely. Totally. I trust him a hundred percent.’ ” The Sarnats and Estey Graham put $10,000 and $15,000, respectively, into Mo-Buff.
Some of the students in Warren’s investing classes had also joined the partnerships, as had Wally Keenan, his former Dale Carnegie instructor. In fact, by 1959, he was getting somewhat of a name around town. No longer hidden, his qualities—good and bad—had begun to be recognized in Omaha. The side of him that had taken the counterposition in the teenage radio show American School of the Air came across in Omaha as brash, a know-it-all. “I used to love to take the opposite side of any argument,” he says, “no matter what. I could turn in a second.” People thought it was nervy of him to ask for money to invest without telling them what he would be buying. “There were people in Omaha who thought what I was doing was some sort of Ponzi scheme,” he recalls. It had repercussions. When Warren had reapplied for full membership in the Omaha Country Club, he was blackballed. To be blackballed from the country club was a serious matter; someone disliked him enough to show it in a tangible and embarrassing way. It was one thing to identify with outsiders, but he also wanted to belong. Through connections, he worked at it until he got off the blacklist.
But his talents shone through to many more people now, and brought him partners of increasing prominence. In February 1959, Casper Offutt and his son, Cap Jr., members of one of Omaha’s most prominent families, approached him about a partnership of their own. When Warren explained that they would not know what he was buying, Cap Sr. bowed out. But Cap Jr., together with his brother John and William Glenn, a businessman for whom Chuck Peterson managed real estate properties, invested anyway. They put $50,000 into Glenoff, the seventh partnership.
And all the while that Warren was investing during these early years of the partnerships, he never deviated from the principles of Ben Graham. Everything he bought was extraordinarily cheap, cigar butts all, soggy stogies containing one free puff. But that was before he met Charlie Munger.
* A million dollars in those days would be worth closer to eight million in 2007.
* Suppose Warren earned 15% for the Buffett Associates partnership. His fee would be $5,781 after each partner got their set 4% interest. With Homer Dodge’s money he would earn fees of $9,081 in total. He would invest his fees back into the partnerships. The next year, he would get 100% of the earnings on that $9,081, plus another round of fees on the others’ capital. And so on.