B000U5KFIC EBOK (23 page)

In 1975, Wheeler, Munger did make an impressive recovery with a
gain of 73.2 percent, and Munger and Marshall liquidated the partnership
early in 1976. Even counting the dreadful times, during the 14 years
Wheeler, Munger operated, the partnership turned in an average annual
return of 24.3 percent before the general partners' override. (For a chart
of the fund's performance, see page 251.)

"When the dust settled, my family had about $3 million from
Wheeler, Munger and about $2 million more from real estate, and so on,"
said Munger. "It was a lot of money at that time, and it was a good time to
have that much money. I owned wonderful securities, and other wonderful, bargain-priced securities were then available in the market."

When Wheeler, Munger was liquidated, the investors got securities
in Blue Chip Stamps and Diversified Retailing, companies that later were
folded into Berkshire Hathaway in stock swaps. Diversified Retailing, a
company that was formed to buy one of the department store chains
competing in the Baltimore metropolitan area, from the beginning had
been mostly owned by the Buffett partnership, and by now was mostly
owned by former members of the Buffett partnership. Wheeler, Munger
owned 10 percent. The original purchase price was below the liquidating value of the business acquired, making it a classic Ben Graham type
of play.

Diversified Retailing had borrowed about half the purchase price for
the Baltimore acquisition, using a bank loan quickly replaced by longterm debentures that had almost no covenants limiting the borrower.
Very soon thereafter, Buffett and Munger realized how intense Baltimore
retailing competition was, and that they had made a mistake. They reversed course and sold the Baltimore department store chain for cash at
almost no loss. The debentures were left in place offset by cash. Meanwhile Diversified Retailing had purchased for nearly nothing another
chain of stores that threw off a profusion of cash. And so, during the
great 1973 to 1974 stock market crash, Diversified Retailing had large
amounts of investable assets, considerably more then twice what Buffett
and Munger had paid for their original stockholdings. With stock prices
at such a low level, it was a shopping spree in a bargain basement for Buffett and Munger. "It has been a source of satisfaction to me for
decades that such a poor start was turned into a large success," said
Munger. And again, shareholders who stuck with them were rewarded.

"We didn't know Diversified Retailing would become Berkshire,"
said Otis Booth. "I gave some shares [of Diversified] to the Los Angeles
Natural History Museum. Over the years I had to beat on them hard to
keep them. They kept two-thirds of the Berkshire that came out of it.
They once had 1800 shares of Berkshire; they're now down to 1200."
Though he doesn't always prevail in his recommendations, Booth still
serves on the board of the museum.

Booth ended up with a 1.4 percent stake in Berkshire Hathaway, a little less than Munger's 1.5 percent holding-making him one of the largest
investors in the company.' Other members of Munger's inner circle also
prospered. Ed Hoskins, Munger's original partner in the electronics manufacturing business invested in Wheeler, Munger, and as a result, eventually ended up with some Berkshire Hathaway stock, as did Guerin,
Marshall, Tolles, and, of course, Munger himself.

"The money in Berkshire Hathaway stock outperformed the rest,"
said Munger. "Little else could compound that way. As late as 1974, it was
trading for $40 per share on shares now [in June of 2000] trading for
$60,000." At times, Berkshire's price has reached more the $90,000.
Munger's own cost basis for his Berkshire shares is less than $40, because
he acquired them by swapping for stock that was purchased at a much
lower price.

AT THE TIME OF WHEELER, MITNGER'S liquidation, limited partners among
other things, got stock in New America Fund, which Munger and Guerin
continued to operate until 1986 when the fund also was liquidated completely. As a small part of the New America Fund final liquidation, shareholders received stock in the Daily Journal Corporation.

BY THE TIME THIS PHASE of their careers was over, Charlie and Al Marshall
had worked side by side in the same office for about two decades. The
real estate projects amounted to a major deal for a young lawyer with a
big family, and Munger says having good partners like Marshall was crucial to their success. "They were big things to take on," recalled Munger.
"Buying Blue Chip Stamps with Guerin and Buffett was a big thing. All
my life, I had high grade partners, some of the very best that could
ever be. Even now that he is so famous, people underrate how fine a partner Buffett is. Jack Wheeler was great, even though he drank too
much. A] Marshall was wonderful-worked hard on projects, made a big
partnership contribution in pushing so hard for the purchase of See's
Candy. I never had any flannel-mouthed baloney in the operation. I dealt
with quality people."

During the 20 or so years they worked together, Al Marshall found
himself having to pull Charlie out of all kinds of social messes. Every once
in a while, said Marshall, Munger would go on a talking spree, and gab so
long and rapidly that nobody was able to interrupt or change the subject.
One evening at a dinner party, the host cornered Al and begged him to go
in the other room and get Charlie, who had consumed several glasses of
wine, to shut up. "Nobody can get a word in edgewise. He's lecturing
them on difficulties religions have in describing heaven, something he
called a thousand-year orgasm."

On top of that, Munger didn't mind turning up the heat when
Marshall got into a little hot water. When the Mungers and the Marshalls
were vacationing together at Nancy's parent's home on Oahu, the two
couples were shopping in a grocery store. Al and his wife Martha were
standing side-by-side at the meat counter picking out steaks for dinner
when Martha Marshall stepped away to look at something else. A] didn't
realize she was gone, and reached out and grabbed the rear end of some
other woman. Al was startled to learn the buttocks were not those of his
wife, and the victim was furious. Munger, who was at the other end of the
meat counter shouted out, "You know, he does that to all the women."
Charlie's comment only made the woman angrier.

Despite the jokes, Marshall said he learned a lot during the decades
he worked with Munger. "I learned to make money," Marshall said. But additionally he came to believe that "Hard work, honesty, if you keep at it,
will get you almost anything."

WHILE MANGER WAS GOING TIIROIUGH this period of enormous change, expansion, and development, his family sometimes were in a quandary
when they tried to describe what Charlie did for a living. Molly Munger
had trouble explaining her father to her friend Alice Ballard, a Philadelphia blue-blood and debutante. Alice had scored 800 on the verbal portion of the SAT and like Molly, attended Harvard Law School. To a
California girl, Alice seemed worth impressing, but Charlie was of
no help.

"My college roommate's father was a partner in an old-line Philadelphia firm. She was descended from William Penn. Charlie called on Fred Ballard (Alice's father), who later said, `I have no idea who [Munger] is
from what he said of himself. He could be working for the CIA.' Daddy
made no coherent explanation of himself. He had this ratty little office in
the stock exchange. What did he do-working in a ratty little office? And
a fledgling law firm-he bought odd companies like K&W-the automotive chemicals company." Nevertheless, Molly's faith in her father was unshaken. "It didn't matter to me. It seemed like, `You just don't know him.
If you don't know it now, you'll know it later. He's fabulous.'"

I've accused Father of being negative. He has a buoyant,
cheerful upside, but also a negative side. He said, "No, no, I'm
not negative. I jump like a little trout if it's a good idea." His
hand went up in the air.

Molly Munger

IIARLES MIJNGLR, JR. KNEW SOMETHING was afoot in Munger's financial
life when his father came to him to discuss a math problem. Charles,
Jr. was studying to be a physicist and his math skills were advanced. The
exercise involved a California company called Blue Chip Stamps, which
had a pool of reserve funds to meet the obligation of redeeming stamps in
the years ahead. It had a float account, similar to those used by insurance
companies, to hold premiums for covering probable future losses-an account that is invested with investment returns accruing to the company.
Each year a predictable number of Blue Chip Stamps were redeemed,
causing a decline in funds, which in turn was offset by the proceeds of
issuing stamps. What Munger really wanted to know was how fast Blue
Chip's investable funds would decline under various scenarios.

Blue Chip Stamps had been in the news because of a dispute it had
with a group mom and pop retailers who wanted to participate as owners
of the company alongside big retailers who had founded it. At the time
Rick Guerin was just recovering from his losses in the company sold to
him by Jack Wheeler.

"Three years later, I got my capital back together, which was next to
nothing, and Charlie and I talked a lot about investment ideas," said
Guerin. "I'd react about Blue Chip Stamps in the newspaper, and I had an
idea," Charlie said, 'I'll take you to my friend who knows more about float
than anyone.'"

When Guerin was introduced to Warren Buffett, Rick realized, as he
had when he first met Munger, that he was talking to someone exceptional. Rick was pleased when Buffett immediately saw the same potential value of Blue Chip's float that he had seen. Just by investing the float
alone, the company could amount to something. Buffett, Munger, and
Guerin slowly began accumulating shares, with Buffett buying the stock
both for his personal account and for the Buffett Partnership.

Tracing the story of Blue Chip Stamps from its inception to the present is confusing, but it is central to understanding how Munger, Buffett,
and Guerin became so rich, and how Berkshire Hathaway evolved into the
company it is today. Blue Chip became the vehicle through which See's
Candy, the Buffalo Neu's, and Wesco Financial were acquired, and these
three companies later became essential to the cultural and financial foundation of Berkshire.

First, the history: An early precursor to frequent flyer miles in the
1950s and 1960s, trading stamps, such as Green Stamps, Blue and Gold,
and Blue Chip, were handed out as a customer incentive by merchants.
Retailers deposited money at Blue Chip in return for their stamps, then
the money was used to operate the stamp company and to purchase the
merchandise handed out when stamps were redeemed. Shoppers were
given a certain number of stamps for each dollar spent in a store, which
they pasted into books, then redeemed for prizes such as toddler toys,
toasters, mixing howls, watches, and other items. Because it took time to
accumulate enough stamps to redeem merchandise-and because some
customers tossed the stamps in the back of a drawer, forgot them, and
never did redeem them-the float built up. By the early 1970s, Blue
Chip's sales amounted to approximately $120 million per year (around
$400 million, in today's dollars). Its float at the time was nearly $100
million.