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But such were the tales that would later be told about Warren’s frugal habits that this story grew arms and legs and scuttled into the legend that he was too cheap to buy Little Susie a crib, and she therefore slept in a drawer throughout much of her White Plains infancy.19

As the pregnant Susie unpacked and arranged her new household while taking care of their baby and getting to know the neighbors, Warren rose every morning and took the New York Central train to Grand Central. In that first month, he had parked himself in the file room at Graham-Newman and, eager to know everything about how the company worked, begun to read through every single piece of paper in every single drawer in an entire room filled with big wooden files.

Only eight people worked there: Ben Graham; Jerry Newman; his son Mickey Newman; Bernie Warner, who was the treasurer; Walter Schloss; two women secretaries; and now Warren. The thin gray laboratory-style jacket Warren had coveted was at last his. “It was a big moment when they gave me my jacket. We all wore them. Ben wore it, Jerry Newman wore it. We were all equal in our jackets.”

Well, not quite. Warren and Walter sat at desks in a windowless room that contained the ticker machine, the direct lines to the brokerage houses, some reference books and files. Walter sat next to the direct lines and made most of the calls to brokers. Ben, Mickey Newman, or, most commonly, Jerry Newman appeared periodically from their private offices to check a quote on the ticker machine. “We would look up stuff and read. We would go through Standard & Poor’s or a Moody’s Manual and look at companies selling below working capital. There were a lot then,” recalls Schloss.

These companies were what Graham called “cigar butts”: cheap and unloved stocks that had been cast aside like the sticky, mashed stub of a stogie one might find on the sidewalk. Graham specialized in spotting these unappetizing remnants that everyone else overlooked. He coaxed them alight and sucked out one last free puff.

Graham knew that a certain number of cigar butts would turn out foul, and thought it futile to spend time examining any individual cigar butt’s quality. The law of averages said most of them were good for a puff. He was always thinking in terms of how much companies would be worth dead—what their assets would be worth if liquidated. Buying at a discount to that value was his “margin of safety”—his backstop against the percentage that presumably would go bankrupt. As a further backstop, he bought tiny positions in a huge number of stocks—the principle of diversification. Graham’s idea of diversification was extreme; some of his positions were as small as $1,000.

Warren, who had such confidence in his own judgment, saw no reason to hedge his bets this way and inwardly rolled his eyes at diversification. He and Walter collected numbers from the Moody’s Manuals and filled out hundreds of the simple forms that Graham-Newman used to make decisions. Warren wanted to know all the basic information about every company. Once he had looked over the field, he narrowed it down to a handful of stocks worth even more careful study, then concentrated his money on what he considered the best bets. He was willing to put most of his eggs in one basket, as he had done with GEICO. By that time, however, he had sold his GEICO shares, because he never seemed to have enough money to invest. Every decision had an opportunity cost—he had to compare each investing opportunity with the next best one. As much as he liked GEICO, he had made the wrenching decision to sell it after finding another stock that he coveted even more, called Western Insurance. This company was earning $29 a share, and its stock was selling for as little as three bucks.

This was like finding a slot machine that would come up cherries every time you played. If you put in twenty-five cents and pulled the handle, the Western Insurance machine was virtually guaranteed to pay at least two bucks.20