The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [154]
Buffett had always wanted to influence the managements of companies in which he invested. But in the past he had not attempted to turn his investments into a church, where he could preach while passing around the collection plate. Now he showed up at Howard Clark’s door unannounced to lobby him to remain resolute despite the shareholder lawsuit.
“I had this habit of just sort of dropping in and talking to different people. There was one time that Howard said to me that it’d be a little nicer if I paid more attention to the organization chart…. He was very nice about it.”3
As if to confirm Buffett’s sense that moral rectitude had financial value, American Express paid the settlement and worked through its travails, and the stock, which had plunged below $35, rose to more than $49 per share. By November 1964, the partnership owned more than $4.3 million of American Express stock. It had made other huge bets: $4.6 million in Texas Gulf Producing and another $3.5 million in Pure Oil, cigar butts both. Together the three made up more than half the portfolio.4 By 1965, American Express alone was almost one-third.
The entire partnership had stood at only $7.2 million at the beginning of 1962. Buffett, fearless in concentrating his bets, would keep buying into 1966 until he had spent $13 million on American Express. He felt the partners ought to know a new “ground rule”: “We diversify substantially less than most investment operations. We might invest up to forty percent of our net worth in a single security under conditions coupling an extremely high probability that our facts and our reasoning are correct with a very low probability that anything could drastically change the underlying value of the investment.”5
Warren had ventured far from the worldview of his mentor, Ben Graham. The hard-nosed “quantitative” approach espoused by Graham was the world of the speed handicapper, of the cigar-butt stooper who worked from pure statistics. Come to work in the morning, flip through the Moody’s Manual or the Standard & Poor’s weekly report, look for cheap stocks based on a handful of numbers, call Tom Knapp at Tweedy, Browne & Knapp and buy them, go home when the market closed, and sleep well at night. As Buffett said of this, his favorite approach, “The more sure money tends to be made on the obvious quantitative decisions.” But the method had a couple of drawbacks. The number of statistical bargains had shrunk to virtually nil, and since cigar butts tended to be small companies, it did not work when large sums of money were involved.
While still working this approach, Buffett had had what he would later call a “high-probability insight” about American Express that confounded Ben Graham’s core idea. Unlike companies whose value came from cash, equipment, real estate, and other assets that could be calculated and if necessary liquidated, American Express had little more than its customers’ goodwill. He had bet his partners’ money—Alice’s inheritance; Doc Thompson’s savings; Anne Gottschaldt’s and Catherine Elberfeld’s money; the Angles’ life savings; and Estey Graham’s money—on that goodwill: the competitive advantage that Charlie Munger had been talking about when he spoke of the “great businesses.” This was the method of the class handicapper, of Phil Fisher, and it involved qualitative, as opposed to quantitative, assessments.
Buffett would later write to the partners that buying “the right company (with the right prospects, inherent industry conditions, management, etc.)” means “the price will take care of itself…. This