The Late, Great Sandy Gottesman
Investing (and life) lessons from the former Berkshire Hathaway director and longtime friend of Warren Buffett
Happy Monday and welcome to our new subscribers!
Some sad news: David “Sandy” Gottesman passed away last week at the age of 96.
A longtime friend of Warren Buffett, Gottesman built his First Manhattan investment advisory firm into a Wall Street powerhouse and served on the board of Berkshire Hathaway for nearly twenty years.
Gottesman preferred to keep a low profile — even telling the New York Times that “the only time a whale gets harpooned is when he surfaces” — so tracking down information about his life and career proved more difficult than expected.
Nonetheless, I tried to dig up some interesting facts and stories that I hope you will enjoy.
For a man who mostly shunned the spotlight, Sandy Gottesman had a knack for popping up at pivotal moments in the Buffett/Berkshire story. Each time, imparting a new lesson to help all of us become more intelligent investors — and better people.
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If you make a mistake, don’t be afraid to cut your losses
When Sandy Gottesman first met Warren Buffett, the two men quickly bonded over their shared love of value investing. They regularly spoke on the phone and occasionally visited each other to discuss their latest market moves and ideas.
In 1966, Gottesman, Buffett, and Charlie Munger teamed up to create a holding company that would “acquire diversified businesses, especially in the retail field”.
Flexing their creative muscles, the trio named this new venture: Diversified Retailing.
Their first purchase was Hochschild-Kohn, a venerable old department store in Baltimore, that Gottesman brought to the group’s attention. (It just so happened to be run by his wife’s uncle.)
Sadly, H-K didn’t pan out.
“Buying Hochschild-Kohn was like the story of a man who buys a yacht,” Munger once drily observed. “The two happy days are the day he buys it and the day he sells it.”
But, rather than going down with the ship (or, in this case, a failing department store), Gottesman rode to the rescue and sold H-K to new owners at a price slightly below what Diversified had originally paid.
Under the circumstances, this small loss felt like a huge win for the three partners.
And, on a happier note, Diversified used the proceeds from the sale exceedingly well — purchasing a big chunk of undervalued Berkshire Hathaway stock. (In 2014, Buffett estimated that the $6 million invested in H-K was then worth about $45 billion thanks to Berkshire’s price appreciation.)
When the two companies eventually merged in the late 1970s, Diversified shareholders received Berkshire stock as part of the transaction. That’s how Gottesman ended up with a sizable stake in Buffett’s conglomerate.
“He saved our asses in Diversified — me, Charlie, and himself,” Buffett said. “He kept that [Berkshire] stock, and now it’s worth … billions.”
The only way to learn about the money game is to play it
Gottesman’s name occasionally came up at Berkshire’s annual meetings.
In 2007, Munger noted one praiseworthy aspect of First Manhattan’s hiring process:
Sandy Gottesman, who is a Berkshire director, runs a large and successful investment operation, and you can tell what he thinks causes people to learn to be good investors by noticing his employment practices.
When a young man comes to Sandy, he asks a very simple question, no matter how young the man is.
He says, “What do you own and why do you own it?”
And, if you haven’t been interested enough in the subject to have that involvement already, he’s rather you go somewhere else.
Gottesman believed that, for any aspiring money manager, there was no substitute for stepping into the investment arena itself.
Proving that you can research a company, develop a compelling (and accurate) thesis, and then stick to your convictions through thick and thin.
Don’t do business with anyone who makes you nervous
Munger mentioned Gottesman again in 2012 when discussing the importance of risk analysis to a company’s long-term success.
Munger: Sandy Gottesman created one of my favorite risk control examples. One day, he fired an associate and the man said, “How can you be firing me when I’m such an important producer?”
And Sandy said, “Yes, but I’m a rich old man and you make me nervous.”
Buffett: Yeah. We do not have anybody around Berkshire that makes us nervous.
To adapt Buffett’s famous line about marrying for money: Working with people who make you nervous and take unnecessary risks probably isn’t a good idea under any circumstances, but it’s downright crazy when you’re already rich.
Buy what you know
One of the biggest Berkshire-related stories of the last decade is how Warren Buffett eschewed his (overblown) distaste for technology stocks and built a massive 5.7% position in Apple.
Ted Weschler, one of Buffett’s investment lieutenants, actually got the ball rolling with a $1 billion stake in AAPL 0.00%↑ — but it was Buffett who decided to make the Cupertino-based giant a cornerstone of the Berkshire portfolio.
What convinced Buffett to take the plunge on Apple?
An offhand comment (and a little bad luck) from Sandy Gottesman.
Here’s the full story (from Tripp Mickle’s “After Steve”):
[Gottesman] had been an investor in Apple for years and loved its products. He told Weschler that he took his iPhone with him everywhere and had been devastated when it slipped out of his pocket in the back of a taxi.
“I felt like I lost a piece of my soul,” he said.
When Weschler relayed the story to Buffett, his boss perked up. Buffett was struck that a friend his age felt that way about a piece of technology and decided to dig into Apple’s business.
After hearing Gottesman’s story, he began to pay more attention to the iPhones being used around him.
Buffett wondered what it would take for an iPhone owner to switch from Apple to Samsung, the battery-plagued brand. During his Sunday trips to Dairy Queen with his grandchildren, he noticed that they were always absorbed in their phones. He realized that Weschler was right: the iPhone wasn’t tech, it was a modern-day Kraft Macaroni & Cheese. The product had a grip on users and popular culture that should endure for years.
Hearing about Gottesman’s misfortune and seeing firsthand his grandchildren’s attachment to their iPhones provided the impetus for one of Warren Buffett’s most inspired investments.
And Apple now makes up over 40% of Berkshire’s portfolio.
Act with gratitude and generosity of spirit
At the 1994 annual meeting, Gottesman (sitting in the crowd) took the microphone during the Q&A session and surprised Buffett and Munger with a touching tribute on behalf of Berkshire shareholders worldwide.
Berkshire stands unique in American business as a company whose name has become synonymous with management excellence.
Unlike many American corporations, we, as stockholders, don’t have to worry about reorganizations, large write-offs, massive restructurings, overstated earnings, and overpaid executives with strategic visions.
Instead, year in and year out, we enjoy the benefits of the common sense and brilliance of Charlie and Warren.
It’s easy to take such consistently outstanding results for granted, but we in this room are the direct beneficiaries of their efforts. By our presence here today, we show our appreciation to them for their exceptional performance.
Buffett then quipped:
Thank you. That was Sandy Gottesman. We’ve worked together for thirty-odd years — and he’s finally got that down.
It’s a funny story, but also one indicative of the kind of man that Gottesman was. This was one of the very few public utterances that he ever made — and he used it to lavish praise and appreciation onto others.
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Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.