Warren may have said he wanted to become a millionaire, but he never said that he would stop there. Later he would describe himself during this period as “a lousy sport at doing anything I didn’t want to do.” What he wanted to do was invest. His children now ranged from five to ten years old, and one friend described Susie as “sort of a single mother.” Warren would show up at school events or toss around a football if asked, but he never initiated a game. Susie taught the children that his special mission must be respected; she told them, “He can only be so much, so don’t expect any more from him.” That applied to her too; Warren was obviously devoted to his wife, and showed that in public, caressing “Susan-o” affectionately. At the same time he was so used to her attention and remained so undomesticated that once, when she was nauseous and asked him to bring her a basin, he came back with a colander. She pointed out the holes; he rattled around in the kitchen and returned triumphantly bearing the colander on a cookie sheet. After that, she knew it was hopeless.
Yet the predictability of Warren’s habits gave a certain stability to the Buffett household, as Susie’s come-on-in, take-a-number atmosphere unfolded around them. In the evenings he reenacted his own father’s routine, arriving at the same time every night, slamming the door from the garage, and yelling, “I’m home!” before heading to the living room to read the newspaper. He wasn’t uncaring, and he was often available. But in conversation his words often had a subtly prepared, even rehearsed quality. Whatever went on inside his mind took place between the lines; it came through in the silences, the flashes of wit, the tremulous flight from certain topics of conversation. His feelings danced behind so many veils that even he seemed unaware of them most of the time.
Susie herself was less available these days. Like her father, she stayed busy and surrounded by people; she avoided being alone and unoccupied. She was vice president of the theater guild, was involved with United Community Services, and spent far more time with those in the Jewish and black communities than among white socialites.
Susie was becoming prominent among a group of Omaha women who were passionate civil-rights supporters. She helped organize the Omaha branch of the Panel of Americans, a speakers’ bureau that sent one Jew, one Catholic, one white Protestant, and one black Protestant to talk to civic groups, churches, and other organizations about their experiences. One of Susie’s friends satirized her role on it as “to apologize for being a WASP.” But at a time when “Negroes” could not use public “white only” restrooms throughout much of the South, the sight of a black woman sitting as an equal on the same stage as white women stirred the audiences.1
In the afternoons, often with Susie Jr. in tow, Susie shot back and forth to meetings and committees on the north side of town, trying to tackle the city’s worst problem: abysmal living conditions in the ghetto.2 The police stopped her several times. “Why are you in this neighborhood?” they’d ask.
“Honey,” the fretful Doc Thompson told Susie Jr., “your mother is going to get killed.” He made her carry a police whistle when she rode with her mother. “Honey, you’re going to get kidnapped,” he said.3
Susie’s role as problem-solver and emotional carpet-sweeper meant that people thought of calling her whenever there was trouble, of any kind. She had referred to Warren as her “first patient,”4 and there were others. She stepped in more often now to manage Dottie’s life as her sister’s ability to cope declined and her drinking increased. She counseled Doris through her divorce from Truman and gave her a copy of a book, Viktor Frankl’s Man’s Search for Meaning, that Doris turned to again and again looking for hope amid misery.5
Outside of Warren’s study, the Buffetts’ home was never a refuge from the world, and opportunities for solitude were rare. Yet the children were growing up with a balance of freedom and discipline, strong ethical principles instilled by both parents, an excellent education, and an emphasis on enriching experiences. Warren and Susie had many long conversations about how to bring up children in a rich family so that they became self-sufficient rather than feeling entitled.
What the children lacked was attention from their parents. They responded to this upbringing in their different ways. The older Little Susie got, the fewer overtures she made for her mother’s attention and the more authority she assumed over her brothers. Howie, the tornado, tunneled through the backyard, leaped off the banisters, hung from the curtains, and tore through the house. He dumped a bucket of water from the roof onto Phyllis the babysitter. Everybody knew not to drink a glass of anything he handed them. But he was also easily wounded. Tenderhearted like his mother, he craved more attention than she could supply. When Susie reached her limit, she sometimes locked Howie in his room.6
Peter, who was naturally quiet, felt rewarded for staying in the background as his siblings ruled through squabbles, with bossy Little Susie striving to contain Howie’s whirlwind.7 When the energy around Peter grew too intense, he retreated inside his head. Rather than express his feelings in words, he played “Yankee Doodle” on the piano in a minor key whenever he was unhappy.8
Warren approved of his wife’s sprawling interests and was proud of her generosity and her leadership role in Omaha, which freed him to focus on his work. He, too, was always adding one more thing to his list, but unlike her he never overextended himself. When something new came into his life, something else went out. The two exceptions were money and friends.
Thanks to both, by 1963 the word had spread that this Buffett fellow out in Omaha knew what he was doing. He no longer had to charm, much less prospect; he simply laid down the terms on which he would take people’s money.
Those outside Omaha often knew more about him than his own neighbors. A friend of Little Susie’s was in the family car on the way to the 1964 New York World’s Fair when her parents stopped for gas. They struck up a conversation with the woman at the next pump, who turned out to be the mother’s former high school teacher. The woman was traveling from Elmira, New York, to Omaha, carrying with her $10,000 to invest with Warren Buffett. Do you know him? she asked. Should I invest with him? He’s our neighbor, the family said. Yes, you should. They got back in the car and headed onward to the World’s Fair, thinking no more of it. With five kids and a new house, it didn’t occur to them to invest for themselves.9
Another would-be partner, Laurence Tisch, one of two brothers who were building a New York hotel empire, sent in a check for $30,000 made out to Charlie Munger. Buffett called him and said he was glad to have Tisch join the partnership, but next time, “make the check out to me.”
Munger could have used the money. Whatever Laurence Tisch may have thought, in 1963 he and Buffett were not partners. Munger had just opened a partnership of his own after waiting until he had accumulated a fair amount of money—around $300,000—by investing in real estate. But this was peanuts by Buffett’s standards, a fraction of Warren and Susie’s wealth.
“Charlie had a lot of children early on. That hindered him a lot in getting independent. Starting early with no encumbrances is a big advantage.”
Ever since they first met, Buffett would say to Munger, It’s nice to be a lawyer and to do real estate on the side, but if you want to make some real money, you ought to start something like my partnerships.10 In 1962, Munger had gone into partnership with his poker buddy Jack Wheeler, a trader on the Pacific Coast Stock Exchange who owned an investing partnership, Wheeler, Cruttenden & Company, which included two “specialist posts” on the exchange, where traders took orders from brokers to trade stocks on the floor. They renamed the business Wheeler, Munger & Co., and sold the trading operation.
Munger had continued his law practice but bolted from his old firm together with several other lawyers, among them Roy Tolles and Rod Hills. They founded a new firm, Munger, Tolles, Hills & Wood.11 All along, Munger had naturally resisted following the rules of a law firm run by anyone but himself.
At their new firm, Munger and Hills imposed an elitist, Darwinian ethos designed to attract the brightest and most ambitious. Within three years, when he was forty-one, Munger abandoned the law altogether to work full-time at investing. But he still consulted to the firm and kept an office there, where he remained an important, almost spiritual presence. Tolles, too, shifted most of his attention to investing.
In his new role as a money manager, Munger had to raise money to manage. Buffett had always hustled for investors in an understated way, often using others as his promoters—people like Bill Angle and Henry Brandt, who found and prepared prospects—so that he could show off his impressive track record with a pleasing modesty. But however gracefully he’d hustled, he’d still done it. Munger felt this was demeaning. He managed to parlay his law practice into an investing partnership, albeit one smaller than Buffett’s, by raising funds from his powerful Los Angeles business connections.
Jack Wheeler had explained to him that, as a member of the exchange, under its rules he could borrow an additional ninety-five cents for every dollar invested.12 If the investment earned a profit of twenty-five percent, the profit on Munger’s capital would be nearly double that.13 This borrowing likewise nearly doubled his risk. If he lost twenty-five percent, he would lose nearly half his capital. But Munger, more than Buffett—far more than Buffett—was willing to take on some debt if he was positive the odds were right.
He and Wheeler set themselves up at the exchange in a “crude, cheap” office festooned with radiator pipes and stuck their secretary, Vivian, in the tiny private back office overlooking an alley.14 Wheeler, a big spender who liked to live large, had just had a hip replacement and soon started showing up for work on the golf course most mornings.15 Munger fell into a routine, arriving at five a.m., before the market opened on the East Coast, and checking the quotation board.16 Buffett had connected him with Ed Anderson, the Graham-Newman investor who had worked for the Atomic Energy Commission and seemed so smart; Munger hired him as his assistant.
Most of the traders at the stock exchange had ignored Munger’s arrival on the scene, but one of them, J. Patrick Guerin, took note. Guerin had bought the trading part of Wheeler’s partnership. A rough-and-tumble guy who was scrambling like mad to better himself, Guerin had worked as a salesman for IBM, then became a stockbroker at a couple of small firms that peddled third-class stocks. This was a part of stockbroking Buffett had detested; Guerin, too, found it a relief to escape life as a “prescriptionist.”
By the time Munger met him, the lean, handsome Guerin had learned to roll his crisp shirt cuff down over his tanned forearm to cover his tattoo. He did the trading for Wheeler, Munger, and says he immediately recognized that Munger had a money mind and began to emulate Munger and Buffett, with the goal of forming his own investing partnership.17
Munger bought cigar butts, did arbitrage, even acquired small businesses—much of this in Buffett’s style—but he seemed to be heading in a slightly different direction than Buffett. Periodically, he said to Ed Anderson, “I just like the great businesses.” He told Anderson to write up companies like Allergan, the contact-lens-solution maker. Anderson misunderstood and wrote a Grahamian report emphasizing the company’s balance sheet. Munger dressed him down for it; he wanted to hear about the intangibles: the strength of its management, the durability of its brand, how someone else could compete with it.
Munger had a Caterpillar tractor dealership as a client. To grow, the business had to buy more tractors, gobbling up more money. Munger wanted to own a business that did not require continual investment, and spat out more cash than it consumed. But what were the qualities of such a business? And what gave such a business an enduring competitive advantage? Munger was always asking people, “What’s the best business you’ve ever heard of?” But he was a man of no great patience, and inclined to think that people could read his mind.18
His impatience stood out more than any theory that was emerging inside his head. He wanted to get really rich, really fast. He and Roy Tolles made bets on whose portfolio would be up more than one hundred percent in a year. And he was willing to borrow money to make money, whereas Buffett had never borrowed a significant sum in his life. “I need three million dollars,” Munger would say, on one of his frequent visits to the Union Bank of California. “Sign here,” the bank would reply.19 Munger did enormous trades like British Columbia Power, which was selling at around $19 and being taken over by the Canadian government at a little more than $22. Munger put not just his whole partnership, but all the money he had, and all that he could borrow into an arbitrage on this single stock20—but only because there was almost no chance that this deal would fall apart. When the transaction went through, the deal paid off handsomely.
Yet despite their different approaches, Munger regarded Buffett as the king of investing, and saw himself as merely a friendly pretender to the throne.21 “Vivian, get me Warren!” he shouted several times a day to whichever secretary had come to occupy Vivian’s desk.22 He cultivated Buffett like a garden he was tending. Buffett explained his philosophy: “You’ve got to coattail,” he said.23 But he did not want his friends to coattail him and considered it unethical when they did. Hence, while Munger, cultivating Buffett, was open about his trades—he got Buffett into his British Columbia Power deal, for example—Buffett always kept his trades to himself unless he was working an idea with a partner.
By the early 1960s, the Buffetts had begun to vacation in California, so that Warren could spend more time with Graham and Munger. Once Warren and Susie took the kids on a long trip up and down the coast, but usually when they came to visit, they’d settle into a motel on Santa Monica Boulevard, and he and Munger would talk stocks for hours. The differences in their philosophies made for long conversations. Buffett would forgo the chance of profits any day to avoid too much risk, and viewed preserving his capital as an almost holy imperative. Munger had the attitude that if you weren’t already rich, you could afford to take some risk—if the odds were right—to get rich. His audacity put him in a different category from all the others who cultivated Buffett, for his deference to Buffett was limited by his high opinion of himself.
In his quest for the great businesses, Munger did not understand Buffett’s fascination with Ben Graham. “Because he is good at explaining Ben Graham,” Munger later wrote, Buffett was “behaving like the old Civil War veteran who after a few minutes of ordinary conversation always interjected: ‘Boom Boom, that reminds me of the battle of Gettysburg.’ ”24
Graham’s flaw, Munger felt, was that he considered the future “more fraught with hazard than ripe with opportunity.”25 Munger began trying to wean Buffett away from Graham’s dreary pessimism, which underlay the drudgery of stooping for cigar butts and sucking out their last puff.
Buffett had a buoyant optimism about the long-term economic future of American business, which had enabled him to invest in the market against his father’s and Graham’s advice. Yet his investing style still reflected Graham’s doom-laden habits of looking at businesses based on what they were worth dead, not alive. Munger wanted Buffett to define the margin of safety in other than purely statistical terms. In doing so, Munger was working against a subtle tendency toward catastrophism in Buffett’s outlook that sometimes cropped up when solving theoretical problems. His father, Howard, had always prepared for the day the currency became worthless, as if that day were imminent. Warren was far more realistic. Nonetheless, he tended to extrapolate mathematical probabilities over time to the inevitable (and often correct) conclusion that if something can go wrong, it eventually will. This style of thinking was the proverbial double-edged sword: It made Buffett a gifted visionary whose thoughts oriented toward doomsday. He would come to use this sword often to slice through knotty problems, sometimes in a very public way.
A few years earlier, another friend of Buffett’s, Herb Wolf of New York Hanseatic, an over-the-counter trading house, had helped Buffett tame another personality trait that was hindering his financial quest. Wolf, an investor in the water utility American Water Works, had sought Buffett out in the early 1950s after reading an article that Warren had written on IDS Corporation in the Commercial & Financial Chronicle.26
“Herb Wolf could tell the effect on American Water Works’ earnings if somebody took a bath in Hackensack, New Jersey. One day Herb said to me, ‘Warren, if you’re looking for a gold needle in a haystack of gold, it’s not better to find the gold needle.’ I had this thing that the more obscure something was, the better I liked it. I thought it was a treasure hunt. Herb got me out of that way of thinking.”
By 1962, Buffett had shaken off the treasure-hunt way of thinking. But he still had Wolf’s passion for detail, and his operations had expanded so much that he now needed another employee to assist him. He managed to keep this one off his own payroll; Buffett would forever go to extremes to control his overhead by paying for expenses in ways that could be shut off as needed, or, better yet—as in this case—could be covered in ways that made them effectively free.
Henry Brandt, Buffett’s stockbroker friend who worked at Wood, Struthers & Winthrop, had been doing part-time research for the BPL partnership. Buffett had been paying Wood, Struthers for Brandt’s time through the brokerage commissions he paid for trading stocks through it. He would be paying commissions to somebody anyway, so Brandt effectively worked for him for free.27
Now Brandt worked for Buffett almost one hundred percent of the time. Buffett paid Brandt by waiving his partnership fee and beginning to cut him in on outside deals without an override. The two men shared an interest in knowing the minutest details about a company. Brandt was fearless about asking questions. Unlike Buffett, he never thought twice about making himself obnoxious if this was what it took. He gladly did enormous amounts of meticulous research by gumshoeing and pestering people. Brandt, however, was incapable of stopping before he found the gold needle. Therefore, Buffett set the agenda and steered the process to keep it from turning into a treasure hunt. Brandt produced foot-high stacks of notes and reports.28
Part of Brandt’s job for Buffett was finding scuttlebutt, a term used by investment writer Phil Fisher, who said that qualitative factors like the ability to maintain sales growth, good management, and research and development characterized a good investment.29 These were the qualities that Munger was searching for in the great businesses. Fisher’s proof that these factors could be used to assess a stock’s long-term potential was beginning to creep into Buffett’s thinking, and would eventually take hold.
Buffett now had Brandt digging into an idea that would have pleased Munger, had he known about it. The episode that resulted would become one of the high points of Buffett’s career. This opportunity had its roots in the machinations of a big-time commodities trader, Anthony “Tino” De Angelis, who arguably was the world’s most important and legitimate dealer in soybean oil. De Angelis had become convinced in the late 1950s that he’d found a shortcut to making money in soybean oil.
De Angelis was using the oil as collateral to borrow from fifty-one banks.30 It apparently struck him that as long as nobody knew how much soybean oil was in the tanks, why not goose up the numbers a little bit so he could borrow more money?
The tanks sat in a warehouse in Bayonne, New Jersey, which was managed by a tiny subsidiary that was an almost invisible part of the gigantic empire of American Express. This arm of the business issued warehouse receipts: documents that certified how much oil was in a tank and could be bought and sold. American Express stood as guarantor of the quantity of oil behind those receipts.
The tanks were connected by a system of pipes and valves, and De Angelis found that the soybean oil could be sloshed and shunted around from one tank to another. Thus, a gallon of oil could pull double or triple or quadruple duty as collateral for a loan. Pretty soon, the loans guaranteed by warehouse receipts were secured by a smaller and smaller amount of soybean oil.
Eventually, it occurred to De Angelis that, in fact, very little oil was needed. Indeed, just enough to fool the inspectors would do the trick. So the tanks were filled with seawater, and oil was placed inside a little tube that the inspectors used to guide their measuring sticks. They did not notice the difference or think to test a sample from outside the tube.31
In September 1963, De Angelis saw a chance to make a further killing. The Soviet sunflower crop had failed, and rumors spread that the Russians would have to turn to soybeans for oil. De Angelis decided to corner the soybean market, forcing the Communists to buy from him at an inflated price. He began to trade in the futures market. Futures contracts give someone the right to buy soybean oil at a later date, betting on the price of oil in the future versus the price today. There was no particular limit to how many soybean futures he could buy. In fact, he could and did control more soybean oil than actually existed on the planet32 by borrowing heavily from his broker. Then, suddenly, it appeared that the U.S. government might not let the Soviet deal go through. The price of soybean oil collapsed. De Angelis’s lenders, holding the now-worthless warehouse receipts, hired investigators and turned to American Express, issuer of the receipts, to recoup their $150 to $175 million in losses. And American Express—caught holding tanks full of nothing but worthless seawater—saw its stock plummet. The story began to hit the newspapers.
Two days later, on Friday, November 22, 1963, President John F. Kennedy was assassinated while riding in a Dallas motorcade.
Buffett was downstairs eating lunch in the Kiewit Plaza cafeteria when somebody came in with the news that Kennedy had been shot. He went back upstairs to his office and found that stocks were plunging on heavy trading. Then the exchange closed, its first emergency closing during trading since the Great Depression.33
As a stunned country erupted in sorrow, anger, and shame, Buffett went home to sit, along with the rest of the country, and watch the nonstop television coverage throughout the weekend. He characteristically displayed no powerful surge of emotion, rather a detached gravity. For the first time, shock and sorrow united the world through the medium of television. For a brief while America stopped thinking about anything but the assassination.
The newspapers, of course, relegated the American Express scandal to their back inside pages for days as the dramatic headlines took precedence.34 But Buffett went looking for it. The stock never recovered from the blow it took on Friday when the market closed, and afterward it continued to slide downhill. Investors were fleeing from the stock of one of America’s most prestigious financial institutions.35 It wasn’t clear whether American Express would survive.
But the company was an emerging financial powerhouse. Half a billion dollars of its Travelers Cheques floated around the world. Its credit card, launched five years earlier, was a huge success. The company’s value was its brand name. American Express sold trust. Had the taint to its reputation so leaked into customers’ consciousness that they no longer trusted the name? Buffett started dropping in on Omaha restaurants and visiting places that took American Express cards and Travelers Cheques.36 He put Henry Brandt on the case.
Brandt scouted Travelers Cheque users, bank tellers, restaurants, and credit-card holders to gauge how American Express was doing versus its competitors.37 Back came the usual foot-high stack of material. Buffett’s verdict after sorting through it was that customers were still happy to be associated with the name American Express. The tarnish on Wall Street had not spread to Main Street.38
During the months that Buffett was investigating American Express, his father’s health declined precipitously. Despite having undergone several surgeries, Howard’s cancer had spread throughout his body. In early 1964, Warren took charge as the de facto leader of the family. While time remained, he had Howard remove him from his will to increase the share left to Doris and Bertie in a trust. The amount—$180,000—was a fraction of his and Susie’s net worth; he felt it made no sense for him to share it when he could so easily earn money himself. He set up another trust for his children so that Howard could leave them the farm to which the Buffett family had planned to flee when the dollar became worthless. Warren would be trustee of these trusts. Howard’s previous will had specified an ordinary wood casket and an economical funeral, and the family convinced him to delete that part.39 One of the most difficult things Warren felt he had to do was to level with his father that he was no longer a Republican at heart.40 The reason, he said, was civil rights.41 Amazingly, however, he could not bring himself to change his voter registration as long as Howard was alive.42
“I wouldn’t throw that in his face. In fact if he had lived, it would have really constrained my life. I would not have come out against my father politically in public. I can envision his friends wondering why Warren was behaving that way. I couldn’t have done it.”
Although the family did not talk about Howard’s impending death at home,43 Susie took over much of his care from Leila. She arranged for the children to stand outside his hospital window with a sign that said, “We Love You, Grandpa.” Susie also made sure that Warren—who had trouble facing illness under any circumstances—went to the hospital every day to see his father.
As Howard worsened, Warren poured his attention into American Express. He had the largest cache of money with which to work that the partnership had ever seen: BPL’s capital at the beginning of 1964 stood at just under $17.5 million. His own money had exploded: He was now worth $1.8 million. During Howard’s last weeks, Warren began to invest in American Express, working tirelessly and methodically to get as many shares as he could without running up the price. Only five years before, he had had to scrape and scrounge to find a few tens of thousands for National American. Never had he put to work anything approaching this much money, and so fast, in his life.
Through most of Howard’s final few days, Susie was alone with him, often for hours at a time. She both feared and understood pain, but she was unafraid of death and had the strength to sit with Howard even when those around her were falling apart. Leila, devastated, let her take charge. In such close proximity to death, Susie found that the boundaries between herself and the other dissolved. “Many people kind of flee, but for me it was natural,” she said. “It was a beautiful experience to be that physically and emotionally intimate with someone you loved, because I knew exactly what his needs were. You know when they need to turn their head, or you know when they need a little ice chip. You know. You feel it. I loved him very much. And he gave me that gift for myself of knowing, of having that experience, and realizing how I felt about it.”44
Susie Jr., Howie, and Peter were sitting at the kitchen table one evening when their father came in, looking more depressed than they had ever seen him. “I’m going to Grandma’s house,” he said. “Why?” they asked. “Aren’t you going to the hospital?” “Grandpa died today,” Warren said, and walked out the back door without another word.
Big Susie planned the funeral, while Warren sat at home, stunned into silence. Leila was distraught, but she anticipated her reunion with her husband in heaven. Though Susie tried to get Warren to explore his feelings about his father’s death, he literally could not think about it, fending it off with anything else available. Falling back upon his core of financial conservatism, he argued with Susie that she had been conned into spending too much money on Howard’s coffin.
Warren sat in silence at the funeral as five hundred people mourned his father. No matter how controversial Howard Buffett’s views were during his life, people came out to show respect for him in the end. Afterward, Warren stayed home for a few days.45 He parried unwelcome thoughts by watching Congress debate landmark civil-rights legislation on television. When he returned to the office, he continued buying American Express at a hectic pace. By the end of June 1964, two months after Howard’s death, he had put almost $3 million into the stock; it was now the partnership’s largest investment. Although he never did show any visible sign of grief,46 eventually he placed a large portrait of his father on the wall across from his desk. And weeks after the funeral, two bald patches appeared on the sides of his head. His hair had fallen out from the shock.