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Nov-29-2012 21:58printcomments

Warren 'n me... Buffett's Fortune

The more I mix with millionaires, the more I like the things we mix. - Stephen Leacock

Warren Buffett
Warren Buffett photo courtesy: mondoweiss.net

(DAYTONA BEACH, FL) - Much has been written about Warren Buffett, world's richest man, especially since he bailed out Goldman Sachs and offered to pay more income tax than his secretary. But few if any of the news items have mentioned the similarities between Warren Buffett and me - our similar background, our parallel careers and the reach of our success. Perhaps this oversight will 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, and that should count for something. Buffett was born in Omaha; I was born in Bergen County, New Jersey, so from an early age (as part of a witness protection program) I was known to more people of note than he was. Certainly, prior to his award of world's richest by Forbers Magazine, it's a fact that more money changed hands in Sicilian Teaneck than in all of Nebraska.

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 inevitable 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 Tracy's Secret Service,* (24 corn flakes box tops) was playing trumpet in a jazz band and had successfully invented a cure for hiccups. The latter coup, forwarded to Pope Pius XI, earned me a Certificate of Merit from the Holy See. These distinctions just don't get much ink in our jaded media.

As a sophomore in high school, Buffett bought a pinball machine, installed it in a barber shop, and by his senior year had ballooned this schtick into a franchise operation. By way of contrast, 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 principal's ransom. It was the beginning of my investment philosophy which I later fleshed out into a system that financial analysts have dubbed "passive investment."

Buffett buffs have fixated on his idolatry for Ben Graham, the father of securities analysis, who co-wrote (with David Dodd) landmark texts on investing, which became standard in every business school in the land. Generations studied Graham and Dodd. The difference between Warren and me was that he followed Ben Graham by enrolling when Graham lectured at Columbia and later became enshrined as the patron saint, the ultimate Knute Rockne of business academe. Whereas, I was paying more attention to Dave Dodd. Nobody has any idea what happened to Dave. He might just as well have invented the sub-prime mortgage.

Both Buffett and I went to the Wharton School, he for two years prior to graduating from Nebraska and doing a Master's program at Columbia. I attended a weekend seminar hosted by Julius Grodinsky, on nepotism at Texas Instruments.


As we both 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 market's fluctuations to your advantage, and seek a margin of safety." I couldn't have said it better. The margin of safety played right into my passive investment theory.

In 1951, Warren went to work in Omaha in his father's brokerage. At the same time I arrived on Wall Street, my cardboard suitcase holding nothing but a copy of Graham and Dodd and a free lunch at Niedick's. Actually, I got off the IRT one stop early. I'd 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 a vice-president, with whom he had an audience lasting 15 minutes, saving 15% on his car insurance, which at the time was his entire portfolio. Meanwhile, I came up with the gecko concept, later starting a sub-industry with a miniature lizard farm, which I auctioned off to an ad agency.

It was time to get serious, and Warren launched Buffett Partnership Ltd., leading a few years later to his acquisition of Berkshire Hathaway, a lacklustre textile manufacturer. Meanwhile, I had not been idle.

Anticipating by a decade or two Buffett's 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 contest in Hoboken known as Texas Hold 'Em (the format of which calls for two cards down and five up, which I considered a good omen).

Just prior to seeking a Chapter 11 financial reorganization on 6-Up's behalf, I actually gave the franchise away, but the episode had taught me an ageless principle in the field of investment: when you're losing, fold 'em, which was to stand me in good stead as part of my passive investment doctrine.

Soon after, Warren made a major move into financial acquisitions with a 12% stake in Salomon Inc., the former Salomon Brothers and Hutzler. I had already made myself known to Ernie Hutzler, just as he was being retired as an inactive partner. Where I made my mistake was that Ernie's function in the firm was that of a rogue trader, who doubled as civil defense coordinator, organizing and training the employees to hide under their desks during fake air raid drills anticipating an atomic bomb being dropped on Wall Street. You had to be there during the Cold War to appreciate Ernie's contribution. One day the SEC found Ernie hiding under his desk and it was curtains for my stake in Salomon.

Coke, incidentally, has remained one of Berkshire's principal holdings. I have always preferred Kool-Aid, which has a much lower P/E ratio. Chacun a son gout.

Some of Warren's put options written at that time have faded badly, with a six or seven billion dollar loss, while I was sort of on the sidelines, with other interests. Following my avocation, I was playing motivational piano in a Tampa bordello.

I also stayed on the sidelines during all Warren's AIG involvement. He was still the richest man in the world in 2008 and 2009, topping out around 62 bills, according to Forbes. Bill and Melinda had been leading the pack for 13 years. 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 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 JP Morgan 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 for JPM. I sent in a message to Jamie, asking if he needed a bit of money.

Unbeknownst to me, the receptionist had already called security, so I never did get an answer. But at least I did my best to straighten out the Street.

Meanwhile, about the same time, Buffett gave all his money to the Bill and Melinda Gates Foundation, apart from a billion or two to each kid, which I've never thought was merited.

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, I was busy shorting Facebook at $40, two days into the IPO.

Even counting Burlington Northern, which he bought for about $34 billion, I figure that makes us about even.

______________________________________________________

Bill Annett grew up a writing brat; his father, Ross Annett, at a time when Scott Fitzgerald and P.G. Wodehouse were regular contributors, wrote the longest series of short stories in the Saturday Evening Post's history, with the sole exception of the unsinkable Tugboat Annie.

At 18, Bill's first short story was included in the anthology “Canadian Short Stories.” Alarmed, his father enrolled Bill in law school in Manitoba to ensure his going straight. For a time, it worked, although Bill did an arabesque into an English major, followed, logically, by corporation finance, investment banking and business administration at NYU and the Wharton School. He added G.I. education in the Army's CID at Fort Dix, New Jersey during the Korean altercation.

He also contributed to The American Banker and Venture in New York, INC. in Boston, the International Mining Journal in London, Hong Kong Business, Financial Times and Financial Post in Toronto.

Bill has written six books, including a page-turner on mutual funds, a send-up on the securities industry, three corporate histories and a novel, the latter no doubt inspired by his current occupation in Daytona Beach as a law-abiding beach comber.

You can write to Bill Annett at this address: bilko23@gmail.com




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Bill Annett November 30, 2012 1:37 am (Pacific time)

Thanks, Bonnie. Don't ask, and particularly don't tell, the IRS.


Bonnie King November 29, 2012 10:13 pm (Pacific time)

Bill, I think you are a much richer man than Mr Buffett. Thanks for sharing such a terrific article. :)

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