In the late 1950s and the early 1960s, while Buffett wrestled with Sanborn, consolidated the partnerships, and moved into the office with his father, he embarked on another project, again some distance from Omaha. The second major orchestration of his supporting group, this was the first in which he actually took control of a company. And it would consume far more of his time and energy than had Sanborn Map.
Dempster Mill Manufacturing was a family-run company in the worst sense of the word. It made windmills and water irrigation systems in Beatrice,* Nebraska, a windswept prairie town that depended on Dempster as its sole important employer. This episode of Buffett’s career had started like putting a quarter in yet another slot machine to get a dollar back—or so it seemed. The stock sold for $18 a share and the company had a steadily growing book value of $72 a share. (“Book value” is the stated value of a company’s assets less what it owes—like a house less the mortgage, or cash in the bank less a credit-card balance.) Dempster’s assets were windmills, irrigation equipment, and its manufacturing plant.
Since Dempster was just another cigar butt, Warren applied his cigar-butt technique, which was to keep buying a stock as long as it continued to sell below book value. If the price rose for any reason, he could sell out at a profit. If it didn’t, and he ended up buying until he owned so much stock that he controlled the company, he could sell off—that is, liquidate—its assets at a profit.1
Over several years, Buffett, Walter Schloss, and Tom Knapp got hold of eleven percent of the stock—second only to the Dempster family—and Warren joined the board. In early 1960, the board hired Lee Dimon, formerly purchasing manager of Minneapolis Molding Co., as Dempster’s general manager, over Buffett’s reservations.2 Buffett maneuvered the chairman, Clyde Dempster, into a figurehead role and continued buying stock.3 He wanted every share that he could lay his hands on. He rang up Schloss in New York and said, “Walter, I want to buy your stock.”
“Gee, I don’t want to sell it to you,” said Schloss. “You know, it’s a nice little company.”
“Look, I’m doing all the work on this idea. I’d like your stock,” said Buffett.
“Warren, you’re a friend of mine. If you want it—take it,” said Schloss.4
In the adult version of absconding with Doris’s bicycle, Buffett took it. He had a weakness: If he felt he needed something, he needed it, and that need must be satisfied. He did this, however, without any apparent malice or arrogance. If anything, it was the opposite; he was just so terribly needy. People like Schloss generally gave in to him because they liked him, and besides, whatever it was he wanted, he obviously seemed to feel he needed it more than they did.
As he gained more stock, Buffett also bought out the Dempster family. With that transaction, he achieved control, eased out Clyde Dempster, and made an offer to all other shareholders on the same terms.5
Here Buffett was treading on tricky ground. As chairman, he felt he could not rightly urge other investors to sell when he was buying. He even bent over backward to warn them that he thought Dempster stock would do well. Nevertheless, money and human nature could be counted on to do their job. People convinced themselves that they would rather have the cash than a thinly traded stock of dubious value. Soon, therefore, Dempster made up twenty-one percent of the partnership’s assets.
In July 1961, Warren wrote his partners that the partnership had invested in a nameless company that might prove to be “a deterrent to short-range performance, but it gives strong promise of superior results over a several-year period.”6 He named Dempster, which the partnership now controlled, and wrote a little sermon about it in his January 1962 letter.7 The “deterrent to short-range performance” part would prove more prescient than he expected.
During 1962, Buffett coached Lee Dimon and tried to explain to him how to manage inventory. But as a former purchasing manager, Dimon knew how to purchase—so he did. The warehouse bulged with windmill parts8 as Dempster sucked up cash. By early 1962, the company’s bank grew alarmed enough to make noises about shutting Dempster down.
Buffett was looking at only a few months before it all caved in and he would have to report to the partners that a business into which he had sunk a million dollars of their money was broke. He rarely asked advice, but finally that April he took the situation up with his friend Munger. Munger referred him to a turnaround specialist, Harry Bottle.
Six days later, lured by a $50,000 sign-on bonus, Harry Bottle was in Beatrice. This meant that Buffett had to fire someone. Not only that, someone at Dempster, the only major business in town.
Buffett dreaded confrontation. His first instinct was to avoid it, and he ran like a singed cat if anyone threatened to explode at him the way his mother had. But he had also learned to shut down emotionally in the face of a possible eruption. The trick, he felt, was “to create a shell around yourself with respect to that, without creating a shell that extends beyond” the situation, to keep from becoming a hardened person.
Whatever happened when he fired Lee Dimon, his wife, Harriett, afterward wrote Warren a letter in which she accused him of being “abrupt and unethical,” and, through his coldness, of destroying her husband’s confidence. Buffett, at almost thirty-two, had not yet learned to fire people with empathy.
Within days he sent his new employee Bill Scott over to Beatrice to help Harry Bottle rummage around the parts department and decide what to toss out and what to reprice.9 They swept through the place like a swarm of boll weevils and slashed inventory, sold off equipment, closed five branches, raised prices for repair parts, and shut down unprofitable product lines. They laid off a hundred people. This extensive shrinkage of the business by its new out-of-town management on the heels of the firing prompted the townspeople of Beatrice to eye Buffett with increasing distrust, suspecting that he was a ruthless liquidator.
By year-end 1962, Bottle had pulled Dempster into the black. In his letter to partners, Buffett called Dempster the high point of the year, and named Harry Bottle the man of the year.10 The bank was happy. Buffett tried to sell Dempster privately but found no takers at his price, so in August he notified the shareholders that the company was for sale, and ran an ad in the Wall Street Journal.
He gave buyers a month to get their bids in before the public auction. He had already been talking to most of the obvious candidates.
Beatrice went berserk at the thought of another new owner that might impose layoffs or a plant closing on its biggest and virtually only employer. In the postwar boom, plants opened, they didn’t close. Less than a quarter century after the end of the Great Depression, the prospect of mass unemployment brought back haunting memories of gray-faced men in soup lines, a quarter of the nation unemployed, and demeaning government make-work jobs.
The people of Beatrice pulled out the pitchforks.11 Buffett was shocked. He had saved a dying company. Didn’t they understand that without him, Dempster would have gone under?12 He had not expected the ferocity, the personal vitriol.
The townspeople launched a crusade to foil Buffett by raising nearly $3 million to keep the ownership in Beatrice.13 Day by day the Beatrice Daily Sun breathlessly counted down to the deadline as the town fought to save its only factory. The day of the deadline, fire sirens sounded and bells rang out as the mayor stepped to a microphone and announced that Buffett had been defeated; Charles B. Dempster, grandson of the company’s founder, headed an investor group that pledged to keep the plant open.14 Cash in hand, Buffett handed out more than $2 million to his shareholders.15 But the experience scarred him. Instead of becoming toughened against animosity, he vowed never to let it happen again. He couldn’t take a whole town hating him.
One day not long after, Buffett called Walter Schloss, saying, “You know, Walter, I have these small positions in five different companies, and I’ll sell them to you.” “Well, what price would you want, Warren?” Schloss asked. “I’ll sell them to you at the price that I’m carrying them at,” Buffett said. “Okay, I’ll buy them from you,” said Schloss immediately.
“I didn’t say, ‘Well, you know, you have to look up each one and check what it’s worth,’ “ Schloss says. “I trusted Warren. If I had said, ‘Well, I can buy it for ninety percent of what you’re carrying it at,’ Warren would have said—‘Forget it!’ I did him a favor, so he wanted to do me one too. If he had also made a profit, then that was fine. And they all worked out brilliantly. I felt that it was his way of saying, ‘Thank you for selling me your Dempster stock.’ I don’t say that’s the reason, but that’s what I mean by being an honest guy.”
* Pronounced “bee-A-triss.”