On a Sunday afternoon in May of last year Warren Buffett, America's second richest man and, some feel, the greatest investor in its history, was meeting the press in an Omaha hotel when a dark-suited man—a bodyguard, apparently—hustled up onto the platform where Buffett was seated and whispered into his ear. The multibillionaire listened without expression while the man in the seat beside him, Charlie Munger, the vice-chairman of their company, Berkshire Hathaway, stared ahead through a pair of horn-rimmed glasses whose lenses weren't merely thick but virtually spherical, like a pair of crystal Ping-Pong balls. Buffett and Munger are quite a duo, with the conversational timing and style of a vaudeville comedy team—Buffett dry and jovial and extroverted, and Munger even drier but blunt and mordant. For an hour or so, until this interruption, the two—both native Nebraskans—had been answering questions on everything from corporate-governance scandals to the likelihood that a major act of terrorism would bankrupt the insurance industry. It's their gift to be able to talk about such subjects so plainly, incisively, and honestly that the reporters had been laughing the whole time.
Now, though, it seemed that something dire was happening. The bodyguard looked concerned—a little panicky, even. When the guard left the platform, Buffett looked up and spoke. The hotel, he informed us, was advising everyone to take shelter immediately in a windowless safe room located in the center of the building: tornadoes had been sighted in western Omaha, and radar indicated that they were headed this way.
For his part, however, he intended to keep on taking questions until no one had anything more to ask or the whole building blew away. He sipped from a can of Cherry Coke and exchanged a look with his straight man Munger, whose myopic self-containment seemed impregnable. Moments later sirens started to wail. A few reporters scuttled out, but most of them took up Buffett's stoic challenge to ignore the warnings and carry on.
The reporters who had done their research knew that this was how Buffett always operates—not only in the face of violent winds but in the face of turbulent markets. He sits tight. He keeps his head while others are losing theirs, and then he moves in, if he wishes, and buys those heads (meaning large blocks of stock or entire companies) at an advantageous price. And then he keeps them. He rolls them into Berkshire Hathaway's almost comically diverse portfolio (the company's wholly owned properties, to list just a few, include a chocolate-candy retailer, an underwear manufacturer, a furniture store, a chain of ice-cream restaurants, a maker of cowboy boots, and an insurance firm that insures insurance firms) and watches his wealth, and that of his shareholders, grow and grow. He watches it grow while the fortunes of other investors—more-excitable types with more-fashionable holdings, which they tend to think about selling the moment they buy them—rise and fall and gyrate and go sideways and eventually, in all too many cases, are ground down between the twin millstones of fear and greed.
The weekend of that stormy Sunday was dedicated to celebrating Buffett's success, or what the business writer Robert Hagstrom has called "the Warren Buffett way"—as though there were some sort of wizardry behind what may be the most thoroughly explained investment method in recent history. Every May, Buffett, Munger, and attending shareholders, whom the two like to refer to as "our partners," gather for Berkshire Hathaway's annual meeting: two hectic days of capitalist frolicking, featuring exhibition Scrabble games, hot-dog feeds, and shareholders-only sales at Borsheim's Jewelers and the Nebraska Furniture Mart, two of the company's retail properties. Though Buffett's personal thrift is the stuff of legend (he still lives in the fairly modest house that he bought in the 1950s), he isn't shy about encouraging shareholders to break out their credit cards for diamonds and carpets. At the end of the weekend he totals the receipts and makes the figures public.
The annual meeting's main event, which took place on a Saturday in 2003, is a freewheeling question-and-answer session with Buffett and Munger, held in a cavernous downtown sports arena. Among the thousands of adoring fans are scores of millionaires who owe their net worth to Berkshire's lofty stock price, which hit a three-year low on March 10, 2000, on the same day the nasdaq reached its all-time high, and then reversed course while the nasdaq sank and sank. In the 1990s highfliers derided Buffett for sitting out the run-up in high-tech and dot-com stocks (he once famously said that he simply "didn't understand" them), but this contrarian feat provided sweet vindication.
The May 2003 session began with a short movie in which Buffett poked fun at his rumpled, down-home image while reminding the cheering audience of his unique celebrity—an unquantifiable but valuable asset that he has never been shy about exploiting but that financial writers tend to overlook when analyzing his character and accomplishments. In one segment Buffett appeared as Daddy Warbucks alongside Bob Kerrey, the former Nebraska senator and now the president of New School University, and belted out the song "Tomorrow," from Annie. In another Ron Insana, a balding, huggable CNBC reporter, summarized Berkshire's recent performance by cracking, "While the rest of the market was taking it in the shorts, Mr. Buffett was buying the shorts" (a reference to Berkshire's acquisition of Fruit of the Loom). At one point the singer Jimmy Buffett, a distant relative of the tycoon's, strummed a guitar and crooned, "I bought Berkshire back when it was cheap." For the finale, CEOs from various Berkshire-owned companies put new words to a familiar Coca-Cola jingle: "It's the real thing, Berkshire Hathaway. What the world wants today. Berkshire Hathaway." When Buffett joined in at the close, and urged the audience members to sing along from their seats, they did so, heartily, swaying to the music and clapping in the dreamy, loose-wristed manner of old ladies feeling the spirit at a gospel service.
With its roster of grinning well-known faces letting Buffett upstage them at every turn (Tiger Woods made a cameo appearance too, pretending to coach Buffett on his creaky golf swing), the movie revealed at least as much about the so-called Oracle of Omaha as did his refusal to bow to the tornado warning. Buffett is a conscious, sophisticated performer, the inventor and caretaker of a rare persona that has no equivalent in American business. Not since Samuel Goldwyn, perhaps, has a tycoon functioned in the culture as both a first-class entertainer and the embodiment of his industry. Buffett's Will Rogers folksiness and Mark Twain wit ("Never ask the barber if you need a haircut"; "Price is what you give; value is what you get"; "Predicting rain doesn't count; building arks does") aren't merely colorful secondary traits but stylized expressions of his very being. They represent more than that, in fact. Buffett's attitudes and mannerisms now stand for American capitalism itself—or at least for its more positive aspects. He is what's good about the free market, in human form—akin to what Joe DiMaggio was to baseball. Bill Gates may be richer, and Donald Trump (the anti-Buffett) flashier, but compared with Buffett they're mere character actors. The role of the straight-shooting leading man, trusted by all, belongs to Buffett alone.
He understands this. Others know it too—particularly ambitious politicians in search of instant economic credentials and an air of humane financial probity. Not long after last year's annual meeting, when more than 10,000 dazzled shareholders shot to their feet as Buffett finally took the microphone, and then hung on his every word for hours afterward, the financier was recruited by Arnold Schwarzenegger to advise his gubernatorial campaign on budget issues. It takes a leading man to know one, and although their relationship foundered over the question of property taxes (Buffett suggested that California raise them), Buffett's decision to even be seen with Schwarzenegger solemnized the muscle man's candidacy. This year John Kerry is looking for the same magic: he teamed up with Buffett early on, and will surely be dropping his name until Election Day.
All of which is to say that the popular business media have for some time now been missing the big story when it comes to the country's second richest man. Buffett's fortune—and the oft told tale of how he made it and continues to add to it—has become the least interesting thing about him. It's Buffett the symbol that matters now, Buffett the folk hero, Buffett the communicator. As a successful investor, he merely moved markets; but as the charismatic, reassuring, quotable prototype of the honest capitalist (a sort of J. P. Morgan with a moral sense), he's capable of influencing elections, galvanizing rock-concert-size crowds, and in general defining how we Americans feel about the system that underlies our wealth.
That Sunday afternoon in Omaha the system was sorely in need of a defender. The violent storm cells approaching from the west, whose dangers Buffett chose to ignore, were nothing compared with the financial cyclones whose winds could still be felt across the country. The Enron and WorldCom scandals, the nasdaq crash, the post-9/11 recession, and the run-up to the Iraq War had shaken the faith of millions. Buffett, Coke in hand, seemed sobered too. He spoke at length against the lax accounting standards that had enabled so much corporate fraud. He mocked the pseudo-scientists of Wall Street who had led so many investors to believe that a market bubble can grow to infinite size. He made a persuasive statistical case, backed by his experience in the insurance world, for a future terrorist attack employing weapons of mass destruction. As usual, he spoke vividly and succinctly, cutting through complexities to the commonsense core of every issue and neither lightening harsh realities nor unduly darkening them. Buffett seemed ever mindful of the role he'd been cultivating for decades: the voice of playful, tempered reason. His most memorable line of the day was not his wittiest, but it typified his understated style, and resonated with authority—an authority derived partly from his investment record, but also from what deserves now to be viewed as his cultural, artistic record.
In response to a question about the prospects of a country beset by war and scandal, Buffett eyed his nearsighted sideman and said simply, as civil-defense sirens sounded in the background and reporters readied their pens and notebooks, "We think America will do pretty well over time."
Pure Omaha poetry.
There is a line of self-made, iconoclastic, pragmatic, larger-than-life American Everymen that begins in the popular mind with Benjamin Franklin, and runs through Mark Twain, Will Rogers, and Harry Truman, but also shows up in such far-flung characters as Walt Whitman, Henry Ford, and Ernest Hemingway. They are the fresh-air paragons of democratic self-invention—the anti-phonies who tell it like it is and, with their grassroots words and ways, rebuke the pretentious sophistication of Europeanized elites. Even when they hold liberal political views, they sometimes come off as reactionary cornballs, because of the way they extend our native mythology of salty, slightly cranky individualism.
Warren Buffett, as much as anyone else alive right now, belongs to this indispensable tradition of truth-telling Americans so square and forthright that they end up seeming subversive. His "true" identity—the stuff about him that can be discovered by interviewing his family and associates or digging through his garbage—doesn't really matter, finally, compared with the reputation he has created, and which the public has chosen to embrace, even idolize. This outward self is a literary artifact. It's a book, not a life. It cries out to be read.
The best way to start reading Warren Buffett is to gather up ten or twenty years' worth of his annual letters to Berkshire Hathaway shareholders (these "Chairman's letters" make up the bulk of the company's annual reports, and copies are available on the Internet), which may be the only documents of their type whose prose is worth poring over even for those who have no stake in the appended balance sheets. Buffett's choice of such a dreary medium as the primary showcase for his thoughts has always sent a message in itself. While the Trumps and Iacoccas of the world prefer to present themselves in garish books with jackets featuring large color photos of their own faces, Buffett, the legendary midwestern cheapskate with a knack for discovering hidden value in cookware clubs (The Pampered Chef) and encyclopedia publishers (World Book), has reclaimed a form of junk mail for his collected works.
Buffett's penny-pinching persona doesn't allow for lavish photos or graphics; the reports are all text, and they're printed in black-and-white. They customarily open with a few sentences on the corporation's financial performance, which is almost always dazzling. Any other CEO would trumpet such numbers with eye-catching graphs, but Buffett tends, if anything, to play them down. Year after year, and especially in his best years, he warns the shareholders that Berkshire's results are not likely to be repeated. When they are repeated, which happens more often than not, he expresses no surprise, just gratitude, and then slips back into his chronic pessimism. In 1992, for example, after citing an increase in Berkshire's per-share book value of more than 20 percent, Buffett made a gloomy general market prediction that couldn't have been more wrong: "The return over the next decade from an investment in the S&P index will be far less than that of the past decade." He went on to remark that his firm's own rate of growth, which continued to be superb, had a perverse dark side: "The drag exerted by Berkshire's expanding capital base will substantially reduce our historical advantage relative to the index."
Such are the boring parts of the reports, composed in the dusty language of the business page. They do exhibit a certain buttoned-down wit, though. Like a multibillionaire Jack Benny, the thrifty Buffett just can't stop worrying. He can't stop finding the bad news in the good. Because we know how well he's done and how well he'll do, his nervousness is amusing and disarming. And by avoiding emotion in his expression at moments when others in his position would be euphoric, he also caricatures his well-known suspicion of moody reactions to short-term market swings. When things look up, he doesn't celebrate, and when things look down, he's not surprised—that's the pose, at least. The truth, we suspect, is that such a cautious outlook is a luxury of the financially untouchable, and that Buffett fully understands this. For himself he feels no anxiety at all—he only pretends to, out of compassion for us, the vulnerable public. The hidden message is a subtle one: I, who don't have to, am keeping my guard up as a way of reminding all of you that you can't afford to let yours down.
Such gestures betray an underlying arrogance. Biographers and magazine writers love to detail Buffett's austerity—his middle-class house, his bare-bones corporate headquarters, his decision to stay put in Omaha—but they make a mistake when they accuse him of modesty. In a man worth tens of billions of dollars, self-deprecation is a boast. When, after returning from a high-profile rescue mission at the scandal-plagued bond firm Salomon Brothers, Buffett joked in his 1992 report that Berkshire "didn't miss me while I was gone," he was complimenting himself for creating a company so successful, so replete with its founder's systems, methods, and attitudes, that it could beat the Street on autopilot.
Buffett's false modesty would be annoying if it weren't so clearly an act—an act meant to instruct rather than to deceive, and one that his followers are eager to learn from in the hope of getting rich themselves. By calling himself "your Chairman" in the reports, by endlessly dissecting his own investment mistakes even when they've done his firm no damage, and by constantly pointing up the unattractiveness of the stock that accounts for his stupendous $40 billion net worth, Buffett is using a form of show-and-tell—exaggerated, dramatic, humorous—to teach lessons about humility, skepticism, and other qualities that he believes are crucial to profitable long-term investing. That is, he's playing the part of Warren Buffett, and a lot of the time he's hamming it up, one senses, in the spirit of Clemens playing Twain.
Once he has dispensed with reporting on Berkshire's performance, Buffett likes to spread out as a writer and indulge his flair for aphorism. "Fear is the foe of the faddist," he wrote in the 1994 report, "but the friend of the fundamentalist." This is the soul of the Buffett program: Stay cool. Exploit the follies of the crowd. It's the oldest investment advice there is, but Buffett has personalized it over the years by showing a certain contempt for the financial markets themselves, which he likes to portray as dens of waste and vanity rather than basically efficient systems for allotting capital. It's one of the reasons he's adored: he treats his shareholders as fellow members of a morally solid, wised-up in crowd surrounded by ethically wayward crazy people. It's us against them, the sane versus the mad, the prudent versus the greedy, and it's our right, perhaps even our duty, to grab the money from their trembling, sweaty hands. After all, left to their own unsound devices, they'd only fritter it away.
To be both an overlord and an underdog, an opportunist and a populist, is quite a trick, but Buffett manages to pull it off by implying that contemporary capitalism has fallen into a self-indulgent decadence that requires a puritan resistance movement led by the likes of Berkshire and its subsidiaries, whose CEOs he loves to praise as exemplars of uncorrupted, old-school enterprise. In 2002 he singled out the founder of The Pampered Chef, Doris Christopher, relating the Horatio Alger tale of how she parlayed $3,000 she had borrowed against a life-insurance policy into a business with annual revenues of $700 million, and fondly noting that Christopher had started her operation in her own basement. For Buffett, the ideal corporate leader is someone who grabs hold of his own bootstraps and never stops pulling up, no matter how far he rises.
Bracing stories of Buffett's clear-eyed managers stand in contrast to his chronic warnings about the dangerous softheadedness of almost everyone else. "Nothing sedates rationality like large doses of effortless money," he observed in the 2000 report, in an essay on the difference between investment and speculation. With the S&P 500 down almost 10 percent for the year, after a prolonged bull run that Buffett had been mocked for missing out on, and with Berkshire showing a 6.5 percent gain, the time had come for the old man to gloat. His 1999 letter had predicted an imminent comeuppance for the markets, and payback had arrived as if on schedule. He shamed everyone involved, but especially the promoters of hyped-up tech stocks, whom he accused first of running a con game and then of suffering from a disease. "It was as if some virus, racing wildly among investment professionals as well as amateurs, induced hallucinations," he wrote.
Mental illness is one of Buffett's pet metaphors. (Indeed, his fixation on it makes one wonder if losing his own mind is his deepest fear.) Again and again in his letters he compares—by implication, at least—his own stability with the manic-depression displayed by Wall Street, which Buffett and his mentor Benjamin Graham, of Columbia University—the author of The Intelligent Investor, the classic primer on value-based stock picking—have famously personified as the flighty "Mr. Market." According to this conceit, investing success is a matter not of intelligence, social position, or inside information but of simple common sense and psychological self-control—an encouraging message for the average person, and perhaps the best reason for Buffett's popularity with the aspiring middle class. Suppressing emotion is the key to wealth, he preaches; the dull and steadfast will inherit the earth from the fancy and neurotic.
Not many people have Bill Gates's IQ, Donald Trump's brazenness, or Tom Cruise's looks, but almost anyone—with a bit of discipline—can have Warren Buffett's temperament. That, at least, is the promise he holds out: unlike most tycoons, he can be imitated, because he's just like the rest of us, only more so.
Buffett's public image represents a singular cultural accomplishment whose difficulty is hard to overstate. Until Buffett came along, the notion of a folk-hero investor was an oxymoron in America. Before the 1920s, buying and selling corporate securities was regarded by ordinary people as an occult activity practiced by a shadowy elite acting in nobody's interest but its own. This view changed, of course, when a prolonged bull market, widely promoted as unstoppable, started sucking in the Main Street masses. It was a golden moment. Then came the Crash. Suddenly the denizens of Wall Street seemed even more sinister, selfish, and cynical than they had before—an impression that lingered for decades. When the markets recovered a portion of their lost honor in the 1950s and 1960s, ordinary Americans kept their distance, intimidated by a Brahmin hauteur. The leading investment personality of the 1970s, Louis Rukeyser, for more than thirty years the host of TV's Wall Street Week, had the patrician profile of a Founding Father, the flowing hair of a concert pianist, and the clubby nasal voice of a Harvard English professor. He was a true blue blood or a smooth fraud or some of both. What he wasn't was one's neighbor. Identifying with Rukeyser was impossible; this marble bust could only be beheld.
The market's next media star was less pretentious, but his affect and appearance were equally odd. The Street-beating mutual-fund manager Peter Lynch, of Fidelity Investments, had prematurely white hair, a pink complexion, a face and body nearly devoid of flesh, and a nerdy, asexual demeanor that seemed to mark him as a sheltered prodigy who had lived indoors all his life to spare his allergies, and had researched stocks while soaking in the tub. Lynch's message was not dissimilar to Buffett's: buy shares in firms whose products you like and use; don't get the willies when prices drop, or succumb to euphoria when they go up; and turn a deaf ear to tipsters, sharpies, and analysts. But the messenger resembled a friendly alien possessed of uncanny intuitive gifts that seemed normal only to him. Lynch insisted that any earthling could use his methods, but one sensed that he overestimated us. The best bet was to buy into his fund, Magellan—which, by the time most Americans had heard of Lynch, had risen so high that its potential seemed spent. And then, abruptly, Lynch gave up his post and faded inexorably from the public's view, despite Fidelity's decision to send him around as its roving corporate ambassador. He had stopped making money for people, so who cared?
Lynch's exit, in 1990, left Buffett alone in the arena. He'd been raising his profile for some time by then (the business press had been raising it for him, actually), but his fame was largely limited to money mavens. He hadn't yet become a semi-official national treasure—the last honest capitalist as conceived by Frank Capra, pitting his provincial integrity against the big boys' metropolitan guile, and sharing the spoils with the folks back home.
His breakthrough into superstardom, sometime in the early nineties, was precipitated by a lucky cluster of events over which Buffett had no direct control. The economic weather was right. Growing doubts about the Social Security system, and the widespread embrace of IRAs and other tax-deductible retirement-savings plans, caused the stock-owning population to balloon just as the tech-led bull market was starting to look like a wealth-creating perpetual-motion machine. All one needed to ride it was a computer and a discount brokerage account; to monitor its movements, track its chatter, meet its VIPs, and learn its language, one had only to watch CNBC. The country was turning into one big trading desk.
In the turbulent news stream that flowed across this desk, Buffett's name was a tidal presence. Stocks rose on rumors of his interest in them, and quickly fell back when the rumors were dispelled. When he bought a company outright—any company, no matter how pedestrian or obscure), the talking heads dissected his decision and ritually concluded that it showed genius. When the nasdaq retreated for two or three days running, Buffett's disdainful statements about tech stocks were deemed prophetic; and when the index climbed to a new high, his negative comments were talked about in a way that reaffirmed his legend but set it in the past tense. America's greatest, most influential investor (almost everyone acknowledged that he'd earned the title) was said by the experts to have lost his touch and dwindled into an "old economy" has-been. All the traits that have earned him tens of billions—his long-term outlook, his midwestern probity, his practice of buying on the dips and closing his checkbook during the advances, his total lack of interest in the Next Big Thing, and, most important, his belief that the market is just a running opinion poll that prices stocks by assigning the same weight to whims, hallucinations, and wild guesses as it does to rational judgments—were now recast as crippling prejudices, or even symptoms of creeping senility. My own go-go broker told me over lunch one day (after touting a glamour stock named Nortel, whose balance sheet would have made Buffett laugh out loud, but whose price seemed to double every couple of months), "The man's defunct. He's in denial. We're living in a new age, and he can't handle it."
To be canonized, one must first die. With the Oracle of Omaha's portfolio underperforming the average Toledo schoolteacher's, Buffett was declared dead by the financial world in the late 1990s and then, after a pause for schadenfreude, fondly elevated to sainthood. The eulogies served a hidden purpose. By remembering Buffett as nearly infallible and making him the great icon of traditionalism, the children of perpetual motion affirmed their new faith. The twisted syllogism went like this: If Buffett, who knew almost everything, was wrong, then investors who know almost nothing must be right. Or: If Buffett can lose, then anyone can win.
As in Twain's case, the rumors of Buffett's death proved to be greatly exaggerated. And like Tom Sawyer, who attended his own funeral in disguise and snickered at the solemn goings-on there, Buffett probably took some secret pleasure in imagining the effect his resurrection (which his sense of history told him was inevitable) would have on the people who were just pretending to miss him.
In the meantime, he sent letters from the tomb to his true disciples: Berkshire's shareholders. In 1999, the stock's worst year ever both in absolute terms and in comparison with the S&P, Buffett assured them that his philosophy—a liberalized version of his old professor Graham's "value" approach—hadn't changed and wasn't going to change, even if the world itself did. He also reminded the panicky and the depressed that the stock represented all but one percent of his personal assets ("We eat our own cooking," Buffett and Munger often like to say). He wound up by conceding that the new technologies would probably "transform" society, but said it was his prerogative as an old codger who'd done pretty well for himself over the years to tend his own garden while others built Utopia. "We just stick with what we understand," he wrote, lumping himself with his fellow Luddite, Munger. They knew nothing about geology, either, he wrote, or about several other important industries, but it hadn't prevented them from getting rich backing businesses they did know something about.
In the hyperbolic climate of the tech boom, with the media loudly lamenting Buffett's demise while it heralded the coming wired paradise, this sensible, understated rationale for declining to join the party was a brilliant rhetorical gesture. "I would prefer not to," says Melville's Bartleby, when asked why he refuses to leave his desk even though he no longer has a job. Buffett's response to his critics was just as memorable, just as disarming. Fiber-optic switches? Waveplex multipliers? Don't understand them. (And, truthfully, who did?) Buffett's indifference to cyberspace made fools of millions of panting investors who'd staked their retirements on gear and gizmos they probably wouldn't recognize if crateloads of them were dumped on their doorsteps.
The following year, as mentioned earlier, brought a modest gain for Buffett and a beating about the head for his antagonists. The nasdaq, whose tech listings embodied the whiz kids' futuristic aspirations, crashed, got up again, fell down the stairs, and staggered around like a sloppy waterfront drunk. But aside from a pointed homily on the difference between investment and speculation, the 2000 letter went light on the I-told-you-sos. It talked business, and one business especially: the almost invisible reinsurance field, led by the obscure but mammoth Gen Re, the largest of Berkshire's wholly owned subsidiaries, the foundation of its financial structure, and the key to understanding Buffett's true character as opposed to the character the public assigns him. Buffett the straight-talking conscience of capitalism is, at bottom, a casino operator, and his casino is the whole world.
Gen Re is a vehicle for accepting bets, enormous bets, for the very highest stakes. A comparatively small bet, cited in Buffett's 2000 letter, involved Grab.com, an Internet firm that hoped to draw traffic to its site by offering visitors a chance to win a billion dollars. The odds were low that anyone would take the prize, but not so low that Grab.com wasn't willing to pay Gen Re to accept responsibility for paying it. Gen Re bet that it wouldn't have to, and won.
But this was a quirky, small-potatoes wager compared with the bets Gen Re is used to making on the likelihood of major earthquakes, killer hurricanes, and other shattering catastrophes, known as "mega-cats." It makes these bets with other insurance companies, which, should a mega-cat occur, might buckle from having to pay the overload of claims. To put it simply, Gen Re earns its fees by backing other gamblers' biggest gambles, and then uses these fees (the so-called "float") to bankroll yet other bets on the behavior of stocks and bonds and so on. Buffett views the float as essentially a low-cost loan, though, borrowed against the potential mega-cats—or perhaps the single super-mega-cat—that could oblige Gen Re to pay it back.
Buffett, the incomparable simplifier of arcane financial concepts, explained the reinsurance game with a streetwise candor befitting a Brooklyn bookie: "We receive a modest premium, face the possibility of a huge loss, and get good odds."
Those "modest" premiums add up, providing Buffett with the enormous pool of virtually no-cost liquid capital that lets him make cash offers for whole companies within fifteen minutes (or so he often boasts) of getting an asking price. The losses he risks in exchange for this rare privilege aren't just huge, however; they're monumental. And the good odds are merely that—good odds. It's hard to exaggerate the nerve involved here. Instead of the thousands of short-term fears faced by lesser investors—stock X will fall on disappointing earnings news; stock Y will stagnate owing to flattening sales; the market itself will plummet on rumors of war—Buffett faces a vast and long-term terror: the mega-cat of mega-cats, whatever it might prove to be. Although Gen Re reserves plenty of money for rainy days, its owner has written that "there is nothing symmetrical about surprises in the insurance business."
All of which raises an inevitable question: Who insures the reinsurer? Jehovah?
On September 11, 2001, the question was answered: No one does. Buffett was hosting a golf tournament in Omaha when the mega-cat hit Manhattan. According to someone who was at the tournament, a top officer at a major bank, the magnates and CEOs out on the course first panicked about the act of terrorism and then began fretting about the possibility of insulting Buffett by leaving early and rushing home. The source wouldn't talk about Buffett's own demeanor, but left the impression that he remained composed—at least in comparison with his guests.
In his 2001 letter Buffett was still composed, despite having suffered, through Gen Re, a healthy portion of the largest loss in the history of the insurance industry. He wrote that he had "overlooked" the possibility that the next mega-cat would be man-made, and he scolded himself as an underwriter for "focusing on experience, rather than exposure." Buffett's superbly impersonal formulation describes a universal human weakness—our blockheaded blindness to the unfamiliar—that he needn't have apologized for sharing. Still, it was sporting of him to do so, considering that most people don't earn billions of dollars by estimating the likelihood of mega-cats.
Buffett went on in the letter to analyze the probability of an attack—nuclear, biological, or chemical—large enough to bankrupt the insurance industry and, as a consequence, Berkshire and himself. The risk was low, he asserted, but it was rising, and in any event it would never reach zero. "The best the nation can achieve is a series of stalemates," he concluded. He called on the government to absorb the risk of what might be a trillion-dollar loss, and he warned the public that unless this happened, it was on its own. "Fear may recede with time," he wrote, "but the danger won't." He summed up by telling Berkshire's shareholders that the company was in a better position than most firms to survive another such catastrophe.
He added, in what could be his epitaph: "At Berkshire, we retain our risks and depend on no one."
No wonder he doesn't cower before tornadoes. No wonder his mere presence in a political campaign is enough to inspire voters' confidence. And no wonder he can speak humorously and simply about delusional securities markets, scandalous accounting practices, corrupt corporate management structures, and other troublesome topics that his peers would rather not discuss at all and that the press can only shriek about. No wonder he seems so calm, so cool, so dry, so patient, so fluent, and so darn … reassuring.
It's Warren Buffett versus the apocalypse, and until the apocalypse arrives (he understands the odds; he probably calculates them in his sleep), the charming old gambler can afford to kid around.