The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [97]
“My service station was the dumbest thing—I lost two thousand dollars, and that was a lot of money for me at the time. I’d never had real damage in a loss. It was painful.”
It seemed to Warren that nearly everything he did in Omaha reinforced his sense of youth and inexperience. He was no longer a precocious boy who was acting like a man, but a young man—about to get married—who looked and sometimes acted like a boy. Kaiser-Frazer, the stock he had shorted two years before in Bob Soener’s office, still hung stubbornly around five dollars a share instead of going to zero as he had expected. Carl Falk was always giving him funny looks and questioning his judgment. And Warren felt more and more queasy about the very nature of his job. He started to think of himself as being like “a prescriptionist.” “I had to explain to people who didn’t know enough about whether they should take aspirin or Anacin,” and people would do anything the “guy in the white coat”—the stockbroker—told them to do. The stockbroker got paid based on turnover instead of advice. In other words, “he’s getting paid based on how many pills he sells. He gets paid more for some pills than others. You wouldn’t go to a doctor whose pay was totally contingent on how many pills you took.” But that’s how the business of being a stockbroker worked at the time.
Warren felt there was a conflict of interest inherent in the business. He’d recommend a stock like GEICO to his friends and family, and tell them that the best thing to do was to hold it for twenty years. That meant he didn’t get any more commissions from them. “You can’t make a living that way. The system pits your interests against your clients.”
Nevertheless, he had begun to develop a small clientele of his own through his network of graduate school friends. In the spring of 1952, he went to Salisbury, North Carolina, to spend Easter with Fred Stanback. He charmed and amused Fred’s parents and entertained the family by talking stocks, quoting Ben Graham, and asking for a Pepsi-Cola and a ham sandwich for breakfast.12 Soon afterward, back in Omaha, Fred Stanback’s father gave him an order to sell some stock in a washing-machine company, Thor Corporation. Warren found a customer through another broker, Harris Upham, who wanted to buy it. Then he got another call from Stanback’s bank about the sale and thought he had two orders. He sold the Thor Corporation stock twice, the second time unwittingly selling stock he didn’t have. Now he had to find additional shares, and ended up buying them at a loss to cover the second sale.
Mr. Stanback treated him graciously despite the mistake. He absorbed the entire loss even though it was Warren’s fault. Warren was grateful and never forgot it. He had more reason for concern about the second buyer, a man known as “Mad Dog” Baxter, who was a remnant of Omaha’s days as a major gambling layoff center*16 and an associate in some of the city’s many illegal betting parlors. Baxter had arrived at Buffett-Falk in person, strolled up to the cashier’s cage, and pulled out a wad of $100 bills, waving it around ostentatiously. Once again, “Carl Falk looked at me questioningly.” Was Buffett-Falk being used to launder illegal gambling money? Situations like this reinforced Warren’s dislike for his job. Even when he wasn’t selling stocks, he felt conflicted. He had turned Buffett-Falk into a “market maker,” a firm that acted as a middleman, buying and selling stocks as a dealer.13 The firm made a profit by selling a stock to clients at a slightly higher price than it paid, and buying stock from clients at a lower price than it sold the stock for. The difference, or “spread,” was its profit. The spread was invisible to the customers. Acting as a market maker lifted a brokerage firm from being a mere order taker to being a player in the Wall Street game. While