The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [150]
Part of Brandt’s job for Buffett was finding scuttlebutt, a term used by investment writer Phil Fisher, the apostle of growth, who said that many qualitative factors like the ability to maintain sales growth, good management, and research and development characterized a good investment.36 These were the qualities that Munger was searching for when he spoke of the great businesses. Fisher’s proof that these factors could be used to assess a stock’s long-term potential was beginning to creep into Buffett’s thinking, and would eventually influence his way of doing business.
Buffett now had Brandt digging into an idea that would have pleased Munger, had he known about it. The episode that resulted would become one of the high points of Buffett’s career. This opportunity had its roots in the machinations of a big-time commodities trader, Anthony “Tino” De Angelis, who had become convinced in the late 1950s that he’d found a shortcut to making money in soybean oil. De Angelis—who had a shady past, having once sold tainted meat to the government school-lunch program—had by then become arguably the world’s most important and legitimate dealer in soybean oil.
It apparently struck De Angelis one day that no one actually knew how much oil was in his warehouse. He was using the oil as collateral to borrow from banks.37 As long as nobody knew how much soybean oil was in the tanks, why not goose up the numbers a little bit so he could borrow more money?
The tanks sat in a warehouse in Bayonne, New Jersey, which was managed by a tiny subsidiary that was an almost invisible part of the gigantic empire of American Express. This arm of the business issued warehouse receipts: documents that certified how much oil was in a tank and could be bought and sold, just like the warehouse receipts for cocoa beans that Graham-Newman had bought from Jay Pritzker in exchange for Rockwood shares.
After American Express had verified the oil in the tanks, De Angelis and his Allied Crude Vegetable Oil Refining Corporation sold these receipts or used them as collateral to borrow from banks—fifty-one banks. Furthermore, American Express stood as guarantor of the quantity of oil behind those receipts.
As for the tanks, they were connected by a system of pipes and valves, and De Angelis found that the soybean oil could be sloshed and shunted around from one tank to another. Thus, a gallon of oil could pull double or triple or quadruple duty as collateral for a loan. Pretty soon, the loans guaranteed by warehouse receipts were secured by a smaller and smaller amount of soybean oil.
Eventually, it occurred to De Angelis that, in fact, very little oil was needed. Indeed, just enough to fool the inspectors would do the trick. So the tanks were filled with seawater, and oil was placed inside a little tube that the inspectors used to guide their measuring sticks. They did not notice the difference or think to test a sample from outside the tube.38
At about that point, dealing in the oil itself was no longer generating enough money to satisfy De Angelis, so he began to trade in the futures market. Futures contracts give someone the right to buy soybean oil at a later date, betting on the price of oil in the future versus the price today. They are like the futures contracts Graham-Newman had sold to lock in the price of cocoa beans. For a buck or two per ton, De Angelis could buy tons of soybean oil to be delivered in nine months at a certain price to be paid on that date. The contracts could be sold before the payment came due, which made speculating in oil much cheaper than paying twenty dollars to buy the oil outright in order to sell it later. Thus stretched, the borrowed money went much further; De Angelis could, through the futures market, control a great deal of soybean oil.
The people at American Express had not been entirely asleep; after an anonymous tip in 1960 that something was amiss down in New Jersey, they made inquiries of De Angelis and his