Three months after the Stage Door Deli party, in January 1970, Buffett’s friend Carol Loomis highlighted his spectacular performance—and his dour view of the prospects for stocks—in an article in Fortune.1 Shortly before the article appeared, he sent the partners a letter explaining what they owned.
The departing partners were floored to find that they owned a trading-stamp company, a bank, and an insignificant newspaper.4 Now they had to decide whether to hold their cards or trade them, because they could have all cash instead.
“He would cut the pie and you would be able to get the first choice on the pieces,” says John Harding. Buffett, of course, wanted them to choose the cash, leaving the Berkshire Hathaway and Diversified Retailing stocks for himself. Nevertheless, he was honest with them. In a letter of October 9, 1969, he made a market forecast, which he had previously declined to do. With the market at such heights, “… [f]or the first time in my professional life,” he wrote, “I now believe there is little choice for the average investor between professionally managed money in stocks and passive investment in bonds”5—although he did allow as how the very best money managers might be able to squeeze out a few percentage points over the earnings of bonds.
Two months later, on December 5, he gave a prediction about how these two stocks would do. “My personal opinion is that the intrinsic value of DRC and B-H will grow substantially over the years.… I would be disappointed if such growth wasn’t at a rate of approximately ten percent per annum.” That was an important forecast that Berkshire and Diversified would not only do better than bonds, but better than he had said in October the partners could expect from even the very best money managers.
“I think both securities should be very decent long-term holdings and I am happy to have a substantial portion of my net worth invested in them.… I think there is a very high probability that I will maintain my investment in DRC and B-H for a very long period.”6
Separately, Buffett wrote the partners a dissertation on how to invest in bonds, again extending himself considerably more than a typical money manager would ever do. Even so, “I had four people panic when I closed down, all divorced women. They trusted me, they had had bad experiences with men, and they didn’t feel they could make it again if they lost what money they’d gotten. They would call me in the middle of the night and say, ‘You’ve got to keep earning me money.’ ”7
But he refused to act as what he considered to be a fiduciary if he could not perform to his high standards. “Basically, if I’m the guarantor, I just can’t do it, knowing how hard it was on me once,” he says, harkening back to what he had felt at age eleven when Cities Service Preferred had disappointed his sister.
He continued working on the partnership dissolution over Christmas in Laguna Beach. He had bought his Christmas gifts with his usual efficiency. As with most things, he had a system: He went to Topps, the best dress shop in Omaha, and gave them a list of the different sizes for all the women in his life.
“I would go over, and they’d wheel out the dresses. I’d make a variety of decisions and buy presents for my sisters, Susie, Gladys, and so forth. I kind of enjoyed it.
“You know, clothing holds its value better than jewelry.”
On December 26, after the exchange of Christmas gifts, he sent the partners another long letter, going out of his way to answer at length a number of their questions.8 A few of the partners had been challenging him. If it was such a lousy business, why not get rid of the Berkshire Hathaway textile mill?
“I have no desire to trade severe human dislocations for a few percentage points additional return per annum,” he wrote. But since the whole point of his business was to eke out a few additional percentage points per annum, this kind of rationalization would have been unthinkable earlier in his career.
What is Sun Newspapers? they asked. It’s worth a buck a share, he replied, kind of skipping the rest of the economics. Adding some famous last words, “We have no particular plans to expand in the communication field,” he wrote.9
Why didn’t you register the Berkshire Hathaway and Diversified stock so that it could be freely traded? Berkshire was so closely held that it traded “by appointment”—which made it hard for anyone to know what the stock was actually worth. Diversified did not trade at all.
A long, complicated explanation followed, in which Buffett argued that a freely traded and liquid public market for these stocks would be less efficient and less fair and “the more sophisticated partners might have an important edge over the less sophisticated partners.” And it was certainly true that the more naive of his departing partners would be kept from the clutches of the manic-depressive Mr. Market, who might at times have valued the stock at a severely discounted price. It lowered the odds that a pack of brokers would talk them into selling just to buy IBM or AT&T. But it also meant that Buffett was limiting his partners’ options—making it harder for them to buy and harder for them to sell—and, if they did sell, making it more likely that they would sell to him.
As general partner of the partnership, he was used to having total control of these two companies. Letting go and giving up control to the anonymous Mr. Market—he just couldn’t do it. Moreover, as soon as he handed these stocks to his departing partners, for the first time his own self-interest and theirs might be at odds. This complicated rationale to justify keeping the stocks unregistered danced a little do-si-do around the fact that Buffett was the most sophisticated partner of all. It was he who would have the most important edge over his former partners. No matter how honest his intentions, the decision widened the potential conflict between his interests and theirs. The painfully earnest tone of Buffett’s letter sounds like someone who has had to talk himself into thinking that he is doing the right thing. But the conflict was guaranteed to cause hard feelings. Anyone who sold to him and was later sorry could look back with hindsight and think: He had an edge on me.
Still, the Howard in Warren demanded that he present their options with scrupulous honesty. The way he answered the next question told the departing partners exactly what to expect.
Should I hold my stock? they asked.
Buffett gave as clear and direct advice as he would ever give in public about a stock.
“All I can say is that I’m going to do so,” he said, “and I plan to buy more.”10
The departing partners were also going to have a third stock to deal with. In this same letter of December 26, Buffett told them that the Blue Chip stock sale had fallen through.11 The stock had plunged in a short time from a high of $25 to $13 a share because Safeway Stores had dropped Blue Chip stamps, its customer base was eroding, and no buyer was in sight for one-third of the business that the Justice Department had mandated it sell to break up its monopoly. Civil antitrust lawsuits seeking damages had been filed against it, one by Douglas Oil Company and another by a group of filling stations.12
Yet even as Blue Chip’s problems multiplied and the price fell, Buffett had been buying the stock instead of selling. He had bought it for Diversified Retailing and for National Indemnity. He had bought it for Cornhusker Casualty and National Fire & Marine, two little insurance companies that Berkshire had acquired. He had also bought it for himself and for Susie.
Now the partners knew that Buffett wouldn’t sell, and indeed planned to hoover up more of all these stocks. They would get whichever they wanted—stock or cash. If they took the money, he would get the stock. If they kept their stock, they would still be his partners, in a sense.
In his anxiety over whether people liked and accepted him, Buffett valued loyalty more than almost anything. The dissolution of the partnership had elements of a loyalty test, as his behavior afterward would make clear.
When the partnership unwound at the end of 1969, he and Susie had hauled home roughly $16 million in cash. During the ensuing year, the shares of Berkshire and Diversified quickly began to change hands. As he had promised—but on a scale that might have staggered his partners, had they known—Buffett used the cash he got from the partnership to buy still more Berkshire and Diversified for his own account. He also used Berkshire’s cash to buy its own stock, and for DRC, offered to buy the company’s stock from some people in exchange for a DRC note that paid interest at nine percent.13 He bought from people ranging from his former brother-in-law Truman Wood to his first investor, Homer Dodge, and his son Norton.14 Those who rejected these offers had to be willing to ride along and let Buffett reinvest the earnings without ever paying out a dime—a show of trust that was important to him.15
Forever after, he would feel a loyalty to those who kept the stock—a loyalty of such depth and strength that the standard-model modern CEO would find it completely incomprehensible. Berkshire, he would later reflect, is still “like a partnership. You basically have the closest thing to a private business with shareholders who identify with you and who like to come to Omaha.” He thought of partners as people who had come together out of a complex set of shared values and interests, not out of short-term economic convenience. He often said that he tried to treat his partners the way he would his family. His partners were people to whom he owed a special duty. In return, he expected loyalty from them.
Yet people made their decisions for all sorts of reasons. Some needed money. Others simply invested in the Sequoia Fund after listening to Bill Ruane. Many people’s brokers urged them to sell the stock of a money-gobbling textile mill. Some listened, some didn’t. Some professional investors had other options and thought they were better off without these humdrum stocks. When Warren went to the West Coast in person and offered the DRC note, Estey Graham’s sister Betty sold her stock; Estey didn’t. Rhoda Sarnat, Ben Graham’s cousin, and her husband, Bernie, decided not to sell, telling themselves, Warren’s buying, and if it’s good enough for him, it’s good enough for us.16 When he offered the note to his sister Doris, she refused it, thinking, If he’s buying, why would I sell?
A few partners quizzed Buffett more closely in person for his opinion of how the stocks would do. He said, carefully, that he thought they would do well, but it could take a long time. People like Jack Alexander and Marshall Weinberg parsed those words, considered the fact that they were good investors themselves, and sold him part of their stock.
Munger would later call Buffett an “implacable acquirer,” like John D. Rockefeller in the early days of assembling his empire, who let nobody and nothing get in his way.17 With hindsight, some people felt hard done by, enticed, or even misled. Others said to themselves, in effect, Well, that’s just Warren. I should have known.
By the end of 1970, many of the former partners had cashed out while Warren continued buying more stock. His and Susie’s ownership of Berkshire had shot from eighteen percent to almost thirty-six percent. Their ownership of DRC had nearly doubled, to thirty-nine percent. As a practical matter, Buffett now controlled both.18 He had also bought more Blue Chip, taking him from two percent to over thirteen percent ownership of its stock.
But it was clear to Susie Buffett that Warren’s gyrations to get control of Diversified and Berkshire Hathaway meant that her husband’s second “retirement” would be similar to his first. One reason was that Blue Chip was in the same sort of trouble as Berkshire Hathaway.19 The business was no longer just shrinking, it was dying.
By 1971, with the country off the gold standard, prices of everything leapfrogged day by day because of inflation. The classic retailing method of enticing customers into a store through a panoply of services and giveaways was thrown overboard. Retailers headed to a discount model.20 Any chance that housewives would plan their shopping to collect enough books of trading stamps to get an electric frying pan evaporated. Buffett and Munger needed something to replace Blue Chip’s earnings.
Then one day Buffett got a call from Bill Ramsey, Blue Chip’s president, saying that a local Los Angeles company, See’s Candies, was for sale. Buffett had carved out a tiny subspecialty of studying candy companies.21 But candy companies were expensive. So far, he had never bitten. “Call Charlie,” he said.22 Munger was in charge of Blue Chip, their West Coast business.
See’s, founded in 1921, competed by using the finest quality butter, cream, chocolate, fruits, and nuts, painstakingly prepared to “See’s Quality,” which was better than “top quality.” The company was a California institution.
“See’s has a name that nobody can get near in California,” Munger told Buffett. “We can get it at a reasonable price. It’s impossible to compete with that brand without spending all kinds of money.” Munger was overflowing with enthusiasm, although his assistant Ed Anderson believed the price was expensive.23
See’s had a tentative deal on the table already and wanted $30 million for assets worth $5 million.24 The difference was See’s brand, reputation, and trademarks—and most of all, its customer goodwill.
They decided that See’s was like a bond—worth paying $25 million for. If the company had paid out its earnings as “interest,” the interest would average about nine percent. That was not enough—owning a business was riskier than owning a bond, and the “interest rate” was not guaranteed. But the earnings were growing, on average twelve percent a year. So See’s was like a bond whose interest payments grew.25 Furthermore:
“We thought it had uncapped pricing power. See’s was selling candy for about the price of Russell Stover at the time, and the big question in my mind was, if you got another fifteen cents a pound, that was two and a half million dollars on top of four million dollars of earnings. So you really were buying something that perhaps could earn six and a half or seven million dollars at the time.”
They had to negotiate to buy the company from two people: first, Charles B. See—or “Candy Harry,” as Buffett, Munger, and Guerin called him.
“Candy Harry really didn’t want to run See’s. He was interested in wine and girls. He wanted to chase after girls. But, of course, he got cold feet about selling at the last minute. Rick and Charlie went to see him, and Charlie gave one of the great lectures of all time on the advantages of grapes and girls, how the highest and best use of Candy Harry’s time was chasing after women.”
At the price Blue Chip offered, $25 million, the $4 million it was earning pretax would give Buffett and Munger payback of nine percent after-tax on their investment from the first day they bought it—not factoring in future growth. Adding in the $2 to $3 million of price increases they thought See’s could institute, the return on their capital would rise to fourteen percent—a decent return; the key was whether the earnings would continue to grow. Buffett and Munger came close to walking. The pickings had been so easy until now, and they had such an ingrained habit of underbidding, that it was like swallowing live guppies for them to pay the asking price.
“In the end,” says Munger, “they came to the exact dollar limit of what we were willing to pay.”26
While the deal was being struck, Buffett discovered that Tweedy, Browne already owned a thousand shares of See’s. Buffett ordered the firm to tender its stock to him. The Tweedy, Browne partners knew how valuable See’s was and thought the price was too low. They resisted and debated the issue briefly with Buffett. They did not see why they should give him their See’s stock. He insisted he needed the stock more than Tweedy, Browne did. Buffett won. They gave him the stock.27
The instant that the deal was inked and the trio of Buffett, Munger, and Guerin joined the board, Buffett threw himself into the candy business with an enthusiasm he had never displayed before. Within days, he wrote a detailed letter to Chuck Huggins, executive vice president, about opening new See’s stores in locations like Colorado Springs, Fayetteville, and Galveston. He suggested that Huggins avoid Iowa, because he had heard that “Iowans are generally not candy enthusiasts.”28 He gave Huggins permission to stop sending monthly boxes of candy to the long list of women whom Candy Harry had designated as his special friends. He started following sugar futures and cocoa futures, which at 58 cents a pound were approaching prices unheard of since the year of the Rockwood cocoa caper.29
Buffett suggested that Huggins “play around with” advertising slogans and try to come up with one along the lines of Coca-Cola’s “pause that refreshes.” It was as if, over his breakfast cornflakes, Huggins could dream up an advertising slogan that compelling.30 One longtime employee described Buffett’s management style this way: “He’d always praise you while he gave you more to do.”31
Deceived by Buffett’s initial eagerness to involve himself in the details of the business, Huggins signed him up for several candy-industry trade magazines. Eventually, Buffett, turning his attention to some newer interest, asked for a cease-and-desist. “Charlie may have visions of becoming a candymaker someday,” he wrote, “but I will continue to just read the statements.”32 He had discovered that he liked owning a candy company, not running one.
It was much the same at home. Buffett would tell someone with great sincerity, “Please come visit, I really want to see you,” then bury his head in a newspaper when they arrived, apparently satisfied with their presence. But there was also the odd chance that he wanted to talk and talk, and they might go away exhausted. Susie had seen his enthusiasms come and go.
Warren was still besotted with his wife, praised her constantly in public, and cuddled her on his lap. But at home, as always, he withdrew into his private pursuits and wanted to be taken care of. Susie referred to him as an “iceberg” to one of her friends. However, nothing had really changed in their relationship since the beginning—except her feelings. He was content. He reasoned that because she loved to give, by receiving he served her. Based on their past and her behavior, there was no reason for him to think otherwise. But Susie’s own desires were changing. She, the emotional vending machine, was now developing a yearning to be taken care of herself.
Thus, while her husband pursued his new businesses away from Omaha or sat sunk in thought in his office, Susie spent less and less time at home. She now had a number of new friends much younger than she. They admired her and returned her generosity and tenderness with openly expressed feelings that ranged from warmhearted affection to outright adoration. But they were less like adopted children and more like genuine friends, albeit friends who, like all her friends, needed her. Meanwhile, Susie had begun treating Peter, her quiet son, in a different way, using him as friend, confidant, and source of emotional support, now that he was growing up and about to enter high school.
Susie Jr. was living in Lincoln, having enrolled at the University of Nebraska. Howie was in his junior year of high school and Susie now devoted herself to launching him into college. Warren, as usual, was happy to delegate all these responsibilities to her.
Susie did succeed in enticing Warren to really pitch in and get involved—rather than simply write checks—whenever business intersected with a cause to which he could lend his expertise. Her friend Rodney Wead and other leaders in the black community had gotten the idea of starting a minority-owned bank to enhance economic development on the North Side. Promoting “black capitalism,” they came to Buffett and his friend Nick Newman, the man who had sponsored Warren in local civil-rights activities.33
Wead was a respected figure in Omaha, and Buffett liked banks. He had just joined the board of Omaha National Corporation, the biggest bank in town, a long-held ambition.34 He had an automatic—and rational—predisposition toward any business where people gave money to the business faster than the company disbursed it. The hope was that Community Bank would attract a diverse group of customers. He hired Peter and one of his friends to sit outside another minority bank to count how many people went inside and to classify them by race.35 Peter’s tally made Warren optimistic, so he joined an advisory board of directors for the bank and also got John Harding from Ruane, Cunniff on the board.36 Buffett told the founders that if they could raise $250,000 in stock from the black community, the advisory board would raise money to match it.37
Most of the managers and the board of directors—which included Buffett’s baseball player friend Bob Gibson—were black, and most were financial tenderfoots. To stave off disaster, Buffett went into his teaching mode and tried to educate the founders on the need for strong lending standards. The bank, he stressed, was not a charity or social-services agency. He attended monthly board meetings that stretched late into the night, but, as with the companies Berkshire owned, he was never involved in the day-to-day management.38 Asked for more money to cover bad loans, Buffett said no. Wead felt Buffett “never understood his role as a wealthy man in our beleaguered community.”39 But Buffett knew the bank wouldn’t help anyone by relaxing its lending standards and making uncollectible loans, which would only teach the wrong financial lesson. So the bank limped along for years without growing.
He got a chance to help in another way when Hallie Smith, a friend of Susie’s, began to bring her the names of black kids who needed money because they couldn’t pay for college. Susie started giving a thousand dollars here and there. “I’ve got to ask Warren,” she said over and over. “Susie, you have money; why don’t you just pay for it?” Smith asked in amazement. “No, I can’t,” Susie always said. “It has to go through Warren.” Smith found it incredible that someone as rich as Susie allowed her husband to make every decision involving money.40
Thus, while Susie was in charge of the family foundation, they worked together on funding and donations. She would have given away huge sums had Warren not put on the brakes. The foundation made small grants to education, and it didn’t have professional management. To do a proper job of managing it required thinking forward: What was going to happen to all that money someday when it ended up in the foundation? Warren felt that someday was far away. Susie had a passionate desire to help in the here and now, but someone needed to strategize for the future.
A year before, Warren had had what for many forty-year-olds would have been a wake-up call. During a dinner at the Sarnats’ in California, one of his fingers started to swell. He had taken a double dose of delayed-action penicillin earlier that day for a minor infection. Bernie Sarnat, a surgeon, suspected an allergic reaction. He gave Warren antihistamines and advised him to get to a hospital.41
Buffett didn’t want to go to the hospital. He had already had enough of sickness in 1971, after a recent bout of salmonella.42 He had Susie drive him back to the house they were renting for the summer. But as he continued ballooning and grew dizzy and sick, she began an urgent search for a doctor who could see Warren in a hurry. The one she finally reached insisted that they go to an emergency room immediately. By then Buffett was barely conscious, and the emergency room team started working to save his life. Three days later, he was still in the hospital. He was lucky, the doctors told him. His penicillin allergy was so severe that if he took it again, he would be dead.
Yet even after this encounter with his own mortality, he remained as fixated on business as ever. Retirement, in Buffett’s special sense, meant no longer acting as a fiduciary. He would be investing as long as he was breathing. He could not help but be competitive—so much so that recently, when six-year-old Jonathan Brandt, son of his friends Henry and Roxanne Brandt, had taken him on in chess, Warren couldn’t bear it when it looked as though he was losing. As the game neared its conclusion, he began Buffetting little Jonny until he won.43
By then, Susie had cultivated an attitude of ironic detachment about Warren’s stubbornness. “Whatever Warren wants, Warren gets,” was her way of describing the man who, as his little sister Bertie had observed all those years ago, always got his way.44 On a visit to Des Moines with a friend to hear the writer and Holocaust survivor Elie Wiesel speak at one of the local synagogues, Susie had spent hours talking to Milt Brown, who now lived there, at a dessert party at somebody’s house.45 For some time she had been filled with feelings of regret about that interrupted relationship; she now wondered openly to close friends whether it was too late to go down a different path. While she rarely talked about her problems or showed self-pity, she acknowledged being depressed about the state of her marriage. But despite her unhappiness, she made no move to address her issues directly or to leave. Rather, she rekindled her relationship with Milt. And increasingly she seemed drawn to California. She had “fallen in love” with the place they had been renting at Emerald Bay in Laguna Beach, perched fifty feet above the ocean among a group of other luxury vacation homes.46
Warren particularly disliked buying houses, considering money spent on them as lying fallow. Susie needled him. “If we were rich,” she said, “you would just go up to that house, and ask the owner how much she wants for it, and pay however much she asked. But I know we’re not rich.” In their perpetual tug-of-war, Susie was usually able to dislodge the cash from him in the end. Buffett delegated the task of buying the house to the Tolleses, who dickered the owner down to $150,000.47 When Roy Tolles called to tell Warren, he said, “I have bad news. You bought it.”