B000U5KFIC EBOK (21 page)

Guerin was learning, and he, like Munger, was making new buddies.
Guerin would become another of Munger's many "best friends," but the
one least like Charlie. "My mother was a seamstress, a Rosie the riveter,"
explained Guerin. She died from alcoholism when Rick was a teenager.
Guerin trained to be an Air Force pilot but dropped out, although for
years afterward he flew his own plane. He spent three years at IBM, then
five to six years as a stockbroker.

"It took me three years to extricate from that (early) partnership,"
said Guerin. "Charlie-and Jack Wheeler to some extent-became my
mentors. I then founded my own partnership, modeling it after the Buffett and Munger partnerships."

J.Y. Guerin & Co. imitated Wheeler, Munger in every way including
the operation of a specialist post. In his famous essay, The Superinvestors of Graham and Doddsville," Buffett described Rick Guerin's investment record. "Table 6 is the record of a fellow, a pal of Charlie
Munger's-another nonbusiness school type-who was a math major at
USC. He went to work for IBM after graduation and was an IBM salesman
for a while. After I got to Charlie, Charlie got to him," Buffett wrote. "This
happens to be the record of Rick Guerin. Rick from 1965 to 1988, against
a compounded gain of 316 percent for the S&P, came off with 22,200 percent, which probably because he lacks a business school education, he regards as statistically significant."'

Guerin did deals with Munger and Buffett, but also invested independently. He became a major shareholder and director of Pacific Southwest
Airline, which in 1988 was merged into USAir. Guerin says that he learned from Munger how to make deals, but he also began to think
deeply about the importance of personal values.

"I think I've been affected by Charlie," said Guerin. "It was in me to
see these values and to respond to them immediately, but he shaped me.
Being around Charlie and Warren has made me a better man." Guerin saw
how clearly logical it is to be ethical, rational, and honest. "It is easier to
tell the truth."

Guerin is Buffett's age and is married to a woman 26 years younger
than himself. They have a five-year-old son. Rick also has a 42-year-old
daughter. Between them, he and his wife Fabienne have seven childrenfive girls and two boys. Munger, Guerin, and Otis Booth still play bridge at
the Los Angeles Country Club with a circle of friends that sometimes includes Mayor Richard Riordan. In addition, Munger and Buffett once
played bridge at nearby Hillcrest Country Club with the late comedian
George Burns, then in his late 90s. To accommodate Burns' cigars, the Hillcrest posted its rule: "No smoking by persons under 95."

Charlie admires a long-standing practice of the Hillcrest Country
Club of demanding a generous charitable giving history as a condition of
membership. "I have heard that, long ago, a big-time theater owner tried
to join, delivering a yellowing newspaper clipping reporting on a World
War II savings bond rally held in one of his theaters. Back came the reply
of the membership committee: `This is a very useful piece of paper. For
instance, you could wipe your ass with it. But it won't get you into this
Club.' "

THE REAL ESTATE DEALS WERE WRAPPING UP, the law firm doing well, and
about that time, Charlie approached Al Marshall and asked him if he
would like to come into Wheeler, Munger as business manager. Munger
had discovered that his style differed from Jack Wheeler's, and he needed
someone around who was more compatible.

Wheeler "was not from Omaha but he was a very smart man," said
Marshall. "He once told me that he'd taken a course in [late 1920s style]
pools and the management of pools, which of course are totally illegal
today. He was a big spender, lived big. He was very good at what he did,
but he also would suffer big reverses once in a while, which did not appeal to Charlie."

Finally Charlie persuaded Wheeler to turn the operation of Wheeler,
Munger over to himself and Marshall, and they would pay Wheeler a cut
of the profits. "There was no acrimony between them," insisted Marshall.
"Wheeler just sort of retired."

Marshall, who ultimately became a general partner, wasn't surprised
that Charlie approached him a second time to join in a business venture.
"If he trusts you, he trusts you completely," said Al. It still amazes
Marshall that for years Charlie listed him as a signatory on a personal
checking account. Charlie knew Al's character and didn't think for a
minute that Marshall would run off with the money, and of course he
didn't.

Munger, ever the absent-minded professor, had Nancy to keep things
straight at home. At the office he needed a lieutenant like Marshall. "We
had a secretary named Vivian," said Marshall. "When she left, we had two
or three secretaries after her, but Charlie just kept calling all of them
Vivian. I've always said it's a good thing his second wife was named
Nancy, too. Otherwise he'd never have remembered her name."

Marshall liked his new position, but it also had drawbacks.

"One of my more obnoxious jobs was to watch the specialist posts,"
said Marshall. Floor traders tend to be action-oriented individuals who
have a lot of adrenaline in their systems. Once one of Marshall's traders
objected to something that had been said and jumped up and slugged another trader. It took Marshall several days to negotiate a peaceful settlement with the battered trader and the exchange's governors. But the
traders also were clever and creative. One of Wheeler, Munger's men set
up a complex four-way arbitrage in the securities of the pharmaceutical
company, Alza, which at the time was just a start-up. Marshall established
a $2 million line of bank credit to finance the arbitrage, but at one point,
the credit line was drawn out to $3 million. A banker came over to the
stock exchange to investigate and to ask Marshall, again, what the credit
line was being used for. Even after Marshall explained, the banker went
away confused. The trader unwound the arbitrage after three weeks with
a profit of $600,000.

Marshall recalled that one evening he needed to talk to Charlie about
a business situation, so he went over to the Mungers' June Street home.
Marshall had five children of his own so he knew what a busy household
was like, but even he was surprised that Charlie could concentrate under
the circumstances. Charlie was sitting in a big chair, and "One kid was
climbing on his shoulder, another was pulling his arm. Another was
yelling. It was bedlam, but he didn't send them out or correct them. It
didn't bother him a bit."

WHILE WHEELER kEPT AN EYE on the specialist posts, Charlie concentrated
on investing the surplus capital. Sometimes he, Buffett, or Guerin-or all three together-invested in the same companies. They scoured the exchanges, the newspapers, and talked to friends, searching for deals. Buffett described both-Buffett Partnership and Wheeler, Munger-as
classic hedge funds, similar to those that again became popular in the
late 1990s.

"We bought some operating businesses," said Munger, "including a
company that made automotive chemicals. At one time, as part of a
bargain-priced package, we bought a manufacturer of car wash machines
and a group of loans to car wash operators. Every time it rained, people
called Marshall to explain why they weren't paying. That was not one of
my happier moments. So we had a lot of experiences, good and bad."

Because the companies they bought were small and sometimes
closely held, the investors became involved in peculiar situations. This
was the case with the tiny automotive chemicals company, K&W
Products.

"I spotted it in the newspaper, an estate sale," said Rick Guerin. "It
turned out it was a company that made a substance that, when poured
into an automobile radiator, would seal up a leak in the car's engine
block. The inventor of the product had launched it into the market by,
time after time, driving his car into an auto repair shop, calling together
the mechanics, and then drilling a disastrous hole in his car's engine
block, which he fixed by pouring his product into the car's radiator. This
proved quite effective as a sales aid, and the company made a fair amount
of money."

"The company came up for sale because the controlling shareholder
[not the original inventor] had died. It was rumored that this owner, a
doctor, had died because he over-prescribed addictive drugs to himself.
He had borrowed money from his wife's aunts to invest in the company,
and the estate owed the aunts $80,000 each. The only asset in the estate
was the stock. For some reason the doctor left his estate to his wife, but
made his mistress the executor. Needless to say this caused some rancor
between the executor and family members. The aunts had not been receiving interest payments and for several years were not able to get any
money. Charlie proposed that he and Guerin buy the two $80,000 notes
held by the elderly aunts.

"Under the circumstances, it would be typical to bid less than
face value," said Guerin, but Charlie insisted on paying the full $80,000
for each note. "Charlie was not willing to benefit from their distress. He
could have taken advantage of them, but did not. I did the leg work. I
found the old ladies. Charlie and I became the creditors, then later traded
the notes for ownership."

Next, Munger, who was at best a little awkward when dealing with
women, telephoned the mistress/executor and invited her to lunch at the
California Club so that they could discuss the matter. Munger was taken
aback when the woman showed up at the office. She had flaming red hair,
eyes enhanced by bright green contact lenses, and was wearing a snug
nurse's uniform that showed off her ample bosom. Charlie was flustered,
but there was no way of getting out of accompanying the woman to lunch
at his conservative businessmen's club, with its dark paneled walls,
leather furniture, and valuable collection of old California art.

Eventually, Charlie and Rick became fifty-fifty owners of a controlling block of stock in the company, with its management owning the rest.
After some time passed, a situation arose where Guerin needed to cash
out of the investment. "I still was very poor. We had an informal understanding that one would take the other out if either needed to get out. I
went to Charlie and said I need to use that money elsewhere. He said fine,
figure out what you want."

Guerin looked over the accounting statements and thought about it.
"I told him it was worth $200,000. Charlie said `No, you're wrong about
that.' I said to myself, `Oh darn,' because I needed $200,000. He said, `It's
worth $300,000.' And he pulled out a check and wrote it. I would have
been delighted with $200,000. I would have been the happiest man on
earth. It was an opportunity for him to show me how stupid I was,"
Guerin said with a chuckle. "Charlie has a saying, `Think about it a little
more and you will agree with me because you're smart and I'm right.'"

The automotive chemicals business was fully acquired in the mid1970s and ultimately became part of Berkshire Hathaway. Berkshire sold
it in 1996 to a group of investors that included a former president of the
company.

THOUGH OTIS BOOTH WAS TOO CONCERNED about the risk to participate in
Munger's final real estate ventures, he quite willingly put money into the
new Wheeler, Munger partnership. "I became the largest participant, and
I remained so."

When he initially went into Wheeler, Munger, Booth had some concerns about what he was doing. "I worried about partnership interests
being just pieces of paper. I was taking them on trust. This guy was
straight, but there was not a great deal of documentation. But I didn't
think it was going to go south. I knew Charlie well enough."

Charlie's partners say he has a flair for structuring a company in the
most effective form and for postponing the tax consequences as long as possible. When it came to Wheeler, Munger, Charlie borrowed a format
from Warren that Warren had borrowed from Ben Graham.

"The structure of the Buffett and Munger partnerships was very important." explained Otis Booth. "At the end of each year profits were distributed, and ownership was reallocated. The reallocation was not a
taxable event. Profits were given according to partnership interests at the
previous year end. First 6 percent to capital, limited and general partners
alike. After that, a huge majority share to capital and a much lower share
to general partners. When there were taxes to pay, all partners bore their
share according to their interests."

Buffett explained that Munger followed the fundamentals of value investing, though his portfolio was far less diversified than those established by the managers of traditional value funds, such as Buffett's friend
and former co-worker at Graham-Newman, Walter Schloss.

"Charlie's portfolio was concentrated in very few securities and
therefore his record was much more volatile but it was based on the same
discount-from-value approach," said Buffett. "He was willing to accept
greater peaks and valleys of performance, and he happens to be a fellow
whose whole psyche goes toward concentration, with results shown."'

Some analysts might claim that Charlie was willing to assume more
risk than Graham, Buffett, or Schloss would tolerate. "Yes," agreed Otis
Booth, "but Charlie feels he has better insight and assessment of risk and
he says `Yes, I'll do that.' But Warren also bought stocks that were out of
favor, such as American Express. The real risk was less than the perceived
risk at the time."

As he became more and more experienced in business, Munger found
small but reliable ways to make risk more tolerable.

"In no way was there a desire to run foolish risks as many gamblers
do," explained Booth. "None of that. And particularly when we were
younger and hungrier. He would look for each little edge you could get.
The seat on the stock exchange. Ability to get an option on land where
the zoning could be changed, whatever."