The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [197]
The gathering ended much as it had begun, with more displays of rudeness from the hotel staff, who had no idea they were hosting anything other than a third-rate group of stockbrokers at a time when the market was falling.28 The staff had officiously shooed the Grahamites away from the jewelry cases on the hotel mezzanine. On the last day, as the group was departing, Ed Anderson approached the front desk, and asked how best to get to the airport. Most of our guests go by limousine, he was told, but for you folks we’ll call a cab.29
Buffett would go on to describe the Colony Club as “a friendly family hotel—that is, friendly if you were the Kennedy family.”30 It was a “low-class performance by a high-class place,” says Anderson. Later, when a Fort Lauderdale businessman who held the mortgage on the Colony Club asked Buffett to advise him on a financing deal, Buffett told the man he would be happy to do it without taking a fee, but “if you ever have a chance to foreclose on them, do it.”31
One of those Buffett had invited to the Colony Club was Hochschild-Kohn’s Louis Kohn. Buffett had grown fond of Kohn and his wife, and he and Susie had vacationed with them in Cozumel. But inviting them to the Colony Club gathering proved awkward, since no sooner had the meeting been planned than Buffett and Munger started to realize that Hochschild-Kohn was not going to work out for them.
“Retail is a very tough business,” says Charlie Munger. “We realized that we were wrong. Practically every great chain-store operation that has been around long enough eventually gets in trouble and is hard to fix. The dominant retailer in one twenty-year period is not necessarily the dominant retailer in the next.” Their experience had given them a deep wariness of retailing—one that would only grow, not lessen, over time.
They wanted businesses that would marmalade them with money, businesses that had some sort of sustainable competitive advantage and could outwit the natural cycle of capital creation and destruction as long as possible. Not long after the meeting in Florida, Munger and Buffett sold Hochschild-Kohn to Supermarkets General for about what it had cost them.32 Buffett wanted to act fast in order to unload the company before winding down the partnership and distributing the assets. And along with the company, the Kohns disappeared from the Buffetts’ lives.33
Diversified Retailing had issued unsecured debt (“debentures”) to finance the Hochschild-Kohn purchase. Buffett had taken special care with this, his first public financing, and insisted to his underwriters that the bonds have several unusual features. The bankers had objected that a novel structure would make the bond harder to sell.
“I said, ‘Well, but bonds should have this in there.’ That was the first bond issue I ever sold, and I put a few things in there that the underwriters had no interest in whatsoever. But I had thought a lot about bond issues over the years. And I had thought about how bondholders got taken.”
Bondholders historically earned less than stockholders because they gave up the potentially unlimited opportunity of a shareholder in favor of lower risk. But Buffett knew that in the real world this was not necessarily true.
“One of the things I put in was that if we didn’t pay the interest on the bond for any reason, the bondholders took over voting control of the company, so they didn’t have to get Mickey Moused by bankruptcy and all that kind of stuff.” Ben Graham had written about this in Security Analysis, with as much passion as he mustered on any subject, describing how courts rarely allow bondholders to seize the assets that back those bonds unless the assets are nearly worthless. Unsecured bondholders’ interests were worked over in receivership through a strangling process that delayed payment almost to the point of irrelevance. Thus, DRC’s debenture also provided that the company could not pay dividends while the debentures were outstanding, meaning that