The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [115]
There was only one problem with his idea. He couldn’t tolerate it if his partners criticized him because the stocks went down. But Warren had figured out a solution. He planned to invite only his family and friends—people he was sure trusted him—into the partnership. On May 1, 1956, he started Buffett Associates, Ltd., a partnership based on the Newman & Graham model,3 with seven partners.
Doc Thompson invested $25,000. “Doc Thompson was the kind of guy, he gave me every penny he had, basically. I was his boy.” Warren’s sister Doris, with her husband, Truman Wood, put in $10,000. His aunt Alice Buffett put in $35,000. “I had sold securities to other people before that, but now I became a fiduciary, and for people who were enormously important to me. These were the people who believed in me. There’s no way in the world I would have taken my aunt Alice’s or my sister’s or my father-in-law’s money if I had thought that I’d lose it. At that point I didn’t think I could lose money over time.”
He already had a separate partnership with his father, and his sister Bertie and her husband had no money they could part with. So his Wharton roommate Chuck Peterson, who put in $5,000, became his fourth partner. Al Jolson aside, he knew all about Warren’s brains and financial maturity from having been his roommate. Chuck had been one of the first to let Warren dispense him scrips as a prescriptionist, buying stocks from him before he went to New York City. “I learned real fast how bright he is and how honest he is and how capable,” he says. “I would trust him until proven otherwise.”4 Warren’s fifth partner was Peterson’s mother, Elizabeth, who invested $25,000 of the money she had inherited when her husband died the year before.
The sixth partner, Dan Monen, was a quiet, stocky, dark-haired young man who used to play with Warren as a child, digging up dandelions in Ernest Buffett’s backyard. Now Warren’s lawyer, he didn’t have much money but put in what he could: $5,000.
Warren was the seventh. He put in only $100. The rest of his share would come from future fees he earned by managing the partnership. “In effect, I got my leverage from managing the partnership. I was brimming with ideas, but I was not brimming with capital.” Actually, by most of the country’s standards, Warren was brimming with capital. But he viewed the partnership as a compounding machine—once money went into it, he did not intend to make withdrawals. So he needed to earn the $12,000 a year his family would live on from the rest of his funds. He invested that money separately.
He devised a formula to charge his new partners. “I got half the upside above a four percent threshold, and I took a quarter of the downside myself. So if I broke even, I lost money. And my obligation to pay back losses was not limited to my capital. It was unlimited.”5
At the time, Warren was already managing money for Anne Gottschaldt and Catherine Elberfeld, the mother and aunt of Fred Kuhlken, a friend from Columbia. When Fred left for Europe the year before, he had asked Warren to look after part of his aunt’s and mother’s money.6 Ever since, Warren had been investing it with utmost caution in government bonds under a different, more modest fee arrangement.
He could have invited Gottschaldt and Elberfeld into the partnership, but he felt that it was unfair to charge them a higher fee than they were already paying. Of course, if the partnership was the sure thing he thought it was, that meant he was depriving them of a golden opportunity. If something went wrong with the investments, however, his aunt and his sister and Doc Thompson would never condemn him. He wasn’t so sure about anybody else.
Acting as a “fiduciary” meant to Warren that any responsibility he took on would be unlimited. To lay out the ground