Jet Jack

Omaha • 1967

As late as 1967, Susie seemed to think that Warren would be more attentive to her and the family if he quit working. In her mind, the two of them had an understanding that they would scale back their lives once he made $8 or $10 million. His 1966 fees and capital gains brought the family’s net worth to over $9 million.¹ She badgered him that the time had come. But Warren’s pace never slackened. Sometimes his back seized up when he got on a plane, and occasionally Susie had to nurse him for several days while he was bedridden with pain. His doctor couldn’t find any specific cause, suggesting that work or stress might have something to do with it. But Warren was about as likely to stop working for the sake of his back as he was to fork down a big plate of broccoli for the sake of his health.

He was always sitting hunched over something, a book, the phone, a bridge or poker game with friends like Dick Holland and Nick Newman, a prominent businessman who owned Hinky Dinky, the same grocery chain from which Warren had slunk, humiliated, as a boy after his grandfather sent him to buy loaves of bread. Newman and his wife were active in the community and in civil-rights circles, and, like the low-key Hollands, they were typical of the Buffetts’ friends. Warren and Susie stayed away from the Omaha social circuit. Their joint social life was evolving into a series of recurring events that followed the rhythm of Warren’s work and often took place when they were traveling to see Warren’s friends. In town, Susie stayed on call; she shuttled between her own friends, family, needy cases, and community work. A sign now hung on the Buffetts’ unlocked back door that read: “The Doctor Is In.” One or another of Susie’s “patients” could often be found wandering around the house. Her clientele came from all different ages and stations in life, and some were demanding. They asked and Susie gave, and when they asked for more, she gave more.

When Susie asked, Warren gave. Unyielding about how he spent his time, he gave in to her on almost everything else. This was the year they remodeled the house. Already the biggest on the block, under Susie’s direction a new wing replaced the old garage, giving the neighborhood kids a place to gather in a new family room. Warren was excited at having his own racquetball court in the basement underneath—like Ping-Pong on a human-size scale—where he took his friends and business colleagues to play.

But even though Warren was like a kid in many ways, and Susie wished he were a more attentive father, he was loyal and committed: He showed up at school events and took the children on vacations. The year of “White Rabbit” and Sgt. Pepper’s Lonely Hearts Club Band, 1967, marked the apex of the rock-and-roll drug culture, but with Susie Jr. in eighth grade, Howie in sixth, and Peter in third, the Buffetts were blessedly free of worries faced by many other parents.

Susie Jr. had developed from a timid child to a self-sufficient teen and the undisputed boss of her siblings. A rock-and-roll girl, she introduced her brothers to groups like the Byrds and the Kinks. She was a straight kid, however, not sucked into the druggy element at school. Howie, now twelve, was still young enough to try to scare his sister and her friends by looming from the crabapple tree outside her window in a gorilla costume. But his pranks were getting more sophisticated, and more dangerous. He put Scout the dog on the roof, went downstairs, and called him to see if he would come. Scout did, and wound up at the vet with a broken leg. “Well, I just wanted to see if he would come,” Howie protested.² To foil his mother from periodically locking him in his room out of frustration, he bought a lock at a hardware store and started locking her out. Peter spent hours at the piano, playing by himself or with his friend Lars Erickson. He was winning talent shows and seemed as absorbed in his music as his father was in making money.

The one person in the family who was seduced by the dark side of the psychedelic sixties was seventeen-year-old Billy Rogers, son of Susie’s sister, Dottie, now a budding jazz guitarist who was experimenting with drugs. His mother did some volunteer work and was an expert seamstress, but she also slept until noon, seemed paralyzed by making decisions, and at times was so distant and vague that it was literally impossible to carry on a coherent conversation with her. Dottie was drinking more and not paying attention to her kids. Susie often took Billy to watch Calvin Keys, a local jazz guitar player—so that Billy could learn technique from him, but also to try to straighten Billy out.³

She faced a daunting task in an era when the drug culture of pot and LSD was ubiquitous and Timothy Leary invited America to “Turn on, tune in, drop out.” The youth-led counterculture was rebelling against all forms of authority, everything for which the prior decades had stood. “This ain’t Eisenhower’s America no more,” said one of the hundred thousand hippies milling about San Francisco’s Haight-Ashbury that summer, as if that were explanation enough.⁴

Warren still lived in Eisenhower’s America. He had never suffered from Beatlemania. His state of consciousness remained unaltered. His mind was deep in rigorous philosophical inquiry, torn between the cigar-butt philosophy of Ben Graham and the “great businesses” of Phil Fisher and Charlie Munger.

“I was in this Charlie Munger–influenced type transition—sort of back and forth. It was kind of like during the Protestant Reformation. And I would listen to Martin Luther one day and the Pope the next. Ben Graham, of course, being the Pope.”

While Munger was nailing his theses on the door of the Cigar Butt Cathedral, the market itself had abandoned all authorities past and present; as the 1960s progressed, chatter about stocks enlivened cocktail parties, and housewives called their brokers from the beauty parlor. Trading volumes were up by one-third.⁵ Buffett, at thirty-six, felt like a grizzled old man in a world that craved Transitron, Polaroid, Xerox, Electronic Data Systems—companies whose technology he did not understand. He told his partners that he was slowing down. “We simply don’t have that many good ideas,” he wrote.⁶

Yet he did not relax his rules in search of ways to keep the money at work. Instead, he laid out two new restrictions that would make it even harder for him to invest. These personal preferences now became part of the official canon.

By “major human problems” he meant layoffs, plant closings—and union businesses that couldn’t take a strike. This also meant he would think once, twice, three times, before smoking any more cigar butts.

The cigar butts he owned were problem enough. Berkshire Hathaway was now “on life support.” Buffett had recently hired his Peat, Marwick auditor, Verne McKenzie, and sent him off to New Bedford to oversee the wretched textile mill. He had been regretting a mistake he had made at a recent Berkshire Hathaway board meeting. Feeling flush during what would turn out to be a brief moment of financial success, Buffett had let himself get talked into a ten-cent-per-share dividend. Either while daydreaming or simply in a moment of weakness, Buffett went along with the distribution; a dime a share sounded measly; it somehow took him twenty-four hours to wake up. By then it was too late and his uncharacteristic agreeableness had showered on the partners and shareholders $101,733 that he knew he could have turned into millions someday.⁷ He would never make a mistake like that again.

Eight months later, Buffett offered the Berkshire shareholders a swap. Anyone who wanted an income-producing security could have a 7½ percent debenture in exchange for stock. A total of 32,000 shares were turned in. With this move Buffett washed out of the mix a group of shareholders who wanted income, ensuring that the rest were more likely to care about growth instead of dividends. And, of course, with fewer shares outstanding, he was able to tighten his grip on Berkshire that much more—curiously, even as the magnitude of his original error in buying the place was clearer. Ken Chace stoically followed Buffett’s orders to shrink the business. Rather than precipitate a hateful backlash like that at Dempster, Buffett listened to Chace’s recommendations that the unions be treated well, and tolerated losses to keep some remnant of the company operational and New Bedford content.

By 1967 Chace and McKenzie had managed to pull the hapless maker of men’s suit linings back to breakeven. But the term “inflation”—moribund since the Second World War—was again on everyone’s lips. The costs of wages and raw materials were rising like silt in a river, and both foreign and southern textile mills with cheaper labor were drying up Berkshire’s sales.

Buffett tried to pull money out of the textile business as fast as possible. He became intimately involved in the most ordinary decisions of the mills, on the phone almost daily with Chace and McKenzie.⁸ Chace had had to shut down the Box Loom division for a week back in October 1966 because of competition from imports; less than six months later Buffett told him to permanently shut down the King Philip D division in Rhode Island, which made fine lawn cotton, about one-tenth of Berkshire’s output. The loss of 450 jobs marked the end of Rhode Island’s cotton industry.⁹ “The tide continues to be far more important than the swimmers” was the bottom line, as Buffett saw it.¹⁰

It wasn’t enough. As the numbers came in, Buffett realized that the Apparel Fabrics and Box Loom divisions were losing so much money that the only way to salvage them was to modernize the equipment. But throwing good money after bad had been Seabury Stanton’s mistake. Buffett refused to invest in the business; it would be like trying to irrigate the desert with a garden hose. Still, closing the plants down would throw hundreds of people out of work. He sat behind his desk and swiveled his chair and thought about it, then thought about it some more.

The irony was that the partnership was swimming in a sea of money.¹¹ And on Wall Street, brokers in pinstripes were getting high on cash. A new breed of men, who had come of age after World War II without the lessons of the Crash and the Great Depression seared into their brains, had risen on the Street. As they pushed stocks to never-before-seen values, Buffett began selling down his American Express position, which by now was worth $28 million compared to the $13 million that it had cost, accounting for two-thirds of the partnership’s gain. But he didn’t want to plow that money back into Berkshire Hathaway.

Rather, his most important task that year was to find something new to which he could hitch the broken-down nag of Berkshire before its “substantial drag” on his performance became intolerable. In Omaha, he had long had his eye on a company, National Indemnity, headquartered just a few blocks away from his Kiewit Plaza office. Buffett first met its founder, Jack Ringwalt, in the early 1950s, in the boardroom at the broker Cruttenden and Company. Ringwalt was one of the smartest, most enterprising men in town. At one point he had declined to invest in the Buffett Partnership—in Ringwalt’s version, because Buffett had demanded a minimum investment of $50,000 (although he was taking far less from nearly everyone at the time). Ringwalt considered himself an investing expert; perhaps Buffett’s penchant for secrecy put him off.¹²

Buffett kept an eye on National Indemnity. A nonstop learning machine, he wanted to know everything there was to know about the insurance business. He checked out armloads of books from the library and came to understand Ringwalt’s strategy, which was to insure the most difficult customers. Ringwalt, Buffett saw, was the mix-up player of insurance—the cautious risk-taker and the penny-pinching, aggressive underwriter who went around the office every night and turned off all the lights.¹³ For a fancy price, he insured the unusual: circus performers, lion tamers, the body parts of burlesque stars.¹⁴ “There’s no such thing as a bad risk,” Ringwalt liked to say, “only bad rates.” He soon became the fastest-moving, most swashbuckling, energetic businessman in Omaha. His daughter referred to him by the racy-sounding nickname Jet Jack. He managed National Indemnity’s investments himself, buying tiny positions in hundreds of stocks, scribbled almost illegibly on ledger sheets: fifty shares of National Distillers, 2,500 of Shaver Food Marts. He carried around hundreds of stock certificates in an old gym bag.

In the early 1960s, Buffett asked his friend Charlie Heider, who was on the board of National Indemnity, whether Ringwalt had any interest in selling. Heider’s answer was intriguing.

“For fifteen minutes every year, Jack would want to sell National Indemnity. Something would make him mad. Some claim would come in that irritated him, or something of that sort. So Charlie Heider and I discussed this phenomenon of Jack being in heat once a year for fifteen minutes. And I told him if he ever caught him in this particular phase to let me know.”

One gray and gloomy February Omaha day in 1967, Heider was having lunch with Ringwalt, who said, “I don’t like this weather.” The conversation wound around to the fact that he wanted to sell National Indemnity. The fifteen-minute window had appeared. Heider set up a meeting with Buffett that very afternoon.¹⁵ When Ringwalt went to see Buffett in his office, however, he started laying down conditions. He said he wanted to keep the company in Omaha. Sensing that the fifteen-minute window was about to disappear, Buffett agreed he wouldn’t move the company. Ringwalt said he didn’t want any employees fired. Buffett said that was okay. Ringwalt said all the other offers had been too low. “How much do you want?” Buffett asked. Fifty dollars a share, said Ringwalt, fifteen dollars more than Warren thought it was worth. “I’ll take it,” Buffett said.

“So we made a deal in that fifteen-minute zone. Then, Jack, having made the deal, really didn’t want to do it. But he was an honest guy and wouldn’t back out of a deal. However, he said to me after we’d shaken hands, ‘Well, I suppose you’ll want audited financial statements.’ And if I’d have said yes, he would’ve said, ‘Well, that’s too bad, then, we don’t have a deal.’ So I just responded, ‘I wouldn’t dream of looking at audited financial statements—they’re the worst kind.’ We went through about three or four iterations like this. And finally Jack gave up and sold me the business, though I don’t think he really wanted to do it.”

Since Buffett knew that Ringwalt would be having second thoughts, he moved fast to seal the deal before Ringwalt could change his mind. Both men wanted a contract no more than one page long.¹⁶ Buffett had final papers drawn up quickly and the funds deposited in the U.S. National Bank.¹⁷

When Ringwalt returned from a vacation in Florida a week later, Buffett freight-trained him with a deal ready to close. Ringwalt showed up to the closing meeting ten minutes late. Buffett and Heider would later explain this by saying that Ringwalt was driving around the block looking for a parking meter with time left on it.¹⁸ Ringwalt always said he was just late. But maybe he was dragging his feet, sorry at losing National Indemnity.

Buffett, of course, knew full well that National Indemnity was the chance to give his fortunes a gigantic push. A short time later, he wrote a paper on the subject under the dull title “Thoughts Regarding Capital Requirements for Insurance Companies.”

The word “capital”—money—was an important hint at what Buffett was thinking when he acquired National Indemnity, for capital was his partnership’s lifeblood. He was pulling capital from Berkshire and it needed to be put to work. “By most standards,” he wrote, “National Indemnity is pushing its capital quite hard. It is the availability of additional resources in Berkshire Hathaway that enables us to follow the policy of aggressively using our capital which, on a long-range basis, should result in the greatest profitability within National Indemnity.… Berkshire Hathaway could put additional capital into National Indemnity, should the underwriting turn sour.”¹⁹

Buffett had figured out a whole new type of business. If National Indemnity made money, he could send those profits out to buy other businesses and stocks, instead of leaving them to hibernate in National Indemnity’s vault. But if the lion ate the lion tamer, National Indemnity might need money to pay the lion tamer’s weeping family. Then the money could come back home to National Indemnity from the other businesses.

Grafting the insurance business onto Berkshire Hathaway, the mess of a textile mill, made its capital homeostatic. It could respond internally to the environment at Buffett’s command, rather than hibernating like a lizard when it got cold or running out when the sun shone to find a rock on which to sun itself.

The key was to price the risks right. As with Ben Rosner and Associated Cotton Shops, he had bought an excellent business run by an able manager. Thus he needed Jack Ringwalt to stick around. Buffett paid Ringwalt handsomely and cultivated him as a friend.

The two men often played tennis in California. Ringwalt, whose taste in clothes resembled Buffett’s, would show up in a grimy old sweatshirt that his daughter had made for him. His racy nickname, Jet Jack, stretched in huge letters over his bay window of a gut. Once when he and Buffett were having lunch at a Jolly Roger restaurant, a little kid came up to him. “Can I have your autograph, Jet Jack?” he asked. Ringwalt swelled with pride. The kid thought he was a celebrity: an astronaut or a movie star. He may not have looked the part except to a little kid, but in his heart, he still felt like Jet Jack.

And rightly so, because the swashbuckle came from inside, not from the way he looked. Ringwalt may have sold his company, but he had gotten back a bit of his own—for what he did with some of the money he got from selling National Indemnity was to buy stock in Berkshire Hathaway.²⁰