B000U5KFIC EBOK (36 page)

I give away more of that product than any other product that Berkshire
Hathaway makes.... It's a perfectly fabulous human achievement. To edit
something that is user-friendly with that much wisdom encapsulated is a
fabulous thing.

While Munger can be as smug about the success of Berkshire as its investors are, he can't resist telling everyone why they're there.

"It's wonderful that we all come here each year," Charlie told a group
of friends at his own dinner party the weekend of the Berkshire annual
meeting. "But why do we really do it? Yes, it's fun. But it's also a way of
subtly saying, I'm very rich. It's also a way of subtly saying, I'm very
smart."

Munger then went on to say that it was becoming a problem to Berkshire that many original shareholders were getting older and dividing
up the shares among their heirs. It makes the shareholder base grow
to unwieldy proportions. Charlie suggested that everyone bring their unmarried children and grandchildren to the annual meeting and hold
mixer dances so the Berkshire heirs could meet and marry one another,
thus keeping the shares within fewer families. Just another one of Charlie's semi-bewildering jokes.

WHILE BERKSHIRE HATHAWAY WAS GAINING size and influence and Munger
was growing wealthier, his family was blissfully unaware of what was
happening to their lives. As far as Emilie Munger was concerned, her father was chairman of Blue Chip Stamps, and Blue Chip Stamps were something you got at a store and pasted in a book.

"I don't remember when Berkshire started growing to a point at
which he was in a different league," said Emilie. "I think my parents were
really private. They didn't want publicity. My dad was a creature of habit
so everything was exactly the same. We never had a feeling we were
growing up in some rich household."

Though Charlie was becoming a celebrity in Omaha, in star-strewn
Los Angeles and on the rest of the West Coast, he didn't attract much
attention.

"Over time," said Emilie, "nothing changed about the way we were
perceived. Not until I was in law school in 1989. I realized some group
over at the business school recognized my name."

The lack of interest the Munger children showed in their father's
career, said Emilie "probably had something to do with coming of age in
the 1960s and 1970s. I went to a fairly liberal college-almost an antibusiness atmosphere. There was a lot of socialism. Evil corporate America. Our schools were more public service or public policy oriented.
When Wendy and Molly went to school, it was really different."

If Emilie Munger's classmates had been inclined to study Berkshire
and it's business practices, they no doubt would have been surprised that
the company operates nothing like other corporate giants. Munger and
Buffett have remained steadfast in keeping their own compensation low.
Each takes $100,000 in salary, plus directors fees from various corporations not controlled by Berkshire. Munger's 1998 directors fees came to
about $81,300. Their enormous wealth comes from their ownership
shares of Berkshire, though that is more true for Buffett than it is for
Munger. Buffett's proportional ownership is much larger, but Munger also
follows a slightly different financial path.

"Charlie's family has 90 percent or more of its net worth in Berkshire
shares," said Buffett. "My wife, Susie, and I have more than 99 percent."

Though Buffett says he almost never sells shares, Munger sometimes
does. In fact between 1993 and 1997 he sold $25 million worth of Berkshire. Additionally, Munger has given away hundreds of shares, including
a share to Robert Cialdini, author of the book Influence, just because he
likes him and his work.

"I've given away a fair amount of Berkshire (stock) in the last couple
of years," Munger said. "I gave away a lot ... because I thought it was the
correct way to behave. And I've sold some because I've had businesses of
my own."'s

THERE ARE LESSONS TO BE learned from his personal career and from the development of Berkshire Hathaway, and they are learnable, as long as people don't confuse simplicity with ease, says Munger, though he doesn't
think everyone will learn them.

"People underrate the importance of a few simple big ideas. And I
think to the extent Berkshire Hathaway is a didactic enterprise teaching
the right systems of thought, the chief lesson is that a few big ideas really
work. I think these filters of ours have worked pretty well-because they
are so simple," says Munger.

Even so, Munger said of Berkshire, "I knew it would do well, but not
this well. `9

Munger's children say they continue to benefit from their father's example. "It's a rich lesson to learn," said Molly Munger. "If you just keep
pressing on and don't let anything that happens get to you, your life is so
much better."

The game of investing is one of making better predictions
about the future than other people. How are you going to do
that? One way is to limit your tries to areas of competence. If
you try to predict the future of everything, you attempt too
much. You're going to fail through lack of specialization.'

Charlie Munger

NE OF CHARLIE'S MAXIMS ABOUT practicing law is the best source of
legal work is the work on your desk," said Robert Denham, the
Munger, Tolles & Olson attorney who handles much of Berkshire Hathaway's legal work. Following that philosophy, said Denham, his working
relationship with Charlie, Warren, and Berkshire has "grown organically."

In fact, Munger, Tolles and its foremost client Berkshire grew together through the 1970s and 1980s. Building brick by brick, Berkshire
emerged in the 1990s with its corporate identity and its position in the
business world secured. From that time on, Munger and Buffett often
found themselves either on the spot or in the spotlight. At the start of the
1990s, Berkshire owned a remarkable collection of businesses and a
strong portfolio of securities. Not only did the operating businesses bring
in large amounts of cash, the Berkshire insurance companies were building substantial amounts of float-all money for Buffett and Munger to
work with. Acquisitions continued apace, and for the most part the investments were in high quality companies.

"Charlie made me focus on the merits of a great business with
tremendously growing earning power," said Buffett, "but only when you can be sure of it-not like Texas Instruments or Polaroid, where the earning power was hypothetical."I

Buffett continued to practice some of the arbitrage techniques he
learned from Ben Graham and occasionally made short-term investments.
Berkshire bought RJR Nabisco junk bonds in 1989 through 1990, Wells
Fargo Bank shares from 1989 through 1991, and in 1991 Berkshire acquired H.H. Brown Shoe Company, the leading North American shoe
manufacturer, which in turn bought the Lowell Shoe Company.

In 1992, Buffett acquired 14 percent of the stock of General Dynamics, a company largely owned by his long-time friends, the Crown family
of Chicago. General Dynamics' military business was badly wounded
when the Cold War ended, and the management was drastically restructuring GD for its new, smaller book of businesses. Several things then
happened in the world, including a civil war in Eastern Europe and a
company-sponsored Dutch auction to buy back shares. GD's stock shot
from Buffett's $11 purchase price to $43.50 and he later sold his shares
at a substantial profit. The same year, Berkshire bought 82 percent of
Central States Indemnity, a credit insurance company.

In 1993, Berkshire got FTC permission to raise its existing stake in
Salomon Bros. to 25 percent, and the same year Berkshire expanded its
shoe holdings by purchasing Dexter Shoe in a stock swap. In 1995, Berkshire added to its home furnishings and jewelry store business with the
purchase of R.C. Willey Home Furnishings and Helzberg's Diamond
Shops.

About this time Buffett and Munger began to draw fire from critics,
the Wall Street Journal especially, for getting better deals on their investments than other investors would. The terms of the deals were particularly attractive in cases such as Salomon and USAir, where the investment
was not acquired on the open market. In these situations, Berkshire was
summoned by management as a white knight, either to save the company
from a hostile takeover or to provide a desperately needed cash infusion.
The deal was negotiated, often taking the form of preferred stock that
had an interest rate component and a feature that allowed conversion to
common stock at a specified price.

Munger defended such arrangements, saying that it is appropriate
that Berkshire get terms not available to others, because Berkshire
"brings more to the party than just our money." Munger said Buffett
provides advice and expertise, in addition to "patient" capital that allows management to pursue long-term strategies. And, pointed out
Munger, other shareholders also benefit when the stock in these companies rise.3

This acquisition list includes only some of Berkshire's purchases during the early 1990s, but they demonstrate a pattern. Berkshire was sticking to the admittedly broad range of industries Buffett and Munger knew
best, but with a particular emphasis on the insurance field.

Perhaps even more important, during the last decade of the century,
Munger and Buffett were able to pursue their preferred strategy of swallowing companies whole whenever possible. When Berkshire owns a company entirely, the two are free to allocate the company's profits as they see
fit. The structure of Berkshire's holdings made a dramatic transition. At the
beginning of 1996, Berkshire's stock portfolio accounted for 76 percent of
its $29.9 billion in assets. By the end of the first quarter of 1999, the stocks
represented only 32 percent of assets, which by then had reached $124 billion. During those three years, Berkshire spent $27.3 billion to buy seven
companies.4 At the 2000 annual meeting, Munger and Buffett explained
that by owning companies in their entirety, they could minimize the impact of a whimsical stock market or Berkshire's share price.

Berkshire's approximately $36.6 million holdings in cash and equivalents and its AAA credit rating gave Munger and Buffett enormous buying
power. PaineWebber insurance analysts Alice Schroeder and Gregory
Lapin point out that Berkshire has become the "buyer of first resort" for
business owners who want to continue to operate their companies, while
at the same time freeing themselves from raising and allocating capital.
The sellers also include privately or closely-held corporations where the
major investors want the option of cashing out all or part of their equity
at will. This is made possible when the owners swap their ownership for
Berkshire shares with limited tax consequences, then later sell Berkshire
stock when it meets their needs.

Berkshire prefers to pay cash, but when necessary, will do a stock
swap. Many families with a large stake in a company insist on a tax-free
transfer, lest they lose a large portion of their wealth to the Internal Revenue Service.