Tuesday, March 27, 2012

A Snapshot of Buffett's Early Years

This a wonderful account by Warren Buffett given to Forbes magazine about his decision to form his original investment partnership in 1956 (a partnership model replicated by Gad Capital Management and Gad Partners Funds), a fateful decision that ultimately led to the genesis of what Berkshire Hathaway is today.

Titled "Warren Buffett's $50 Billion Decision" the story is below. Yet visit the link for great pictures of Buffett in his early years.

Warren Buffett's $50 Billion Decision
by Warren Buffett

Benjamin Graham had been my idol ever since I read hisbook The Intelligent Investor.I had wanted to go to Columbia Business Schoolbecause he was a professor there, and after I got out of Columbia, returned to Omaha, and startedselling securities, I didn’t forget about him. Between 1951 and 1954, I made apest of myself, sending him frequent securities ideas. Then I got a letterback: “Next time you’re in New York, come and see me.”

So there I went, and he offered me a job atGraham-Newman Corp., which he ran with Jerry Newman. Everyone says that A.W.Jones started the hedge fund industry, but Graham-Newman’s sister partnership,Newman and Graham, was actually an earlier fund. I moved to White Plains, NewYork, with my wife, Susie, who was four months pregnant, and my daughter. Everymorning, I got on a train to Grand Central and went to work.

It was a short-lived position: The next year, when Iwas 25, Mr. Graham—that’s what I called him then—gave me a heads-up that he wasgoing to retire. Actually, he did more than that: He offered me the chance toreplace him, with Jerry’s son Mickey as the new senior partner and me as thenew junior partner. It was a very tiny fund—$6 million or $7 million—but it wasa famous fund.

This was a traumatic decision. Here was my chance to stepinto the shoes of my hero—I even named my first son Howard Graham Buffett.(Howard was for my father.) But I also wanted to come back to Omaha. I probablywent to work for a month thinking every morning that I would tell Mr. Graham Iwas going to leave. But it was hard to do.

The thing is, when I got out of college, I had $9,800,but by the end of 1955, I was up to $127,000. I thought, I’ll go back to Omaha,take some college classes, and read a lot—I was going to retire! I figured wecould live on $12,000 a year, and off my $127,000 asset base, I could easilymake that. I told my wife, “Compound interest guarantees I’m going to getrich.”

My wife and kids went back to Omaha just ahead of me.I got in the car, and on my way west checked out companies I was interested ininvesting in. It was due diligence. I stopped in Hazleton, Pennsylvania, tovisit the Jeddo-Highland Coal Company. I visited the Kalamazoo Stove &Furnace Company in Michigan, which was being liquidated. I went to see what thebuilding looked like, what they had for sale. I went to Delaware, Ohio, tocheck out Greif Bros. Cooperage. (Who knows anything about cooperage anymore?)Its chairman met with me. I didn’t have appointments; I would just drop in. Ifound that people always talked to me. All these people helped me.

In Omaha, I rented a house at 5202 Underwood for $175a month. I told my wife, “I’d be glad to buy a house, but that’s like acarpenter selling his toolkit.” I didn’t want to use up my capital.

I had no plans to start a partnership, or even have ajob. I had no worries as long as I could operate on my own. I certainly did notwant to sell securities to other people again. But by pure accident, sevenpeople, including a few of my relatives, said to me, “You used to sell stocks,and we want you to tell us what to do with our money.” I replied, “I’m notgoing to do that again, but I’ll form a partnership like Ben and Jerry had, andif you want to join me, you can.” My father-in-law, my college roommate, hismother, my aunt Alice, my sister, my brother-in-law, and my lawyer all signedon. I also had my hundred dollars. That was the beginning—totally accidental.

When I formed that partnership, we had dinner, theseven of them plus me—I’m 99 percent sure it was at the Omaha Club. I bought aledger for 49 cents, and they brought their checks. Before I took their money,I gave them a half sheet of paper that I had made carbons of—something I calledthe ground rules. I said, “There are two or four pages of partnership legaldocuments. Don’t worry about that. I’ll tell you what’s in it, and you won’tget any surprises.
“But these ground rules are the philosophy. If you are in tune with me, thenlet’s go. If you aren’t, I understand. I’m not going to tell you what we own oranything like that. I want to get bouquets when I deserve bouquets, and I wantto get soft fruit thrown at me when I deserve it. But I don’t want fruit thrownat me if I’m down 5 percent, and the market’s down 15 percent—I’m going tothink I deserve a bouquet for that.” We made everything clear, and they gave metheir checks.

I did no solicitation, but more checks began comingfrom people I didn’t know. Back in New York, Graham-Newman was beingliquidated. There was a college president up in Vermont, Homer Dodge, who had beeninvested with Graham, and he asked, “Ben, what should I do with my money?” Bensaid, “Well, there’s this kid who used to work for me.…” So Dodge drove out toOmaha, to this rented house I lived in. I was 25, looked about 17, and actedlike 12. He said, “What are you doing?” I said, “Here’s what I’m doing with myfamily, and I’ll do it with you.”

Although I had no idea, age 25 was a turning point. Iwas changing my life, setting up something that would turn into a fairlygood-size partnership called Berkshire Hathaway. I wasn’t scared. I was doingsomething I liked, and I’m still doing it.


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