The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [529]
While a full discussion of insider trading is beyond the scope of this book, the theory of insider trading was promulgated with SEC Rule 10b-5 in 1942, but “so firmly entrenched was the Wall Street tradition of taking advantage of the investing public,” as John Brooks puts it in The Go-Go Years, that the rule was not enforced until 1959, and it was not until the 1980s that anyone seriously questioned the duties of people other than insiders under insider-trading laws. Even then, the Supreme Court affirmed, in Dirks v. SEC, 463 U.S. 646 (1983), analysts could legitimately tell their clients this type of information, and the Supreme Court also noted in Chiarella v. United States, 445 U.S. 222 (1980), that “informational disparity is inevitable in the securities markets.” To some extent, there was understood to be some benefit to the market of a gradual leakage of inside information; in fact, how else was the information to get out? The practice of business public relations and conference calls had not developed.
In these 1980s cases, however, the Supreme Court defined a new “misappropriation” theory of insider trading, in which inside information that was misappropriated by a fiduciary could lead to liability if acted upon. Then, largely in response to the Bubble-era proliferation of “meeting and beating consensus” earnings and the “whisper numbers” that companies began to suggest to favored analysts that they were going to earn, in 2000, through Regulation FD (Fair Disclosure), the SEC broadened the misappropriation theory to include analysts who selectively receive and disseminate material nonpublic information from a company’s management. With the advent of Reg. FD, the “grapevine” largely ended, and a new era of carefully orchestrated disclosure practices began.
15. At the end of 1956, after the dividend was paid, Warren owned 576 shares trading at $20, worth $11,520.
16. He registered the securities in his own name, rather than his brokers’, so the checks came straight to his home.
17. Interviews with George Gillespie, Elizabeth Trumble, who heard this story from Madeline. Warren heard it for the first time at his fiftieth birthday party, from Gillespie. Apparently Susie had never mentioned it to him.
18. More than five decades later, Howie recalls this as his first memory. While that may seem improbable, in “Origins of Autobiographical Memory,” Harley and Reese (University of Chicago, Developmental Psychology, Vol. 35, No. 5, 1999) study theories of how childhood memories are recalled from the earliest months of life and conclude that this phenomenon does occur. One of the explanations is parents who repeat stories to their children. A gift from Ben Graham—probably significant to Warren—might plausibly be recalled by Howie from infancy because at least one parent helped him imprint it solidly in memory by discussing it so much.
19. Interview with Bernie and Rhoda Sarnat.
20. This story also is cited in Janet Lowe’s Benjamin Graham on Value Investing: Lessons from the Dean of Wall Street. Chicago: Dearborn Financial Publishing, 1994.
21. Interview with Walter Schloss.
22. Warren Buffett letter to the Hilton Head Group, February 3, 1976.
23. Schloss was starting the partnership with $5,000 of his own capital, a risky arrangement that left him nothing on which to live. Buffett got him help with housing from Dan Cowin. Ben Graham put in $10,000 and had some of his friends do so too; eight of Schloss’s friends put in $5,000 each. Schloss charged 25% of profits, “but that’s it. If the market went down, we would have to make up the loss until my partners were whole.”
24. Knapp was a security analyst at Van Cleef, Jordan & Wood, an investment adviser.
25. Interview with Tom Knapp.
26. Interview with Ed Anderson.
27. Ibid.
28. Graham was born May 9, 1894. He decided to shut down Graham-Newman when he was sixty-one, but the last Graham-Newman shareholder meeting was