Beating The Street February 5, 2014 Volume II, #41 _____ Id rather be the man who bought the Brooklyn Bridge than the one who sold it. -Will Rogers _______ Two for the see-saw... Warren Buffett and Me A lot of ink has been devoted to Warren Buffett, especially since his two most newsworthy ploys - bailing out Goldman Sachs and offering to pay more income tax than his secretary. But none of those news items have mentioned the similarities between Buffett and me - our comparable background, our parallel careers and the reach of our success. Perhaps this oversight can be remedied with this brief memorandum. Warren Buffett was born a year after the Wall Street Crash, and there he has the advantage over me. But I was born two years earlier, just prior to 1929, when everyone was less smart but at least still had a few bucks - which should count for something. Buffett was born in Omaha; I was born in Fort Lee, New Jersey, so from an early age (as part of a witness protection program) I was known to a few people of note. And prior to Buffets becoming the richest man in the world, its a fact that more money changed hands in Sicilian Bergen County than in all of Nebraska. As a sophomore in high school, Warren bought a pinball machine, installed it in a barber shop, and by his senior year had ballooned the operation into a franchise. On the other hand, I contented myself with setting pins in a bowling alley, took a broken leg as a result of an errant ten-ball and successfully sued the owner for a school principals ransom. (My father was a school principal.) It was the beginning of my investment philosophy which I later fleshed out into a system that no less a pundit than Larry Kudlow has dubbed involuntary investment. Buffett buffs have fixated on his idolatry for Ben Graham, the father of securities analysis, who co-wrote (with David Dodd) a landmark text on investing, which became standard in every business school in the land. Our whole generation venerated Graham and Dodd. The difference between Warren and me was that he followed Ben Graham by enrolling when Graham not only lectured at Columbia but later became enshrined as the patron saint, the ultimate Knute Rockne of financial academe. Meanwhile, I was paying more attention to Dave Dodd. Nobody has any idea what happened to Dave. As far as economic history is concerned, he might just as well have invented the sub-prime mortgage. There are disparities in our differing approach to early childhood, and yet there are eerie similarities. With an early predilection for entrepreneurship, the boy Warren Buffett sold magazines and chewing gum door-to-door, had the mandatory paper route and filed his first tax return when he was 14. On the other hand, by that time, I had been commissioned a lieutenant in Dick Tracys Secret Service, (24 cereal box tops) was playing kazoo in our school jazz band and had successfully invented a cure for hiccups. The latter, forwarded to Pope Pius XI, earned me a Certificate of Merit from the Holy See. These distinctions just dont get much ink in our jaded media. Both Warren and I went to the Wharton School, he for two years prior to graduating from Nebraska and doing a Masters program at Columbia. I attended a weekend seminar there hosted by Julius Grodinsky, devoted to the gestation of nepotism at Texas Instruments. As the two of us moved into the workaday world, the parallels are even more noticeable. The basic ideas of investing, said Warren somewhere or other, are to look at stocks as business, use the markets fluctuations to your advantage, and seek a margin of safety. I couldnt have said it better. In fact I didnt. In 1951, Warren went to work in Omaha for his fathers brokerage. At the same time I arrived on Wall Street, my cardboard suitcase containing nothing but a copy of Graham and Dodd and a coupon for free lunch at Niedicks. Actually, coming from the Brooklyn side, I got off the IRT in error one stop early. Id intended to buy a pair of socks at the Fulton Street Fish Market, but the guy I asked for directions thought I said stocks. A year later, Buffett journeyed to the head office of Geico and was welcomed by vice-president Lorimer Davidson, with whom he had an audience lasting 15 minutes, just enough to save 15% on his car insurance, which at the time was his entire portfolio. Meanwhile, I came up with the gecko concept, later starting a miniature lizard farm, which I auctioned off to Geikos ad agency. The rest is history. It was time to get serious, and Warren launched Buffett Partnership Ltd., leading a few years later to his acquisition of Berkshire Hathaway, a lackluster textile manufacturer, but fortunately with Shakespearean overtones. Meanwhile, I had not been idle. Anticipating by a decade or two Buffetts historic investment in Coca-Cola, my keen observation had singled out a little known competitor known as 6-Up, the franchise for which I snapped up in a late-night poker marathon in Hoboken. Every time I got the deal, I called for Texas Hold Em (the format of which calls for two cards down and five up, (prior to 6-up, get it?) which I considered a good omen). Just prior to seeking a Chapter 11 reorganization in which the 6-Up patent would have been the centerpiece, I actually gave the franchise away. But the episode had taught me an ageless principle in the field of investment: when youre losing, hold em, which was to stand me in good stead as part of my passive investment doctrine. Soon after that, Warren made a major move into financial acquisitions with a 12% stake in Salomon Inc., the former Salomon Brothers and Hutzler. Because of my Street smarts, I had already become the protege of Ernie Hutzler, just as he was being retired as an inactive partner. Where I made my mistake in aligning my fortunes with Ernie was that his function in the firm was that of a rogue trader. He also doubled as civil defense coordinator, training the employees to hide under the trading desk during fake air raid drills. You had to be there during the Cold War to appreciate Ernies contribution. One day the SEC found Ernie hiding under his desk and kind of whimpering. It was curtains for my career at Salomon, not to mention the future of the 6-Up franchise. Coke, incidentally, has remained one of Berkshires principal holdings. I have always preferred Kool-Aid, which has a much lower P/E ratio. But chacun a son gout. Its no secret that some of Buffetts subsequent put options have fared badly, with a six or seven billion dollar loss, while I was content to remain on the sidelines because of other interests. I continued to keep my own counsel, lying in the weeds during all the AIG saga. Buffett was still the richest man in the world in 2008 and 2009, topping out around 62 bills, according to Forbes. Bill and Melinda Gates had been leading the pack for 13 years, along with a corporals guard of Waltons. And then he (Buffett) dropped to around $40 billion, which must have been a concern, but he never showed it. In 09 he did to General Electric what he had done to Goldman Sachs, with an option to buy three billion shares at 22 1/4, with a three year call, plus a 10% dividend. He expressed at the time the difficulty of knowing when to sell. I never had that problem, thanks to my Texas Hold em experience. A final word about the Goldman Sachs investment. When I heard that Warren had put ten billion into a special GS preferred stock issue, I immediately called on the head office of JPMorgan Chase and asked to speak to Jamie Dimon. I was told that he was in an emergency meeting with his Libor traders, who had just incurred a six billion dollar loss. I sent in a message to Jamie, asking if he needed a bit of help. Unbeknownst to me, the receptionist had already called security, so I never did get an answer. But at least I tried to help Jamie straighten out the Street. Meanwhile, of course, Buffett had given all his money to the Bill and Melinda Gates Foundation, apart from a billion or two to each of his kids, which Ive always thought was niggardly. That left me pretty well alone at the top. Because, while the President invited Buffett to the White House no doubt to discuss how he could invest in infrastructure, and Buffett was pretty well out of the play, and after a lifetime of near-misses, I finally got it right by shorting Facebook at $40, two days into the IPO. Even counting Burlington Northern, which Buffett bought for about $34 billion, I figure that makes us about even.
Posted on: Wed, 29 Jan 2014 14:29:19 +0000
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