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Making It

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AP
Warren Buffett at the Nebraska Regional Bridge Tournament, Council Bluffs, Iowa, August 5, 2006

If he were not the second-richest person in the world, Warren Buffett’s other well-known attributes—an Omaha address, a five-bedroom house where he’s lived for fifty-two years, an annual $100,000 salary, and a phone he answers himself—would be unremarkable. But we have certain expectations for the fabulously wealthy, encouraged in no small measure by the fabulously (and former fabulously) wealthy themselves: the 66,000-square-foot house with six kitchens (Bill Gates) or the house with twenty-six bathrooms (Prince Bandar); the Mercedes, Lexus, Range Rover, and Cadillac fleet (Bernard Madoff); the Gulfstream V jet (Mark Cuban); the $50,000 bespoke vicuña suits (the King of Morocco). Though he is not without his indulgences—as one of the owners of NetJets, which sells fractional shares of private planes, he uses his company’s services—Buffett’s frugality is part of what marketers would call his brand identity. His apparent personal disregard for the money he so excessively accumulates reinforces his credibility: he’s not greedy, he’s just good at what he does.

According to Alice Schroeder, his devoted biographer, Buffett’s career in wealth accumulation began early, around the age of six, when he started buying packs of gum and selling them to the neighbors for a few pennies’ profit. He then switched to Coke, which he peddled door-to-door in the summer; then “pre-owned” golf balls. The Buffetts weren’t poor—his father, who eventually went on to represent Omaha for four terms in Congress before being considered too right-wing for even conservative Nebraskans—started out as an insurance salesman and switched to selling stocks during the boom right before the 1929 bust. By the time Warren was born in 1930, stocks were a hard sell and money was tight.

Buffett first visited Wall Street at the age of ten, where he was given an audience with Sidney Weinberg, the head of Goldman Sachs. (That may help explain Buffett’s long-standing attachment to the firm.) It was around that time, too, that he purchased his first stocks, three shares each for himself and his sister Doris, which he bought at $35 and sold at $40, which was good, except that not long after that the stock was trading at $200. At eleven he read a book that suggested a hundred ways to make a thousand dollars, which gave him a goal: to make a million dollars by the age of thirty-five. Twenty-four years later Warren Buffett was a millionaire five times over.

Buffett, it is safe to say, has a different relationship to money than you and me. For us it’s a means to an end. For him, it’s a vocation. He is called to it. If it’s for anything, it’s for getting more of. The man is a collector. He just happens to collect dollars.

Getting money interests Buffett more than having money or spending money. It’s an intellectual and moral pursuit: how do companies make money, how should their assets be valued, what are the undervalued businesses that others haven’t noticed, what does ownership require, what’s the relationship of directors to shareholders? Rejected by Harvard Business School after an undistinguished undergraduate career at the University of Nebraska that followed a short stint at Penn’s Wharton School, Buffett landed at Columbia Business School, where he fell under the spell of Professor Benjamin Graham. Graham was a cigar-chomping, womanizing, physically unprepossessing man with an outsized talent for making money. He was also a well-regarded financial writer, the coauthor, with another Columbia professor, of a mammoth and arcane volume called Security Analysis, which became Buffett’s bible.

According to Schroeder, Buffett learned three main lessons from Ben Graham that influenced him profoundly:

A stock is the right to own a little piece of a business…. Use a margin of safety…[and] Mr. Market is your servant, not your master. Graham postulated a moody character named Mr. Market, who offers to buy and sell stocks every day, often at prices that don’t make sense. Mr. Market’s moods should not influence your view of price.

In a long career of buying and selling stock, this advice was especially helpful during the dot-com bubble, when Buffett’s refusal to jump on the tech-stock wagon and his public declaration that it was smoke-and-mirrors earned him public derision. (“Approval…is not the goal of investing,” he wrote recently. “In fact, approval is often counter- productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”)

Ben Graham, in addition to teaching, ran an investment company, Graham-Newman, whose moves Buffett took to studying like a baseball scorecard. When, as a first-year business student, he learned that Graham-Newman had purchased a majority stake in a little-known insurance company called GEICO, Buffett got on a train from New York on a weekend morning and made a cold call on the company headquarters in Washington, D.C. After introducing himself to the security guard as a student of Ben Graham’s who was hoping to find someone there who could explain GEICO’s business, he was eventually ushered into the office of the financial vice-president, a man named Lorimer Davidson. Davidson, who expected to spend a few minutes with Graham’s student, found himself still talking with Buffett four hours later:

The questions he was asking me were the questions that would have been asked by an experienced insurance-stock analyst. His follow-up questions were professional. He was young, and he looked young. He described himself as a student, but he was talking like a man who had been around a long time, and he knew a great deal…. I began asking him questions.

Buffett went home, liquidated half his worldly assets, and invested them in GEICO. In 1996 he bought the company outright.

People hoping to emulate Buffett’s success study his every move the way he studied Graham’s. There’s a not-so-small industry of Buffett books, DVDs, and apparel; Amazon.com has its own Warren Buffett store where it’s possible to buy the latest edition of Security Analysis with a foreword by Warren Buffett, or download The Warren Buffett Investing Strategy to your iPod, which you can listen to while lounging in a Warren Buffett pop-art T-shirt and savoring a collection of See’s (a company owned by Buffett) truffles.

Buffett’s annual letter to the shareholders of Berkshire Hathaway, the textile company he bought for $7.50 a share in 1962 that he turned into a holding company comprised of insurance, candy, vacuum cleaner, furniture, jewelry, prison uniform–manufacturing, food, paint, encyclopedia, and other companies that now trades for about $90,000 a share, down from a high of $150,000 in December 2007, is read by millions of investors and money managers and market neophytes alike looking for any bits of advice they can glean to increase their net worth. It is not unusual for the company’s annual meeting, hosted in Omaha by Warren Buffett himself, to attract tens of thousands of shareholders (and those who score tickets on eBay) eager to learn from the master.

Even now, with the recent downgrading of Berkshire Hathaway from the coveted triple-A rating by Moody’s Rating Service (which is owned in part by Buffett) to the less desirable AA2, and an annual letter that served as a disarming mea culpa to explain the company’s unprecedented 62 percent drop in net income last year—Buffett’s worst loss ever—the Buffett brand and Buffett’s reputation as the world’s greatest investor remain intact. This may be because despite some bad trades, like buying gas and oil stocks when they were trading at their peak and investing in a couple of banks that went belly-up, Berkshire Hathaway stock still managed to decline less precipitously than the market itself. (About his bad investment in ConocoPhillips stock, he writes, “Even if prices should rise…the terrible timing of my purchases has cost Berkshire several billion dollars.”)

How Warren Buffett became Warren Buffett turns out to be a fascinating story, at least as told by Alice Schroeder. Schroeder, a certified public accountant and insurance industry analyst who met Buffett when she covered Berkshire Hathaway for Morgan Stanley, is the first writer to have complete access to the man, whose unconventional home life might have made him more wary of giving a writer carte blanche. But Buffett has a reputation for transparency and integrity, as well as idiosyncrasy, and in Schroeder’s hands the oddities of his fifty-two-year marriage to his wife Susan, which included twenty-six years in which she chose to live apart from him in San Francisco while he stayed at home with the “housekeeper” she hired and maybe, also, had an affair with Washington Post publisher Katherine Graham, are almost beside the point. He loved his wife, she got tired of waiting around while he was at the office, she took off (with her tennis coach), and even so, they stayed married and vacationed together and celebrated holidays together, and were together in 2004 as she was dying. It’s just too sweet a story to be serious tabloid material, and anyhow, the majority of Buffett’s acolytes are interested in copying his portfolio, not his lifestyle.

So what’s the chance of that happening? For those who invested early with Buffett, very good. It is estimated that the original $10,000 stake he collected from his earliest “partners” is now worth hundreds of millions of dollars. But there’s a great difference between relying on Buffett’s skill and expertise to amass great wealth and amassing great wealth by developing the skills and expertise that let Buffett be Buffett. “Fat chance?” you say. “That guy’s genius, the Tiger Woods, the Lennon and McCartney, the Bill Gates of the New York Stock Exchange.” Possibly—but if Malcolm Gladwell is right, his success—and theirs—has little to do with genius.

Gladwell, of course, is the clever master of the anecdote who owns the franchise on high-concept books with pithy titles— The Tipping Point, Blink, and now Outliers—that repurpose scraps of academic research into slinky intellectual lamé. These books have made him a fixture on the best-seller list and the envy of his peers—if he has any. In his own somewhat ill-defined terms, Gladwell is an outlier, a statistical anomaly, one who “is markedly different in value from the others of the sample” and doesn’t “fit into our normal understanding of achievement.” In addition to him, the Beatles, Robert Oppenheimer, and Asian math students, for instance, all make the cut. Still, it is not clear, when talking about human endeavors, which variables or combination of variables needs to be outside the norm to achieve outlier status: If it’s money in the bank, how much? If it’s books sold, how many? It’s as if success is a corollary of obscenity: you know it when you see it.

And “seeing” may be the most crucial variable of all. Is it the quality of the literary work, for example, that makes someone an outlier—“men and women who do things that are out of the ordinary”—or is it the size of the advance? Consider the case of Susan Boyle, the unemployed, forty-seven-year-old spinster from Scotland who became a global sensation recently after her remarkable audition for the reality show Britain’s Got Talent. Boyle’s singing voice was no less extraordinary the day before she appeared on TV, yet until that happened, no one would have thought her anything but ordinary, including herself. When Gladwell says, in his subtitle, that Outliers is “The Story of Success,” he assumes that recognition is a necessary, and maybe sufficient, condition.

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