The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [76]
Reputedly the largest hardware wholesaler in North America, Marshall-Wells was earning so much money that if it had paid out those earnings to shareholders as a dividend, they would have gotten $62 a share. The stock traded at around $200 a share. Owning a Marshall-Wells share was something like owning a bond, one that paid thirty-one percent interest (the $62 earnings on a $200 share). At that rate, in three years, Warren would have nearly two dollars of value for every dollar he had invested in Marshall-Wells. Even if the company didn’t pay the money out, the stock would have to rise eventually.
You would be crazy to pass up such a stock.
But Warren did not explain any of this to Lou Green. Instead, he said, “‘Because Ben Graham bought it.’
“Lou looked at me and said, ‘Strike one!’
“I’ll never forget the way he looked at me when he said it.”
It dawned on him: “Warren, think for yourself.” He felt foolish.
“We’re sitting in this little cafeteria, I’m with this impressive character, and all of a sudden I’m striking out.”
He did not want to make any more mistakes like this, and he did want to find more stocks like Marshall-Wells, so as Graham’s seminar approached, Warren started memorizing everything he could find out about Ben Graham’s method, his books, his specific investments, and Graham himself. He had learned that Graham was chairman of the board of a company called Government Employees Insurance Company, or GEICO.20 This stock was not mentioned in Security Analysis. When he looked in the Moody’s Manual, he found that the Graham-Newman Corporation had owned fifty-five percent of it but had recently given out the stock to its shareholders.21
What was this GEICO? Warren was curious. So on a cold, wintry Saturday morning a few weeks later, he jumped on the earliest train to Washington, D.C., and showed up at GEICO’s door. No one was about, but a guard answered his knock. As he recalls, Warren asked in his humblest manner whether anyone was there who might explain GEICO’s business to him. He made sure to mention that he was a student of Ben Graham’s.
The guard trotted upstairs to the office where GEICO’s financial vice president, Lorimer Davidson, sat working. Faced with this request, Davidson thought to himself that “being a pupil of Ben’s, I would give him five minutes and thank him, find a polite way of sending him on his way.”22 He told the guard to show Warren in.
Warren introduced himself to Davidson with precise but flattering sincerity: “‘My name is Warren Buffett. I’m a student at Columbia. Ben Graham is going to be, probably, my professor. I read his book, and I think he’s wonderful. And I noticed that he’s the chairman of Government Employees Insurance. I don’t know anything about it, but I wanted to come here and learn.’”
Davidson started talking to Warren about the arcane business of auto insurance, thinking that out of kindness to a pupil of Graham’s, he would waste a few minutes of his valuable time. But, he said, “After about ten to twelve minutes of his questions, I realized that I was talking to a highly unusual young man. The questions he was asking me were the questions that would have been asked by an experienced insurance-stock analyst. His follow-up questions were professional. He was young, and he looked young. He described himself as a student, but he was talking like a man who had been around a long time, and he knew a great deal. When my opinion of Warren changed, I began asking him questions. And I found out that he had been a successful businessman at age sixteen. That he had filed his own income tax at age fourteen and every year since then. That he had had a number of small businesses.”
Lorimer Davidson had accomplished so much himself that he was hard to impress. “Davy,” as he was universally known, had been a mediocre student, but, he says, “Almost from the time I was ten, eleven years old, I knew what I wanted to do. I wanted to be just what my father was. I never