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The Snowball
Warren Buffett and the Business of Life
Alice Schroeder
BANTAM BOOKS
To David
It is the winter of Warren’s ninth year. Outside in the yard, he and his little sister, Bertie, are playing in the snow.Warren is catching snowflakes. One at a time at first. Then he is scooping them up by handfuls. He starts to pack them into a ball. As the snowball grows bigger, he places it on the ground. Slowly it begins to roll. Hegives it a push, and it picks up more snow. He pushes the snowball across the lawn, piling snow on snow.Soon he reaches the edge of the yard. After a moment of hesitation, he heads off, rolling the snowball through the neighborhood.And from there, Warren continues onward, casting his eye on a whole world full of snow.

PART ONE
The Bubble

1
The Less Flattering Version
Omaha • June 2003

Warren Buffett rocks back in his chair, long legs crossed at the knee behind his father Howard’s plain wooden desk. His expensive Zegna suit jacket bunches around his shoulders like an untailored version boughtoff the rack. The jacket stays on all day, every day, no matter how casually the other fifteen employees at Berkshire Hathaway headquarters are dressed. His predictable white shirt sits low on the neck, its undersizecollar bulging away from his tie, looking left over from his days as a young businessman, as if he had forgotten to check his neck size for the last forty years.His hands lace behind his head through strands of whitening hair. One particularly large and messy fingercombed chunk takes off over his skull like a ski jump, lofting upward at the knoll of his right ear. His shaggyright eyebrow wanders toward it above the tortoiseshell glasses. At various times this eyebrow gives him a skeptical, knowing, or beguiling look. Right now he wears a subtle smile, which lends the wayward eyebrow acaptivating air. Nonetheless, his pale-blue eyes are focused and intent.He sits surrounded by icons and mementos of fifty years. In the hallways outside his office, NebraskaCornhuskers football photographs, his paycheck from an appearance on a soap opera, the offer letter (neveraccepted) to buy a hedge fund called Long-Term Capital Management, and Coca-Cola memorabiliaeverywhere. On the coffee table inside the office, a classic Coca-Cola bottle. A baseball glove encased inLucite. Over the sofa, a certificate that he completed Dale Carnegie’s public-speaking course in January1952. The Wells Fargo stagecoach, westbound atop a bookcase. A Pulitzer Prize, won in 1973 by the SunNewspapers of Omaha, which his investment partnership owned. Scattered about the room are books andnewspapers. Photographs of his family and friends cover the credenza and a side table, and sit under thehutch beside his desk in place of a computer. A large portrait of his father hangs above Buffett’s head on thewall behind his desk. It faces every visitor who enters the room.
Although a late-spring Omaha morning beckons outside the windows, the brown wooden shutters are closedto block the view. The television beaming toward his desk is tuned to CNBC. The sound is muted, but thecrawl at the bottom of the screen feeds him news all day long. Over the years, to his pleasure, the news hasoften been about him.
Only a few people, however, actually know him well. I have been acquainted with him for six years,originally as a financial analyst covering Berkshire Hathaway stock. Over time our relationship has turnedfriendly, and now I will get to know him better still. We are sitting in Warren’s office because he is not goingto write a book. The unruly eyebrows punctuate his words as he says repeatedly, “You’ll do a better job thanI would, Alice. I’m glad you’re writing this book, not me.” Why he would say that is something that willeventually become clear. In the meantime, we start with the matter closest to his heart.“Where did it come from, Warren? Caring so much about making money?”His eyes go distant for a few seconds, thoughts traveling inward: flip flip flip through the mental files.Warren begins to tell his story: “Balzac said that behind every great fortune lies a crime.1 That’s not true atBerkshire.”
He leaps out of his chair to bring home the thought, crossing the room in a couple of strides. Landing on amustardy-gold brocade armchair, he leans forward, more like a teenager bragging about his first romancethan a seventy-two-year-old financier. How to interpret the story, who else to interview, what to write: Thebook is up to me. He talks at length about human nature and memory’s frailty, then says, “Whenever myversion is different from somebody else’s, Alice, use the less flattering version.”Among the many lessons, some of the best come simply from observing him. Here is the first: Humilitydisarms.
In the end, there won’t be too many reasons to choose the less flattering version—but when I do, humannature, not memory’s frailty, is usually why. One of those occasions happened at Sun Valley in 1999.

2
Sun Valley
Idaho • July 1999
Warren Buffett stepped out of his car and pulled his suitcase from the trunk. He walked through thechain-link gate onto the airport’s tarmac, where a gleaming white Gulfstream IV jet—the size of a regionalcommercial airliner and the largest private aircraft in the world in 1999—waited for him and his family. Oneof the pilots grabbed the suitcase from him to stow in the cargo hold. Every new pilot who flew with Buffettwas shocked to see him carrying his own luggage from a car he drove himself. Now, as he climbed theboarding stairs, he said hello to the flight attendant—somebody new—and headed to a seat next to a window,which he would not glance out of at any time during the flight. His mood was buoyant; he had beenanticipating this trip for weeks.

His son Peter and daughter-in-law Jennifer, his daughter Susan and her boyfriend, and two of hisgrandchildren all settled into their own café au lait leather club chairs set around the forty-five-foot-longcabin. They swiveled their seats away from the curved wall panels to give themselves more space as the flightattendant brought drinks from the galley, which was stocked with the family’s favorite snacks and beverages.A pile of magazines lay nearby on the sofa: Vanity Fair, the New Yorker, Fortune, Yachting, the RobbReport, the Atlantic Monthly, the Economist, Vogue, Yoga Journal. She brought Buffett an armload ofnewspapers instead, along with a basket of potato chips and a Cherry Coke that matched his red Nebraskasweater. He complimented her, chatted for a few minutes to ease her nervousness at flying for the first timewith her boss, and told her that she could let the copilot know that they were ready to take off. Then heburied his head in a newspaper as the plane rolled down the runway and ascended to forty thousand feet. Forthe next two hours, six people hummed around him, watching videos, talking, and making phone calls, whilethe flight attendant set out linens and bud vases filled with orchids on the bird’s-eye maple dining tablesbefore returning to the galley to prepare lunch. Buffett never moved. He sat reading, hidden behind hisnewspapers, as if he were alone in his study at home.

They were flying in a $30 million airborne palace called a “fractional” jet. As many as eight owners shared it,but it served as part of a fleet, so all the owners could fly at once if they wished. The pilots in the cockpit, thecrew that maintained it, the schedulers who got it to the gate on six hours’ notice, and the flight attendantwho served their lunch all worked for NetJets, which belonged to Warren Buffett’s company, BerkshireHathaway.

Sometime later, the G-IV crossed the Snake River Plain and approached the Sawtooth Mountains, a vastCretaceous upheaval of dark and ancient granite mounds baking in the summer sun. It sailed through thebright clear air into the Wood River Valley, descending to eight thousand feet, where it started to buck on themountain wave of turbulence thrown into the sky by the brown foothills beneath. Buffett read on,unperturbed, as the plane rocked and his family jerked about in their seats. Brush dotted higher altitudes of asecond ridge of hills and rows of pines began their march up the ridges between ravines on the leeward side.The family grinned with anticipation. As the aircraft descended through the narrowing slot between the risingmountain peaks ahead, the midday sun cast the plane’s lengthening shadow over the old mining town ofHailey, Idaho.

A few seconds later, the wheels touched down on the Friedman Memorial Airport runway. By the time theBuffetts had bounded down the stairs onto the tarmac, squinting in the July sunshine, two SUVs had driventhrough the gate and pulled up alongside the jet, driven by men and women from Hertz. They all wore thecompany’s gold-and-black shirts. Instead of Hertz, however, the logo said “Allen & Co.”

The grandchildren bounced on their heels as the pilots unloaded the luggage, tennis rackets, and Buffett’sred-and-white Coca-Cola golf bag into the SUVs. Then he and the others shook hands with the pilots, saidgood-bye to the flight attendant, and climbed into the SUVs. Bypassing Sun Valley Aviation—a pocket-sizetrailer at the runway’s southern end—they swung through the chain-link gate onto the road that led to thepeaks beyond. About two minutes had elapsed since the plane’s wheels first touched the runway.

Right on schedule, eight minutes later, another jet followed theirs, headed to its own runway parking spot.Throughout the golden afternoon, jet after jet cruised into Idaho from the south and east or swung around thepeaks from the west and descended into Hailey: workhorse Cessna Citations; glamorous, close-quarteredLearjets; speedy Hawkers; luxurious Falcons; but mostly the awe-inspiring G-IVs. As the afternoon waned,dozens of huge, gleaming white aircraft lined the runway like a shop window full of tycoons’ toys.The Buffetts followed the trail blazed by earlier SUVs a few miles onward from the airport to the tiny town ofKetchum on the edge of the Sawtooth National Forest, near the turnoff to the Elkhorn Pass. A few mileslater, they rounded Dollar Mountain, where a green oasis appeared, nestled among the brown slopes. Hereamid the lacy pines and shimmering aspens lay Sun Valley, the mountains’ most fabled resort, where ErnestHemingway began writing For Whom the Bell Tolls, where Olympic skiers and skaters had long made theirsecond home.

The tide of families they were joining this Tuesday afternoon all had some connection to Allen & Co., aboutique investment bank that specialized in the media and communications industries. Allen & Co. had puttogether some of the biggest mergers in Hollywood, and for more than a decade had been hosting an annualseries of discussions and seminars mingled with outdoor recreation at Sun Valley for its clients and friends.Herbert Allen, the firm’s CEO, invited only people he liked, or those with whom he was at least willing to dobusiness.

Thus the conference was always filled with faces both famous and rich: Hollywood producers and stars likeCandice Bergen, Tom Hanks, Ron Howard, and Sydney Pollack; entertainment moguls like Barry Diller,Rupert Murdoch, Robert Iger, and Michael Eisner; socially pedigreed journalists like Tom Brokaw, DianeSawyer, and Charlie Rose; and technology titans like Bill Gates, Steve Jobs, and Andy Grove. A pack ofreporters lay in wait for them every year outside the Sun Valley Lodge.

The reporters had traveled a day earlier to the Newark, New Jersey, airport or some similar embarkationpoint to board a commercial flight to Salt Lake City, then raced to Concourse E’s bullpen to sit amid a crushof people waiting for flights to places like Casper, Wyoming, and Sioux City, Iowa, until it was time to cramthemselves into a prop plane for the one-hour bronco ride to Sun Valley. On arrival their plane was directedto the opposite end of the airport next to the tennis-court-size terminal, where they witnessed a crew oftanned young Allen & Co. employees dressed in pastel “SV99” polo shirts and white shorts welcoming thehandful of Allen & Co. guests who were arriving early on commercial flights. These were instantlyrecognizable among the other passengers: men in Western boots and Paul Stuart shirts with jeans, womenwearing goatskin-suede jackets and marble-size turquoise beads. The Allen staff had memorized thenewcomers’ faces from photographs supplied in advance. They hugged people they had gotten to know inyears past as if they were old friends, whisked away all the guests’ bags, and led their charges off to the SUVslined up steps away in the parking lot.

The reporters went to the rental-car desk, then drove to the Lodge, by now acutely conscious of their lowlystatus. For the next few days, many areas of Sun Valley would be marked as “private,” blocked from pryingeyes by closed doors, omnipresent security, hanging flower baskets, and large potted plants. The reporterswould lurk around the fringes, excluded from the interesting things going on inside, noses pressed against thebushes.1 Ever since Disney’s Michael Eisner and Capital Cities/ABC’s Tom Murphy had dreamed up a dealto merge their companies at Sun Valley ’95 (the way the conference was often referred to—as if it hadengulfed the entire resort, which, in a way, it had), the press coverage had grown until it took on theartificially giddy atmosphere of a business version of Cannes. The mergers that splintered off from SunValley, however, were only occasional calves from an iceberg. Sun Valley was about more than makingdeals, though the deals garnered most of the press. Every year the rumors sizzled that this company or thatwas working on a deal at the mysterious conclave in the Idaho mountains. Thus, as the SUVs rolled one byone into the porte cochere, the reporters peered through the front windows to see who was inside. Whensomeone newsworthy arrived, they chased their prey into the lodge, brandishing cameras and microphones.The press quickly recognized Warren Buffett as he stepped out of his SUV. “The DNA of the conference hadhim built into it,” said his friend Don Keough, chairman of Allen & Co.2 Most of the press people likedBuffett, who went out of his way not to be disliked by anyone. He also intrigued them. His public image wasthat of a simple man, and he seemed genuine. Yet he lived a complicated life. He owned five homes butoccupied only two of them. Somehow he had wound up having, in effect, two wives. He spoke in homelyaphorisms with a kindly twinkle in his eye and had a notably loyal group of friends, yet along the way he hadearned a reputation as a tough, even icy dealmaker. He seemed to shun publicity yet managed to attract moreof it than almost any other businessman on earth.3 He jetted around the country in a G-IV, often attendedcelebrity events, and had many famous friends, yet said that he preferred Omaha, hamburgers, and thrift. Hespoke of his success as being based on a few simple investing ideas and tap-dancing to work with enthusiasmevery day, but if that was so, why had nobody else been able to replicate it?

Buffett, as always, gave the photographers a willing wave and a grandfatherly smile as he walked by. Theycaptured him on film, then began peering at the next car.The Buffetts drove around to their French-country-style condominium, one of the coveted Wildflower groupnext to the pool and tennis courts, where Herbert Allen housed his VIPs. Inside, the usual loot awaited them:a pile of Allen & Co. SV99 logo jackets, baseball caps, zip fleeces, polo shirts—every year a differentcolor—and a zippered notebook. Despite his fortune of more than $30 billion—enough to buy a thousand ofthose G-IVs parked out at the airport—Buffett liked few things more than getting a free golf shirt from afriend. He took the time to look carefully through this year’s swag. Of even more interest to him, however,was the personal note that Herbert Allen sent to each guest—and the perfectly organized conferencenotebook that explained what Sun Valley had in store for him this year.

Timed to the second, organized to the hilt, crisp as Herbert Allen’s French cuffs, Buffett’s schedule was laidout hour by hour, day by day. The notebook spelled out the conference speakers and topics—until now aclosely guarded secret—and the luncheons and dinners that he would attend. Unlike the other guests, Buffettknew much of this in advance, but he still wanted to see what the notebook had to say.

Herbert Allen, the so-called “Lord of Sun Valley” and the conference’s quiet choreographer, set the tone ofcasual luxury that pervaded the event. People always cited him for high principles, brilliance, good advice,and generosity. “You’d like to die with the respect of somebody like Herbert Allen,” a guest gushed. Afraidof being disinvited to the conference, those who voiced any criticism rarely went beyond vague hints thatHerbert was “unusual,” restless, impatient, and possessed of an oversize personality. Standing in the shadowof his tall, wiry frame, one had to strain to keep up with the words that crackled forth like machine-gun fire.He barked questions, then cut off respondents mid-sentence, lest they waste a second of his time. Hespecialized in saying the unsayable. “Ultimately Wall Street will be eliminated,” he once told a reporter,although he ran a Wall Street bank. He referred to his competitors as “hot-dog vendors.”4Allen kept his firm small, and his bankers staked their own money on their deals. This unconventionalapproach made the firm a partner rather than a mere servant to its clients, who were the elite of Hollywoodand the media world. Thus, when he played host, his guests felt privileged, rather than like captives pitchedby salesmen at every turn. Allen & Co. arranged a detailed social agenda every year built around eachguest’s personal network of relationships—which the firm understood—and the new people that Allen’smajordomos felt each should meet. Unspoken hierarchies dictated the distances of the guests’ condominiumsfrom the Inn (where meetings were held), which meals the guests were invited to attend, and with whom theywould be seated.

Buffett’s friend Tom Murphy referred to this kind of event as “elephant-bumping.” “Anytime a bunch of bigshots get together,” says Buffett, “you can get people to come, because it reassures them if they’re at anelephant-bumping that they’re an elephant too.”5

Sun Valley was always very reassuring, because unlike most elephant bumps, one could not buy one’s wayin. The result was a sort of faux democracy of the elite. Part of the thrill of coming was to see who was notinvited, and, more thrilling still, who was disinvited. Yet within their stratum, people did develop genuinerelationships. Allen & Co. fostered conviviality through lavish entertainment, beginning on the first evening,when the guests donned Western gear, climbed into old-fashioned horse-drawn wagons, and followedcowboys up a winding trail past a natural stone spire onto Trail Creek Cabin meadow. There, Herbert Allenor one of his two sons greeted the guests as the sun began to set. Cowboys entertained the children with ropetricks near a large white tent bedecked with urns of scarlet petunias and blue sage, while the Sun Valley oldguard reunited and welcomed new guests as they stood side by side in line, plate in hand, for a buffet ofsteaks and salmon. The Buffetts usually ended the evening sitting with friends around the bonfire beneath thestar-dappled western sky.

The frolicking continued on Wednesday afternoon with an optional and very mild white-water paddle downthe Salmon River. On this trip relationships blossomed, for Allen & Co. orchestrated who sat where on thebus to the embarkation point as well as on the rafts. The river guides steered through the mountain valley insilence, lest they interrupt conversations and disturb budding alliances. Spotters hired from the localpopulation and ambulances lined the route in case someone tumbled into the freezing water. The guests werehanded warm towels as soon as they put down their paddles and stepped out of the rafts, then served platesof barbecue.

Those not rafting could be found fly-fishing, horseback riding, shooting trap and skeet, mountain biking,playing bridge, learning to knit, studying nature photography, playing Frisbee with the ubiquitous canineconference guests, ice-skating on the outdoor rink, playing tennis on perfect clay courts, lounging at the pool,or golfing on immaculate greens, where they rode in carts stuffed full of Allen & Co. sunscreen, snacks, andbug spray.6 All the entertainment flowed quietly, seamlessly, whatever was needed appearing unasked,supplied by a seemingly inexhaustible staff of almost-invisible yet ever-present Allenites in SV99 polo shirts.It was the babysitters, however, a hundred-some good-looking, mostly blond, deeply tanned teenagers inthese same polo shirts and matching Allen & Co. backpacks, who were Herbert Allen’s secret weapon. Asthe parents and grandparents played, the sitters saw to it that each Joshua and Brittany was accompanied byhis or her own playmate for whatever activity they chose—a tennis clinic, soccer, bicycling, kickball, awagon ride, a horse show, ice-skating, relay races, rafting, fishing, an art project, or pizza and ice cream.Each babysitter was personally selected to ensure that every child always had such a wonderful time thatthey would beg to come back year after year—while at the same time delighting their parents with occasionalglimpses of the very, very attractive young person who was allowing them to spend days of guilt-free timewith other adults.

Buffett had always been one of the most appreciative of Allen’s beneficiaries. He loved Sun Valley as afamily vacation, for left to his own devices at a mountain resort with his grandchildren, he would have beenat a complete loss for what to do. He had no interest in outdoor activities other than golf. He never wentskeet shooting or mountain biking, thought of water as “a prison of sorts,” and would rather go aroundhandcuffed than ride on a raft. Instead, he slipped comfortably into the center of the elephant herd. Heplayed a little golf and bridge, including a standing golf game with Jack Valenti, president of the MotionPicture Association of America, for a dollar bet, and a bridge game with Meredith Brokaw, and otherwisespent his time socializing with people like Playboy CEO Christie Hefner and computer hardware CEOMichael Dell.

Often, however, he disappeared for long periods into his condo overlooking the golf course, where he readand watched business news in the living room seated next to an enormous stone fireplace.7 He barely noticedthe view of pine-covered Baldy, the mountain outside his window, or the bank of blossoms like a Persianpalace rug: pastel lupines and sapphire delphiniums towering over poppies and Indian paintbrush, crisp bluesalvia and veronica nestled among the stonecrop and hens-and-chicks. “The scenery is there, I guess,” hesaid. He came for the warm atmosphere Herbert Allen had created.8 He liked being with his closest friends:Kay Graham and her son Don; Bill and Melinda Gates; Mickie and Don Keough; Barry Diller and Diane vonFurstenberg; Andy Grove and his wife, Eva.

But above all, for Buffett, Sun Valley was about reuniting with his whole family during one of the rare timesmost of the family spent together. “He likes us all being in the same house,” says his daughter, Susie BuffettJr. She lived in Omaha; her younger brother, Howie, and his wife, Devon—missing this year—lived inDecatur, Illinois; while their younger sibling, Peter, and his wife, Jennifer, lived in Milwaukee.Buffett’s wife of forty-seven years, Susan, who lived apart from him, had flown in to meet them from herhome in San Francisco. And Astrid Menks, his companion for more than twenty years, remained at theirhome in Omaha.

On Friday night, Warren donned a Hawaiian shirt and escorted his wife to the traditional Pool Party on thetennis courts next to their condo. Most of the guests knew and liked Susie. Always the star of the Pool Party,she sang old-fashioned standards by the light of tiki torches in front of the illuminated Olympic pool.This year, as the cocktails and camaraderie flowed, the babble of a barely comprehensible newlanguage—B2B, B2C, banner ads, bandwidth, broadband—competed with the sounds of Al Oehrle’s band.All week long a vague sense of unease had drifted through the lunches and dinners and cocktails like a silentfog amid the handshakes, kisses, and hugs. A new group of recently minted technology executives, filled withan unusual swagger, introduced themselves to people who had never heard of them a year before.9 Somedisplayed a hubris that was at odds with Sun Valley’s usual atmosphere, where a determined informalityreigned and Herbert Allen enforced a sort of unwritten rule against pomposity, on penalty of banishment.The cloud of arrogance hung heaviest over the presentations that were the conference’s centerpiece. Headsof companies, high government officials, and other people of note gave talks unlike those they deliveredanywhere else, because hardly a word of what was said was ever whispered beyond the flower boxes hangingby the doors of the Sun Valley Inn. Reporters were banned, and the celebrity journalists and the media baronswho owned the television networks and newspapers sat in the audience but honored a code of silence. Thusfreed to perform only for their peers, the speakers said important and often true things that could never bearticulated in front of the press because they were too blunt, too nuanced, too alarming, too easily satirized,or too likely to be misinterpreted. The workaday journalists lurked outside, hoping for crumbs that wererarely thrown.

This year the new moguls of the Internet had been strutting, showing off their soaring expectations,trumpeting their latest mergers and looking to raise cash from the money managers sitting in the audience.The money people, who stewarded other people’s pensions and savings, together commanded so muchwealth that it could hardly be comprehended: more than a trillion dollars.10 With a trillion dollars in 1999,you could pay the income tax of every single individual in the United States. You could give a brand-newBentley automobile to every household in more than nine states.11 You could buy every single piece of realestate in Chicago, New York City, and Los Angeles—combined. Some of the companies makingpresentations needed that money, and they wanted this audience to give it to them.

Early in the week, Tom Brokaw’s panel, called “The Internet and Our Lives,” had drum-majored aprocession of presentations about how the Internet would reshape the communications business. Priceline’sJay Walker took the audience through a dizzying vision of the Internet that compared the information superhighwayto the advent of the railroad in 1869. One after another, executives laid out the glittering prospectsfor their companies, filling the room with the intoxicating vapor of a future unlimited by storage space andgeography, so slick and visionary that while some were convinced that a whole new world was unfolding,others were reminded of snake-oil salesmen. The folks who ran technology companies saw themselves asPromethean geniuses bringing fire to lesser mortals. Other businesses that grubbed in the ashes to make thedull necessities of life—auto parts, lawn furniture—were now of interest mostly for how much technologythey could buy. Some Internet stocks traded at infinite multiples of their nonexistent earnings, while “realcompanies” that made real things had declined in value. As technology stocks overtook the “old economy,”the Dow Jones Industrial Average*1 had burst through the once-distant 10,000-point barrier only four monthsbefore, doubling in less than three and a half years.

Many of the recently enriched congregated between speeches at a cordoned-off dining terrace by the DuckPond, where a pair of captive swans paddled around a pool. There, any guest—but not a reporter—couldedge through the masses of people in khaki pants and cashmere cable sweaters to ask a question of Bill Gatesor Andy Grove. Meanwhile, the journalists chased after the Internet moguls as they moved between the Innand their condos, amplifying the atmosphere of inflated self-importance that permeated Sun Valley this year.Some of the new Internet czars spent Friday afternoon lobbying Herbert Allen to get them into celebrityphotographer Annie Leibovitz’s Saturday afternoon shoot of the Media All-Star Team for Vanity Fair. Theyfelt they had been invited to Sun Valley because they were the people of the moment, and they had troublebelieving that Leibovitz had made her own choices about who to photograph. Why, for example, would sheinclude Buffett? His role in media had come mostly secondhand—through board memberships, a largenetwork of personal influence, and a history of media investments large and small. Besides, he was oldmedia. They found it hard to believe that his face in a photograph still sold magazines.

These would-be all-stars felt slighted because they knew perfectly well that the balance in media had shiftedtoward the Internet. That was so even though Herbert Allen himself thought the “new paradigm” for valuingtechnology and media stocks—based on clicks and eyeballs and projections of far-off growth rather than acompany’s ability to earn cold hard cash—was bunk. “New paradigm,” he sniffed. “It’s like new sex. Therejust isn’t any such thing.”12

* * *

The next morning, Buffett, emblem of the old paradigm, rose early, for he would be the closing speaker of theyear. Invariably, he turned down requests to speak at conferences sponsored by other companies, but whenHerbert Allen asked him to speak at Sun Valley, he always said yes.13 The Saturday morning closing talk wasthe keynote event of the conference, so instead of heading straight to the golf course or grabbing a fishingrod, almost everyone went to the breakfast buffet at the Sun Valley Inn, then settled into a seat. TodayBuffett would be talking about the stock market.

In private, he had been critical of the gunslinging, promoter-driven market that had sent technology stocksgalloping toward delirious heights all year. The stock of his company, Berkshire Hathaway, languished intheir dust, and his rigid rule of not buying technology stocks seemed outmoded. But the criticism had noinfluence on how he invested, and to date, the only statement he had made in public was that he never mademarket predictions. So his decision to get up at the podium in Sun Valley and do just that was unprecedented.Perhaps it was the times. Buffett had a firm conviction and an overwhelming urge to preach.14

He had spent weeks preparing for this speech. He understood that the market was not just people tradingstocks as though they were chips in a casino. The chips represented businesses. Buffett thought about thetotal value of the chips. What were they worth? Next he reviewed history, pulling from an exhaustive mentalfile. This was not the first time that world-changing new technologies had come along and shaken up thestock market. Business history was replete with new technologies—railroads, telegraph, telephone,automobiles, airplanes, television: all revolutionary ways to connect things faster—but how many had madeinvestors rich? He was about to explain.

After the breakfast buffet, Clarke Keough walked to the podium. Buffett had known the Keough family formany years; they had been neighbors back in Omaha. It was through Clarke’s father, Don, that Buffett hadmade the connections that led him to Sun Valley. Don Keough, now chairman of Allen & Co. and formerpresident of Coca-Cola, had met Herbert Allen when he bought Columbia Pictures from Allen & Co. forCoca-Cola in 1982. Keough and his boss, Coca-Cola’s CEO, Roberto Goizueta, had been so impressed byHerbert Allen’s unsalesmanlike approach to selling that they had convinced him to join their board.Keough, a Sioux City cattleman’s son and former altar boy, had now technically retired from Coca-Cola buthe still lived and breathed the Real Thing, so powerful he was sometimes called the company’s shadow chiefexecutive.15

When the Keoughs were his neighbors in Omaha in the 1950s, Warren had asked Don how he was going topay for his kids’ college and suggested that he invest $10,000 in Buffett’s partnership. But Don was puttingsix kids through parochial school on $200 a week as a Butter-Nut coffee salesman. “We didn’t have themoney,” his son Clarke now told the audience. “This is part of my family’s past that we will never forget.”Buffett joined Clarke at the podium, wearing his favorite Nebraska red sweater over a plaid shirt. He finishedthe story.16

“The Keoughs were wonderful neighbors,” he said. “It’s true that occasionally Don would mention that,unlike me, he had a job, but the relationship was terrific. One time my wife, Susie, went over and did theproverbial Midwestern bit of asking to borrow a cup of sugar, and Don’s wife, Mickie, gave her a wholesack. When I heard about that, I decided to go over to the Keoughs’ that night myself. I said to Don, ‘Whydon’t you give me twenty-five thousand dollars for the partnership to invest?’ And the Keough familystiffened a little bit at that point, and I was rejected.

“I came back sometime later and asked for the ten thousand dollars Clarke referred to and got a similarresult. But I wasn’t proud. So I returned at a later time and asked for five thousand dollars. And at thatpoint, I got rejected again.

“So one night, in the summer of 1962, I started heading over to the Keough house. I don’t know whether Iwould have dropped it to twenty-five hundred dollars or not, but by the time I got to the Keough household,the whole place was dark, silent. There wasn’t a thing to see. But I knew what was going on. I knew that Donand Mickie were hiding upstairs, so I didn’t leave.

“I rang that doorbell. I knocked. Nothing happened. But Don and Mickie were upstairs, and it was pitchblack.
“Too dark to read, and too early to go to sleep. And I remember that day as if it were yesterday. That wasJune twenty-first, 1962.
“Clarke, when were you born?”
“March twenty-first, 1963.”
“It’s little things like that that history turns on. So you should be glad they didn’t give me the ten thousand dollars.”Having charmed the audience with this little piece of give and take, Buffett turned to the matter at hand.
“Now, I’m going to attempt to multitask today. Herb told me to include a few slides. ‘Show you’re with it,’he said. When Herb says something, it’s practically an order in the Buffett household.” Speeding pastexactly what comprised “the Buffett household”—for Buffett thought of his household as being like anyother family’s—he launched into a joke about Allen. The secretary to the President of the U.S. rushed intothe Oval Office, apologizing for accidentally scheduling two meetings at once. The President had to choosebetween seeing the Pope and seeing Herbert Allen. Buffett paused for effect. “‘Send in the Pope,’ said thePresident. ‘At least I only have to kiss his ring.’
“To all you fellow ring-kissers, I would like to talk today about the stock market,” he said. “I will be talkingabout pricing stocks, but I will not be talking about predicting their course of action next month or nextyear. Valuing is not the same as predicting.
“In the short run, the market is a voting machine. In the long run, it’s a weighing machine.
“Weight counts eventually. But votes count in the short term. And it’s a very undemocratic way of voting.Unfortunately, they have no literacy tests in terms of voting qualifications, as you’ve all learned.”
Buffett clicked a button, which illuminated a PowerPoint slide on a huge screen to his right.17 Bill Gates,sitting in the audience, caught his breath for a second, until the notoriously fumble-fingered Buffett managedto get the first slide up.18

DOW JONES
INDUSTRIAL AVERAGE
December 31, 1964
874.12
December 31, 1981
875.00
He walked over to the screen and started explaining.
“During these seventeen years, the size of the economy grew fivefold. The sales of the Fortune five hundredcompanies grew more than fivefold.*2 Yet, during these seventeen years, the stock market went exactlynowhere.”
He backed up a step or two. “What you’re doing when you invest is deferring consumption and layingmoney out now to get more money back at a later time. And there are really only two questions. One is howmuch you’re going to get back, and the other is when.
“Now, Aesop was not much of a finance major, because he said something like, ‘A bird in the hand is worthtwo in the bush.’ But he doesn’t say when.” Interest rates—the cost of borrowing—Buffett explained, are theprice of “when.” They are to finance as gravity is to physics. As interest rates vary, the value of all financialassets—houses, stocks, bonds—changes, as if the price of birds had fluctuated. “And that’s why sometimes abird in the hand is better than two birds in the bush and sometimes two in the bush are better than one inthe hand.”
In his flat, breathy twang, the words coming so fast that they sometimes ran over one another, Buffett relatedAesop to the great bull market of the 1990s, which he described as baloney. Profits had grown much less thanin that previous period, but birds in the bush were expensive because interest rates were low. Fewer peoplewanted cash—the bird in the hand—at such low rates. So investors were paying unheard-of prices for thosebirds in the bush. Casually, Buffett referred to this as the “greed factor.”The audience, full of technology gurus who were changing the world while getting rich off the great bullmarket, sat silent. They were perched atop portfolios that were jam-packed with stocks trading at extravagantvaluations. They felt terrific about that. It was a new paradigm, this dawning of the Internet age. Theirattitude was that Buffett had no right to call them greedy. Warren—who’d hoarded his money for years andgiven very little away, who was so cheap his license plate said “Thrifty,” who spent most of his time thinkingabout how to make money, who had blown the technology boom and missed the boat—was spitting in theirchampagne.Buffett continued. There were only three ways the stock market could keep rising at ten percent or more ayear. One was if interest rates fell and remained below historic levels. The second was if the share of theeconomy that went to investors, as opposed to employees and government and other things, rose above itsalready historically high level.19 Or, he said, the economy could start growing faster than normal.20 He calledit “wishful thinking” to use optimistic assumptions like these.
Some people, he said, were not thinking that the whole market would flourish. They just believed they couldpick the winners from the rest. Swinging his arms like an orchestra conductor, he succeeded in putting upanother slide while explaining that, although innovation might lift the world out of poverty, people who investin innovation historically have not been glad afterward.
“This is half of a page which comes from a list seventy pages long of all the auto companies in the UnitedStates.” He waved the complete list in the air. “There were two thousand auto companies: the mostimportant invention, probably, of the first half of the twentieth century. It had an enormous impact onpeople’s lives. If you had seen at the time of the first cars how this country would develop in connectionwith autos, you would have said, ‘This is the place I must be.’ But of the two thousand companies, as of afew years ago, only three car companies survived.
21 And, at one time or another, all three were selling forless than book value, which is the amount of money that had been put into the companies and left there. Soautos had an enormous impact on America, but in the opposite direction on investors.”He put down the list to shove his hand in his pocket. “Now, sometimes it’s much easier to figure out thelosers. There was, I think, one obvious decision back then. And of course, the thing you should have beendoing was shorting horses.”*3 Click. A slide about horses popped up.

U.S. HORSE POPULATION
1900—17 million
1998—5 million
“Frankly, I’m kind of disappointed that the Buffett family was not shorting horses throughout this entireperiod. There are always losers.”Members of the audience chuckled, albeit faintly. Their companies might be losing money, but in their heartsbeat a conviction that they were winners, supernovas blazing at the cusp of a momentous shift in the heavens.Undoubtedly their names would grace the pages of history books someday.Click. Another slide appeared.
“Now the other great invention of the first half of the century was the airplane. In this period from 1919 to1939, there were about two hundred companies. Imagine if you could have seen the future of the airlineindustry back there at Kitty Hawk. You would have seen a world undreamed of. But assume you had theinsight, and you saw all of these people wishing to fly and to visit their relatives or run away from theirrelatives or whatever you do in an airplane, and you decided this was the place to be.
“As of a couple of years ago, there had been zero money made from the aggregate of all stock investmentsin the airline industry in history.
“So I submit to you: I really like to think that if I had been down there at Kitty Hawk, I would have beenfarsighted enough and public-spirited enough to have shot Orville down. I owed it to future capitalists.”22
Another light chuckle. Some were getting tired of these musty old examples. But out of respect, they letBuffett get on with it.
Now he was talking about their businesses. “It’s wonderful to promote new industries, because they are verypromotable. It’s very hard to promote investment in a mundane product. It’s much easier to promote anesoteric product, even particularly one with losses, because there’s no quantitative guideline.” This wasgoring the audience directly, where it hurt. “But people will keep coming back to invest, you know. Itreminds me a little of that story of the oil prospector who died and went to heaven. And St. Peter said,‘Well, I checked you out, and you meet all of the qualifications. But there’s one problem.’ He said, ‘Wehave some tough zoning laws up here, and we keep all of the oil prospectors over in that pen. And as youcan see, it is absolutely chock-full. There is no room for you.’
“And the prospector said, ‘Do you mind if I just say four words?’
“St. Peter said, ‘No harm in that.’
“So the prospector cupped his hands and yells out, ‘Oil discovered in hell!’
“And of course, the lock comes off the cage and all of the oil prospectors start heading right straight down.
“St. Peter said, ‘That’s a pretty slick trick. So,’ he says, ‘go on in, make yourself at home. All the room inthe world.’“The prospector paused for a minute, then said, ‘No, I think I’ll go along with the rest of the boys. Theremight be some truth to that rumor after all.’ 23
“Well, that’s the way people feel with stocks. It’s very easy to believe that there’s some truth to that rumorafter all.”
This got a mild laugh for a half second, which choked off as soon as the audience caught on to Buffett’spoint, which was that, like the prospectors, they might be mindless enough to follow rumors and drill for oil inhell.
He closed by returning to the proverbial bird in the bush. There was no new paradigm, he said. Ultimately,the value of the stock market could only reflect the output of the economy.
He put up a slide to illustrate how, for several years, the market’s valuation had outstripped the economy’sgrowth by an enormous degree. This meant, Buffett said, that the next seventeen years might not look muchbetter than that long stretch from 1964 to 1981 when the Dow had gone exactly nowhere—that is, unless themarket plummeted. “If I had to pick the most probable return over that period,” he said, “it would probablybe six percent.”
24 Yet a recent PaineWebber-Gallup poll had shown that investors expected stocks to returnthirteen to twenty-two percent.25
He walked over to the screen. Waggling his bushy eyebrows, he gestured at the cartoon of a naked man andwoman, taken from a legendary book on the stock market, Where Are the Customers’ Yachts?26
“The mansaid to the woman, ‘There are certain things that cannot be adequately explained to a virgin either bywords or pictures.’” The audience took his point, which was that people who bought Internet stocks wereabout to get screwed. They sat in stony silence. Nobody laughed. Nobody chuckled or snickered or guffawed.Seeming not to notice, Buffett moved back to the podium and told the audience about the goody bag he hadbrought for them from Berkshire Hathaway. “I just bought a company that sells fractional jets, NetJets,” hesaid. “I thought about giving each of you a quarter share of a Gulfstream IV. But when I went to theairport, I realized that’d be a step down for most of you.” At that, they laughed. So, he continued, he wasgiving each of them a jeweler’s loupe instead, which he said they should use to look at one another’s wives’rings—the third wives’ especially.
That hit its mark. The audience laughed and applauded. Then they stopped. A resentful undercurrent waswashing through the room. Sermonizing on the stock market’s excesses at Sun Valley in 1999 was likepreaching chastity in a house of ill repute. The speech might rivet the audience to its chairs, but that didn’tmean that they would go forth and abstain.
Yet some thought they were hearing something important. “This is great; it’s the basic tutorial on the stockmarket, all in one lesson,” thought Gates.27 The money managers, many of whom were hunting for cheaperstocks, found it comforting and even cathartic.
Buffett waved a book in the air. “This book was the intellectual underpinning of the 1929 stock-marketmania. Edgar Lawrence Smith’s Common Stocks as Long Term Investments proved that stocks alwaysyielded more than bonds. Smith identified five reasons, but the most novel of these was the fact thatcompanies retained some of their earnings, which they could reinvest at the same rate of return. That wasthe plowback—a novel idea in 1924! But as my mentor, Ben Graham, always used to say, ‘You can get inway more trouble with a good idea than a bad idea,’ because you forget that the good idea has limits. LordKeynes, in his preface to this book, said, ‘There is a danger of expecting the results of the future to bepredicted from the past.’”28
He had worked his way back around to the same subject: that one couldn’t extrapolate from the past fewyears of accelerating stock prices. “Now, is there anyone I haven’t insulted?”

29 He paused. The question
was rhetorical; nobody raised a hand.
“Thank you,” he said, and ended.
“Praise by name, criticize by category” was Buffett’s rule. The speech was meant to be provocative, notoff-putting—for he cared a great deal what they thought of him. He had named no culprits, and he assumedthey would get over his jokes. His argument was so powerful, almost unassailable, that he thought even thosewho didn’t like its message must acknowledge its force. And whatever unease the audience felt was notexpressed aloud. He answered questions until the session ended. People began to stand, awarding him anovation. No matter how they saw it—a masterful exposition on how to think about investing or the last roarof an old lion—the speech was by any standard a tour de force.
Buffett had stayed on top for forty-four years in a business where five years of good performance was ameaningful accomplishment. Still, as the record lengthened, the question always loomed: When would hefalter? Would he declare an end to his reign, or would some seismic shift dethrone him? Now, it seemed tosome, the time had come. It may have taken an invention as significant as the personal computer, coupledwith a technology as pervasive as the Internet, to topple him, but he’d apparently overlooked informationthat was freely available and rejected the reality of the approaching millennium. As they muttered a polite“wonderful speech, Warren,” the young lions prowled, restive. And so, even in the ladies’ room at the break,sarcastic remarks were heard from the Silicon Valley wives.30
It was not just that Buffett was wrong, as some felt, but that even if he were eventually proved right—asothers suspected he would be—his dour prediction of the investing future contrasted so sharply withBuffett’s own legendary past. For in his early glory days, stocks were cheap, and Buffett had scooped themup in handfuls, almost alone in noticing the golden apples lying untouched on the path. As the years passed,barriers grew up that made it harder to invest, to get an edge, to figure out what others didn’t know. So whowas Buffett to preach at them, now that it was their turn? Who was he to say that they shouldn’t makemoney while they could off this wonderful market?
Throughout the rest of the lazy afternoon, Herbert Allen’s guests played one last game of tennis or golf orheaded to the Duck Pond Lawn for a leisurely chat. Buffett spent his afternoon with old friends, whocongratulated him on his triumph of a speech. He believed he had done a convincing job of swaying theaudience. He had not given a speech full of such commanding evidence simply to go on the record.
Buffett, who wanted to be liked, had registered the standing ovation, not the mutterings. But the lessflattering version was how many were not convinced. They believed that Buffett was rationalizing havingmissed the technology boom, and they were startled to see him make such specific predictions, propheciesthat surely would turn out to be wrong. Beyond his earshot, the rumbling went on: “Good ol’ Warren. Hemissed the boat. How could he miss the tech boat? He’s a friend of Bill Gates.”31
A few miles away at the River Run Lodge later that evening, with the guests at the closing dinner againarranged according to some invisible plan, Herbert Allen finally spoke, thanking various people and reflectingon the week. Then Susie Buffett took the stage beside the windows that overlooked the pebbly Big WoodRiver and once again sang the old standards. Later the guests returned to the Sun Valley Lodge terrace,where Olympic skaters axeled and arabesqued in the Saturday night ice show.
By the time fireworks exploded across the sky at evening’s end, Sun Valley ’99 had been declared anotherglorious five-day extravaganza. Yet what most people would remember was not the rafting or the skaters; itwas Buffett’s talk about the stock market—the first forecast he had made in exactly thirty years.