One of the first pieces of correspondence Buffett received in the new millennium was an e-mail from Ron Ferguson, CEO of General Re.
Buffett was already bracing himself. General Re had so far brought him nothing but deplorable news. A year earlier, after the company had admitted being duped in the Unicover fraud mere weeks after Berkshire bought it, Ferguson had made a new confession. General Re had lost millions guaranteeing ticket sales on Hollywood films without knowing what scripts would be filmed or who would star in them. Buffett had been incredulous when he found out. It could have gone without saying that his favorite manager, the brilliant Ajit Jain, would never have guaranteed any dumb movie deals. Although it did get said.
Then Ferguson engaged him in a nitpicking match over how to underwrite an Internet lottery called Grab.com that Ajit was reinsuring. Buffett now realized that Ferguson had a philosophy that was sharply different from his. Buffett always liked to talk about how he would rather step over one-foot bars than look for seven-foot bars to hurdle. The Grab.com lottery deal offered an easy profit—a one-foot bar to step over.1 Ferguson didn’t want to do it because it was such a layup. General Re, he said, only did deals where it had an underwriting edge.
Buffett roundhoused the match to an end, then decided that he needed a change in management. Yet he did not act. The business needed mending, not a purge. Firing Ferguson so soon after he had bought Gen Re would mean a public hullabaloo. He hated firing people.
Two months after the Grab.com deal, come the millennium, Ferguson was confessing that General Re had lost another $273 million from bad insurance pricing. In its first twelve months as part of Berkshire, General Re—formerly a paragon of discipline—had run straight into the ditch and had lost nearly $1.5 billion dollars. No company that Buffett had ever owned had lost money approaching a fraction of this magnitude.
When the news was published, investors rapidly readjusted their thinking once again. Had paying $22 billion for General Re been a mistake? Buffett’s reputation took another hit.
Meanwhile, at Coca-Cola, all was not well.2 Its new CEO, Doug Daft, had laid off six thousand people in January as his opening act. Investors reacted with shock. Coca-Cola stock got socked, and along with it, BRK, already cheap at $56,100 on January 1, started to plummet.
Two weeks later, on February 9, in the early-morning sanctuary of his office, Buffett sat with half an eye fixed on CNBC, sorting through his reading. The hotline on the credenza behind his desk rang. Only Buffett answered this phone. He picked it up instantly. Jim Maguire, who traded BRK on the floor of the New York Stock Exchange, was calling to tell him that sell orders were pouring in for BRK. While Buffett had been playing bridge online the previous evening, an Internet bulletin-board writer on Yahoo! had posted, “Warren in Hospital—Critical.” Over the next few hours, the rumor spread virally from posters like “hyperpumperfulofcrap,” who said over and over “BUFFETT OLD AND WEAK, SELL,” and “SELL, SELL, SELL, SELL, SELL.” With the rumors filtering through Wall Street and convincing people that Buffett was in the hospital in critical condition, BRK was trading heavily and getting hammered.3
Buffett’s personal phone line started ringing. He answered it himself, as usual, lighting up with a big grinning “Oh, hiiiiii!” to show he was happy to hear from the caller.
“How are you?” the caller inquired, with a slight tone of urgency.
“Well … never better!”
If a tornado were barreling straight toward Kiewit Plaza, Buffett would say that things were “never better” before mentioning the twister. People knew to read his tone of voice; today it sounded stressed. All morning, callers wanted to know—how was he, really?
I’m fine, Buffett explained, everything is fine. Really. But from the way BRK was trading, people were listening to hyperpumperfulofcrap.
CNBC broadcast the rumors about Buffett’s possible demise, flambéing the story with word of his reassurances. Skepticism grew. If he was saying he was fine, he must not be. A second rumor began to circulate that he was taking advantage of the situation to buy Berkshire’s own stock cheap. That hit him on the tender spot where his reputation for personal integrity collided with his reputation for ruthless rapacity.
For two days the siege continued while BRK traded down more than five percent. By presuming his indispensability, the rumor paid Buffett a sort of inverted compliment. But he was outraged that anyone would think he would cheat his own shareholders by buying back stock at their expense under false pretenses. And he hated being a dog on anyone’s leash. He was appalled at the thought that responding to manipulation would reward and encourage more rumors—and thereby set a precedent.
Eventually, he reasoned, the rumors would die under their own demonstrated falsity. But a new reality had dawned: The Internet meant that he had less and less control over public perception of him. Finally, he capitulated and issued an extraordinary press release denying the rumors.
The announcement was useless. BRK plunged eleven percent that week and didn’t recover.
On March 9, Newsday hit the stands quoting Harry Newton, publisher of Technology Investor Magazine: “I’ll tell you what Warren Buffett should say when he releases his statement to shareholders: ‘I’m sorry!’ that’s what.” The next day, BRK hit a low of $41,300 per share, trading at scarcely more than the value at which its pieces were carried on its books. The legendary “Buffett premium”—the high price the stock supposedly traded at just because of Buffett—was gone. The NASDAQ index had just reached 5,000. Since January 1999 it had doubled, its component stocks increasing more than $3 trillion in value.
The contrast was too sharp to leave alone. A money manager wrote that investors like Buffett were “made obsolete in 1999 by mavericks who say the old laws of investing have been repealed and backed up their theories with eye-popping numbers.”4
Buffett was miserable about the bad publicity, though he never considered changing his investment strategy. Owners of BRK apparently would have been better off investing in an index of the market over the past five years—the most prolonged drought in Berkshire’s history. Buffett understood the basics of computers perfectly well. But he would not consider buying a technology stock at any price. “When it comes to Microsoft and Intel,” he said, “I don’t know what that world will look like ten years from now. And I don’t want to play in a game where the other guy has an advantage.”5
In February 2000, the SEC had denied Berkshire Hathaway’s request to keep some of its stockholdings confidential. It weighed the various interests of investors in a stable market versus the right to know, and ruled in favor of the right to know. He would only have time to tweezer up stocks in little bits before people could ride his coattails. The SEC had turned him into Ben Graham, who opened up his books for the whole world to see. That stung at a time when the media referred to Buffett as “formerly the world’s greatest investor.”6
The Wall Street Journal compared his performance to a retired AT&T employee whose portfolio was up thirty-five percent, saying that this technology-stock dabbler “isn’t exactly Warren Buffett—thank goodness.”7
Never in Buffett’s career had resolution and clear thinking been put to the kind of test that he had endured for the past three years. Every indication in the market said that he was wrong. He had only his inner conviction to steer him straight. And this was the needy man who was so sensitive to public criticism that he ran from anything that would expose him to it; who had sculpted his life around managing his reputation; and who fought like a tiger against anything that could sully it.
Yet, even under siege to his reputation, this time, Buffett never fought back. He neither wrote editorials, nor dueled in the press, nor gave television interviews to defend himself. He and Munger carried on their regular dialogue with Berkshire’s shareholders, saying that while the market was overvalued, they could not predict how long it would last. Finally, not for the record but as a warning and a way of teaching, Buffett explained his views once and for all and predicted that the market would fall far short of investors’ hopes for two decades in a tour de force of a speech at Sun Valley that he shortly afterward turned into a Fortune article.
It had taken one great surge of courage to burst past his fears and beg for help from Nick Brady to save Salomon. But to show such restraint, then commit himself to such a forecast in the face of years of criticism and ridicule, took a different kind of courage, making the Internet bubble one of the greatest personal challenges of his career.
On March 11, Berkshire Hathaway issued its annual report, and Buffett graded himself a “D” for failing to invest Berkshire’s capital. He did not say, however, that he considered avoiding technology stocks to have been a mistake.
Separately, Buffett announced that BRK was so cheap that Berkshire would now entertain offers from investors to buy its own stock. To do so—to give money back to shareholders to whom he hadn’t paid a dividend in decades—was extraordinary.
And for the second time, Buffett was publicly announcing what he wanted to buy in advance. Not since the Great Unwinding of the partnership in 1970 had he said, “I will buy Berkshire Hathaway.” Once again, investors had to ask themselves which side to play. This time, many people understood the message. Before he could buy a single share, BRK rose twenty-four percent.
The following week, the NASDAQ, full of technology stocks, sent up a warning plume of ash.8 By late April, it had cratered thirty-one percent, among the largest losses in historic terms.
By Easter, Buffett did not care; he was doubled over in pain. He could not believe it. Right before his all-important shareholder meeting, the critical performance of his year, the rumors about his health had come true. Susie Jr. rushed him to the hospital at three o’clock in the morning, where he spent the next several days trying to pass a kidney stone. He phoned Big Susie repeatedly in panic. She was away in Grand Lake, Colorado; there was nothing she could do.9
He sat up all night drinking tumblers of water until, finally, the water torture worked and he passed the stone. But from then on he had to worry about a part of his anatomy that had not previously concerned him, because kidney stones recur. “The plumbing thing—I hate it. Basically that’s what goes wrong as you get older,” he said.
He took inventory of his problems. The stock was in such disrepute that only his offer to buy it himself had saved it. General Re, his largest deal, seemed cursed. Coca-Cola was nagging at his thoughts. How could so much damage have happened so quickly in a business with such a bulletproof brand? Could it really all be poor old Ivester’s fault? And now a problem with his health had reared up to stare him in the face.
The fact of mortality dwelled beneath the surface of Buffett’s bathtub memory, periodically sliding its way back up into the tub.10 He had still never come to terms with his father’s death. He had never decided on a suitable memorial to Howard. He had moved the large portrait of Howard so that it hung on the wall behind his desk, floating above his own head. Howard’s papers sat in the basement of his house, untouched. Warren could not bring himself to go through them. He teared up if he even thought about it, obviously terrified to let the emotions that had been held back all these thirty-five years erupt.
He’d warned that trees don’t grow to the sky; someday everything must end. Yet he himself couldn’t face the day he would have to draw the line under his career and say: “This is it. I’m done. The Sistine Chapel is finished. No further brushstroke will improve it—any further effort will produce an ordinary result.”
He was sixty-nine years old. He couldn’t believe that he was sixty-nine years old; he still felt like a young man. He comforted himself with the knowledge that decades remained until he reached the age at which his mother had died. General Re would be fixed, and Coca-Cola, as he knew, could be run by a ham sandwich. The kidney stone … Whoosh! The bathtub memory went to work. He returned to preparing for his shareholder meeting, which had become the happiest week of his year.
For several days at the end of April, the airport grew busier than usual, and a rivulet, then a stream of people arrived in Omaha. People wearing Berkshire Hathaway meeting credentials strolled through town as if identifying themselves as members of a club.
The shareholder meeting itself—which had multiplied to include thousands of staff, vendors, and volunteer employees; acres of exhibits, flowers, and displays; truckloads of turkey sandwiches, hot dogs, and Coke; signage, exhibits, security, media, sound, video, lighting, and private parties for the vendors and helpers—was designed, choreographed, and overseen by just one employee, Kelly Muchemore, whom Buffett called the “Flo Ziegfeld” of Berkshire Hathaway. Kelly did not even have a secretary. Technically, she was a secretary. It would take four people to replace Kelly, Buffett pointed out with pride. (One side effect of this kind of praise was that it sometimes caused people to wonder whether they were getting paid a quarter of what they were worth.11 Buffett, however, was skilled at paying people with more praise than cash.)
By four o’clock in the morning on Saturday, several hundred restless people wearing laminated meeting credentials on lanyards around their necks lined up outside the Civic Auditorium, waiting for the doors to open. Three hours later, people stampeded past the guards who checked their credentials to claim the prime seats on the floor. By eight o’clock it became clear that they needn’t have bothered to show up before dawn. Half the seats in the house were empty. Thirty minutes later, the auditorium held nine thousand people.12 Attendance was down by forty percent from the fifteen thousand who had come the year before.
Around nine-thirty Buffett and Munger walked onto the stage and looked out over the shrunken crowd of the faithful, clad in everything from business garb to shorts. After a five-minute business meeting, the question-and-answer session opened as usual, with shareholders lined up at microphones positioned around the auditorium, lobbing questions. Somebody asked about technology stocks. “I don’t want to speculate about high-tech,” Buffett said. “Anytime there have been real bursts of speculation, it eventually gets corrected.” He compared the market to the phony riches of chain letters and Ponzi schemes. “Investors may feel richer, but they’re not.” Pause. “Charlie?”
Munger opened his mouth. The audience perked up slightly. Munger often said, “Nothing to add.” But whenever Buffett handed the microphone to him, the auditorium hummed with the subtlest sensation of danger. It was like watching an experienced lion tamer working with a chair and a whip.
“The reason we use the phrase ‘wretched excess,’ ” Munger said, “is because it produces wretched consequences. It’s irrational. If you mix raisins with turds, they’re still turds.”
The crowd gasped. Did he say turds? Did Charlie just compare Internet stocks to turds in front of children who had come with their parents, not to mention in front of the press? He said turds! It took some time for the meeting to settle back into its normal rhythm.
The questions droned on as Buffett and Munger listened, unwrapping Dilly Bars with much rustling. Shareholders began to voice complaints. They didn’t like the stock price.13 One said she was going to look into correspondence schools, since her Berkshire stock would no longer pay for college.14 Gaylord Hanson of Santa Barbara, California, stood at the microphone to harangue that he had bought BRK near its highs in 1998 because of Buffett’s track record and had come out okay only because the money he’d lost had been made up by four technology stocks.15 He urged Buffett to invest at least ten percent of Berkshire’s assets in technology, “the only game in town. Isn’t there enough left in your brain power to maybe pick a few?”
It was worse than humiliating. Looking out into the audience, Buffett saw that, for the first time, some of them assumed that he was letting them down: the effort of nearly fifty years rolled backward, undone, his own shareholders turned against him. His age suddenly signified not experience but obsolescence. In the press, people now referred to him as an old man.
Afterward, Buffett guzzled Cherry Coke while signing autographs, then made a round of parties with Astrid, Dilly Bars dripping in his wake. He held court at Gorat’s with the family on Sunday night, then oversaw the board meeting—another teaching exercise—on Monday morning. Afterward, he, Susie, and the kids and their families flew to New York. By the time he was catching up with friends, eating out and seeing shows with the family, and dutifully checking off his list the unloved annual chore of buying suits at Bergdorf’s, the bathtub memory had done its work.
Saturday morning he summoned three members of General Re’s management to his suite at the Plaza Hotel. Ron Ferguson brought a series of PowerPoint handouts and began to pace through General Re’s string of terrible results. Buffett listened for a few minutes, frowning and fidgeting. Finally he said, Why don’t we just jump to the end. Results had to improve. The lines of authority must be reinforced. Clients were dictating terms to General Re, not the other way around. This must end. Somebody had to be accountable.16
He stopped short of telling Ferguson to retire, betrayed by his weakness for older managers. He sympathized with Ferguson, who’d suffered a subarachnoid hemorrhage in late 1999. Ferguson, who had seemed slightly off-kilter for some time afterward, had offered to step down then. Buffett had told him no. He didn’t believe in putting people out to pasture; some of his best managers were elderly, including Mrs. B, who had worked until age 103 and died a year later. He missed her caustic little soul, and bragged all the time about Berkshire’s geriatric crew. His board of directors was beginning to resemble the elderly U.S. Supreme Court. His own goal was to outlive Mrs. B.
Imagine, therefore, if Buffett’s genie had been watching over his shoulder a few weeks later, as he played bridge after dinner at Bill and Melinda Gates’s house. He was answering questions in the raspy voice that meant he hadn’t been sleeping, repeating that he was “just fine,” but Sharon Osberg, who knew how to read the signs that meant Buffett was in real distress, conferred with the Gateses, who immediately summoned a doctor over Buffett’s protests.17 The doctor was surprised that Buffett had never had a colonoscopy. He gave him a painkiller to get him home in comfort. But, he said, you really should go in and have a complete examination and a colonoscopy when you get back to Omaha.
The genie would have been less tactful. Howard Buffett had had colon cancer and died of complications from it. What was Buffett thinking, at age sixty-nine, never having had a colonoscopy? This was certainly not treating your body like the only car you’d ever own.
A month later, BRK had recovered by nearly $5,000 a share to $60,000. Fortune magazine noticed that even though he “lost his heavenly touch” in 1999, Berkshire’s recent forty-seven percent recovery from its March low made him a “good revivalist.”18 He would need some reviving in other ways, however.
Buffett had scheduled the dread procedure at last.19 So much medical attention at once—only a month after the kidney stone. But a colonoscopy could be considered “routine.” He distracted himself by talking on the phone and playing bridge. He played helicopter on the computer. When people asked him about the upcoming procedure, he said, “I’m not the least bit worried.”
But he woke up from the colonoscopy to a nasty shock. A sizable benign polyp was nesting in his gut. The polyp had taken over so much real estate that removing it would require demolishing a good chunk of the surrounding neighborhood. It had a few small friends nearby as well. This was not something to trifle with. Buffett decided to have surgery in late July, after Sun Valley. “Oh, I’m not worried at all,” he said, making jokes and stressing the good results from his cardiology tests. “I never worry about my health. Unless you’d brought it up, I never would have even thought about it.”
But Buffett now seemed cornered into issuing a press release about his health. The statement blared the details of his surgery, describing it as routine.20
The surgery took several hours, during which fifteen inches of Buffett’s innards were removed, and left him marked with a seven-inch scar. During the week he spent recovering at home, he grew a beard for the first time in his life. Deprived of Berkshire, he talked a lot on the phone. He sounded weak.
“Oh, no, I’m not tired at all, I’m perfectly fine,” he said. “I’ve lost a few pounds I needed to lose. Astrid’s taking good care of me. The doctor says I can eat anything I want. By the way, did I tell you that I went into the hospital with a colon, but I came out with a semicolon?” Asked if he was concerned about a recurrence: “Oh, no, I’m not worried at all about that. I never worry about anything, you know. Incidentally, did I tell you that the anesthesiologist used to be my caddy at the country club? I told him before he put me under that I sure hope I tipped him well.”
Berkshire Hathaway’s press release simply noted that the polyp was confirmed benign and no further treatment was required. Despite the announcement, rumors raced over the Internet and around Wall Street again. Some insisted that Buffett must have had cancer; polyps did not require surgery. But Warren was not sick and certainly did not feel old. He still felt like the “Firebolt.”
Yet after tolerating cavalier treatment all his life, his health was beginning to set limits. Someday, his wrestling match with infinity would end; the questions he was avoiding must be faced. Since Berkshire and Buffett were interchangeable in his mind, everything in his nature rebelled against this task. Many of the questions hinged on Big Susie, who he was sure was going to outlive him. He told people that she would take care of everything.