Buffett: The Making of an American Capitalist

by Roger Lowenstein

Investing without Graham would be like communism without Marx—the discipline would scarcely exist.

When the Crash came, the Joint Account lost a tolerable 20 percent. In 1930, Graham—like so many—was convinced that the worst was over. He borrowed on margin and plunged into stocks. And then the bottom fell out. “The singular feature of the great crash,” as John Kenneth Galbraith observed, “was that the worst continued to worsen.”

Graham, in the introduction, frankly acknowledged that investing in common stocks seemed “discredited.”11 At the market’s recent lows, a third of American industry was selling at less than its liquidation value.

By focusing on the earnings, assets, future prospects, and so forth, one could arrive at a notion of a company’s “intrinsic value” that was independent of its market price. The market, they argued, was not a “weighing machine” that determined value precisely. Rather, it was a “voting machine,” in which countless people registered choices that were the product partly of reason and partly of emotion.18 At times, these choices would be out of line with rational valuations. The trick was to invest when prices were far below intrinsic value, and to trust in the market’s tendency to correct.

Loeb’s speculator regarded stocks as pieces of paper, worth however much or little the next fellow might pay. His aim was to anticipate that next fellow, and the fellow after that. The Graham-and-Dodd investor saw a stock as a share of a business, whose value, over time, would correspond to that of the entire enterprise.

These were the days when Jews were locked out of Wall Street’s gentile firms, and Graham preferred to hold his spots for Jews.46 † (Morgan Stanley would not hire its first Jew until 1963.)

So Warren settled for courting Susie’s father. According to Susie, Warren went over to my parents’ home every night and played the ukulele. My father [had] played the mandolin since he was 20, so he was really excited about having someone to play with. So Warren did that every night, while I went out with this other person.

In retrospect, Warren said he had been lonely until he met her.

somebody else advertises Maytag washers she tears out their ad and puts it on her Maytag washer,” Buffett marveled. “It is hell to compete with her.”

Buffett put it, that she “started with five hundred bucks and put everyone else out of business.”18 It was her utter singularity of purpose. When the Omaha World-Herald inquired as to her favorite movie, Mrs. B replied, “Too busy.” Her favorite cocktail? “None. Drinkers go broke.” Her hobby, then? Driving around and spying on competitors.19

(At Buffett’s prompting, New York University granted Mrs. B an honorary doctorate of commercial science, an honor she shared with Fed chairman Paul Volcker and Citicorp CEO Walter Wriston.)

a good manager was unlikely to overcome a bad business.30 This led to a truism about problem businesses in general: “ ‘turnarounds’ seldom turn …”

This devastating outcome for the shareholders indicates what can happen when much brain power and energy are applied to a faulty premise. The situation is suggestive of Samuel Johnson’s horse. “A horse that can count to ten is a remarkable horse—not a remarkable mathematician.”

Menaced by a hostile bid, it would merge with Warner Communications and, in the process, thoroughly wreck its balance sheet. Indeed, Time would be the most prominent example of the self-destructive tactics of the merger era.

Once upon a time, at least at well-performing companies, the major shareholders’ commitments to management had been a force inhibiting takeovers. By the mid-eighties, such commitments had the half-life of a cup of coffee.

Buffett, who had met Murphy in the early seventies, knew that anyone who didn’t waste paint on his headquarters was his sort of guy.

Investment banks, breaking a time-honored code, went after former clients. Corporate minnows gobbled up whales. Wall Street had become a war zone. The raiders obtained a certain celebrity.

Others, such as Phillips Petroleum, bedeviled by Carl Icahn, were so intent on making themselves unattractive to the bad guys that they went deeply into debt, wrecking their own balance sheets before the raiders could do it to them.

had a net worth of only $145 million, while Revlon was worth over $1 billion. But Perelman, financed with junk bonds, prevailed. Revlon was his, and Bergerac was out of a job. He had been wrong in saying that Revlon was not for sale. Everything was for sale.

Takeovers, in theory, were a curative, the system’s method of pruning corporate deadwood. In the neat economic model, assets flowed to the highest bidder because, by definition, the high bidder was the one who could put them to best use.

Even Boone Pickens, in a too-candid moment, blamed the oil takeovers on the simple fact that it was cheaper to drill for oil “on the floor of the New York Stock Exchange” than in the ground.

As if to sanctify its algebraic properties, it was christened with a Greek letter, beta. A stock with a beta of 1.0 bounced around as much as the general market; one with a beta of 1.2 was quantifiably more volatile, and one with a beta of 1.5 more volatile still.

But on the same page, the authors again advised, “… you can trust prices.” But which prices—of the morning of October 19, or of six hours later? Never mind; the theory was “remarkably well-supported by the facts.”

Coke had been seen as “a sublimated essence” of all that America stood for;23 even then, the sound of a nickel dropping down the slot, followed by “a whir and a clunk” and an ice-cold bottle sliding out the chute, had been something to behold. And it had been known, even in 1938, that the potential thirst of people overseas was far from quenched.

“The idea that you get a lifetime supply of food stamps based on coming out of the right womb strikes at my idea of fairness,” he said.19 Ultimately, the claim checks should go to society.

“Warren would rather choke to death than write a check to a university.”

Put differently, social progress cannot be measured as easily as the profits of Coca-Cola. But Buffett wanted to see “concrete results.”26

In 1990, for example, about $1.7 million, or 75 percent of that year’s gifts, was devoted to family planning, sex education, birth control, abortion rights, and so on. Susie and Warren were both firm believers, but their emphases differed. While Susie was largely inspired by the poor living conditions of people, and particularly women, that she had seen in the Third World,30 Warren conceptualized in macroeconomic terms. He had a Malthusian dread that overpopulation would aggravate problems in all other areas—such as food, housing, even human survival.

He was hung up on the notion that the recipients might be unworthy—that charity was a “food stamp” that would likely corrupt both donor and donee.

On Wall Street, it was often the good ideas that got you into trouble, for what the wise did in the beginning, “fools do in the end.”