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It was shortly thereafter one of the
most profound and upsetting events in Buffett's life took place. At
forty-five, Susan Buffett left her husband - in form. Although she
remained married to Warren, the humanitarian / singer secured an apartment in
San Francisco and, insisting she wanted to live on her own, moved there.
Warren was absolutely devastated; throughout his life, Susie had been "the
sunshine and rain in my [his] garden". The two remained close, speaking
every day, taking their annual two-week New York trip, and meeting the kids at
their California Beach house for Christmas get-togethers. The transition
was hard for the businessman, but he eventually grew somewhat accustomed to the
new arrangement. Susie called several women in the Omaha area and insisted
they go to dinner and a movie with her husband; eventually, she set Warren up
with Astrid Menks, a waitress. Within the year, she moved in with Buffett,
all with Susie's blessing.
Warren Buffett
Wants Two Nickels to Rub Together
By the late '70s, the his reputation
had grown to the point that the rumor Warren Buffett was buying a stock was
enough to shoot its price up 10%. Berkshire Hathaway's stock was trading
at more than
$290 a share, and Buffett's personal wealth was almost $140 million. The
irony was that Warren never sold a single share of his company - meaning his
entire available cash was the $50,000 salary he lived on. During this
time, he made a comment to a broker, "Everything I got is tied up in Berkshire.
I'd like a few nickels outside."
This prompted Warren to start
investing for his personal life. According to Roger Lowenstein's
"Buffett", Warren was far more speculative with his own investments. At
one point he bought copper futures - which was unadulterated speculation.
In a short time, he had made $3 million dollars. When prompted to invest
in real estate by a friend, he responded "Why should I buy real estate when the
stock market is so easy?"
Berkshire
Hathaway Announces Charitable Giving Program
Later, Buffett once again showed
his tendency of bucking the popular trend. In 1981, the decade of greed,
Berkshire announced a new charity plan which was thought up by Munger and
approved by Warren. The plan called for each shareholder to designate
charities which would receive $2 for each Berkshire share the stockholder owned.
This was in response to a common practice on Wall Street of the CEO choosing who
received the company's hand-outs [often they would go to the executive's
schools, churches, and organizations]. The plan was a huge success and
over the years the amount was upped for each share. Eventually, the
Berkshire shareholders were giving millions of dollars away each year - all to
their own causes. Another important event around this time was the stock
price - it hit $750 per share in 1982, most of the gains attributed to
Berkshire's stock portfolio which was now valued at over $1.3 billion dollars.
Warren Buffett
Buys Nebraska Furniture Mart, Scott Fetzer, and an Airplane for Berkshire
Hathaway
For all the fine businesses
Berkshire had managed collect, one of the best was about to come under its
stable. In 1983, Warren Buffett walked into Nebraska Furniture Mart, the
multi-million dollar furniture retailer built from scratch by Rose Blumpkin.
Speaking to Mrs. B, as local residents called her, Buffett asked if she would be
interested in selling the store to Berkshire Hathaway. Blumpkin's answer
was a simple "yes", to which she responded she would part for "$60 million".
The deal was sealed on a handshake and one page contract was pulled up.
The Russian-born immigrant merely folded the check without looking at it when
she received it days later.
Scott & Fetzer was another great
addition to the Berkshire family. The company itself had been the target
of a hostile takeover when an LPO was launched by Ralph Schey, the chairman.
The year was 1984 and Ivan Boesky soon launched a counter offer for $60 a share
[the original tender offer stood at $50 a share - $5 above market value].
The maker of Kirby vacuum cleaners and World Book encyclopedia, S&F was
panicking. Buffett, who had owned a quarter of a million shares, dropped a
message to the company asking them to call if they were interested in a merger.
The phone rang almost immediately. Berkshire offered $60 per share in
cold, hard, cash. When the deal was wrapped up less than a week later, B.
Hathaway had a new $315 million dollar cash-generating powerhouse to add to its
collection. The small stream of cash that was taken out of the struggling
textile mill had built one of the most powerful companies in the world.
Far more impressive things were to be done in the next decade. Berkshire
would see its share price climb from $2,600 to as high as $80,000 in the 1990's.
In 1986, Buffett bought a $850,000
used Falcon aircraft. As he had become increasingly recognizable, it was
no longer comfortable for him to fly commercially. The idea of the luxury
was hard for him to adjust to, but he loved the jet immensely. The passion
for jets eventually, in part, led him to purchase Executive Jet in the 90's.
The 80's went on with Berkshire
increasing in value as if on cue - the only bump in the road being the crash of
1987. Warren, who wasn't upset about the market correction, calmly checked
the price of his company and went back to work. It was representative of
how he viewed stocks and businesses in general - they were just numbers. This
was one of "Mr. Market's" temporary aberrations. It was quite a strong
one; fully one-fourth of Berkshire's market cap was wiped out. Unfazed,
Warren plowed on. A year later, in 1988, he started buying up Coca-Cola
stock like an addict. His old neighbor, now the President of Coca-Cola,
noticed someone was loading up on shares and became concerned. After
researching the transactions, he noticed the trades were being placed from the
Midwest. He immediately thought of Buffett, whom he called. Warren
confessed to being the culprit and requested they don't speak of it until he was
legally required to disclose his holdings at the 5% threshold. Within a
few months, Berkshire owned 7% of the company [$1.02 billion dollars worth of
the stock]. Within three years, Buffett's Coca-Cola stock would be worth
more than the entire value of Berkshire when he made the investment.
Warren
Buffett's Money and Reputation On the Line During the Solomon Scandal
By 1989, Berkshire Hathaway was trading at
$8,000 a share. Buffett was now, personally, worth more than $3.8 billion
dollars [within the next ten years, he would be worth ten times that amount.]
Before that would happen, there were much darker times ahead. In the early
90's, the reputation Buffett had built was threatened by a renegade trader at
Solomon Brothers, where Warren sat on the Board of Directors. The firm had
been mired in losses, which seems ludicrous when one considers that there were
many, many employees making over $1 million dollars a year [one trader made as
much as $23 million].
The real trouble began when the head
of Solomon's government bond desk, Paul Mozer, illegally used customer accounts
to purchase Treasury bonds on behalf of Solomon. According to the treasury
department rules, no individual dealer could be awarded more than 35% of an
offering. This stemmed from an occurrence in 1962 when J.P. Morgan's
company gained control of 50% of the T-Bills up for auction, giving concern to
any one firm being able to "corner" the market. The short of it is, Mozer
eventually bid for Treasury bills on behalf of Solomon's own account, as well as
two of its major institutional clients, Mercury and Quantum Funds. The
notes that were awarded to the two funds were then "sold" to Solomon, allowing
Mozer to get around the thirty-five percent rule... he managed to gain 57% of
the available T-Bills. Paul attempted to cover his tracks, until the
Treasury department sent a "routine housekeeping letter" to an executive at
Mercury. Of course, since they had placed a bid to begin with, Mercury
called Mozer, who claimed it was a "mistake" and ask they not respond to the
Treasury department.
Going to the top of the company,
Mozer confessed and promised not to do it again. After consulting with
Solomon's attorney, the executives decided not to mention it - they were not
legally required to call the SEC and inform them of what happened, although the
counsel advised it as the wise thing to do. This would have been fine, and
more than likely, no one would have ever found out if it hadn't been for the
Mozer's audacity. Shortly thereafter, he repeated his behavior and was
awarded 87% of the auction. This sent out of a frenzy among other firms,
who claimed Solomon was cornering the market. The SEC eventually got
involved, and the executives all fired for covering up the Mozer's behavior.
It turns out there had been six different instances of bidding violations.
Suddenly finding itself without senior management, and having lost almost all
credibility, Solomon needed a savior. The Feds had given word that
Solomon's status as a primary dealer was in serious danger. The
repercussions would have been massive; the firm would have gone under
completely, possibly causing an economic nightmare that would have raced through
Wall Street in seconds. With the entire U.S. economy potentially in
danger, Warren Buffett boarded his plane and flew to New York. By the end
of the day, he was named CEO [Munger, wisely, was completely and totally
opposed]. Having Buffett at the helm was like a steroid shot of credibility for
Solomon. The risk to his professional life was enormous; indeed, his
entire reputation hung on the line. Howie warned his father that "everyone
who ever wanted to take a shot at you is going to do it".
As in his operating companies,
Buffett wanted the leader identified. Although he was currently the acting
CEO, it was important for him to know who would eventually lead the firm after
his corporate "CPR" was done. He individually pulled the upper managers
into a room and asked them who they thought should run the company.
A few days later, word comes that
the Treasury department has banned Solomon from trading. Panic immediately
set in; almost all of the $150 billion dollars to the firm's name was financed
with short-term assets. If the company couldn't participate in the federal
auctions, it would have no choice but to close shop. Buffett pleaded the
Federal Reserve, including Greenspan himself, informing them that the lawyers
were pulling bankruptcy papers up as they spoke. The conversations ended
unresolved. At the same time, Buffett distributed his home phone number to
the top managers at Solomon and told them to call if they found any further
evidence of dishonest behavior. The move was a brilliant stroke of talent;
everything was okay, Warren was in charge.
In the end, Solomon was awarded its
trading privileges and Buffett went home, effectively saving the company.
[More information on the Solomon case is available in the special documents
section at NorthernLight.com].
Warren Buffet
at the Turn of the Millennium
During the remainder of the 1990's,
the stock catapulted as high as $80,000 per share. Even with this
astronomical feat, as the dot-com frenzy began to take hold, Warren Buffett was
accused of 'losing his touch'. In 1999, when Berkshire reported a net
increase of 0.5% per share, several newspapers ran stories about the demise of
the Oracle. Confident that the technology bubble would burst, Warren
Buffett continued to do what he did best... allocate capital into great
businesses that were selling below intrinsic value. His efforts did not go
unrewarded. When the markets finally did come to their senses, Warren
Buffett was once again a star. Berkshire's stock recovered to its previous
levels [after falling as low as $30,000 per share], and the man from Omaha was
once again seen as an investment icon.
Previous page >
Warren Buffett is Born... > Page
1, 2, or Return to
Warren Buffett Home
Sources:
Buffett: The Making of an American Capitalist by Roger Lowenstein [highly
recommended to anyone interested in Buffett].
Warren Buffett's Letters to Shareholders
Essays for Corporate America: Warren Buffett
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