B000U5KFIC EBOK (15 page)

"He shamed me into demonstrating the wisdom of my own advice,"
chuckled Munger.'

This happened not long after the own-your-own concept of apartment occupancy started to become popular in California.

"Charlie and I went in together," said Booth. "We each owned half.
We bought the other half, adjacent to Caltech. It's still there."

When Munger and Booth joined forces in real estate development
and construction, it was a totally new experience for them, but Munger
fell back on principles and skills he'd learned in other businesses.

The units across from Caltech are more than 35 years old, and have
become so integrated into the neighboring landscape that they fade into
the background. Yet, in a part of the country where housing sometimes
seems disposable, the projects have endured and still hold their own in a
respectable neighborhood.

"We gave our occupants more land and a better size and it turned out
people really liked it. Moreover we had a good location," said Munger. "It
worked out very well."

"It was slow, there was a recession we had to wait out," agreed
Booth. But in the end there was a "very substantive profit - 400 percent.
We put in $100,000, got back $500,000."

When the Caltech units, completed in 1967, were sold, Charlie and
Otis then went to work on a site in Pasadena on Orange Grove Avenue, a
broad street where apartments now encroached on 1900-era mansions.
With this project, they applied the lessons they learned on the Caltech
units and made more money faster.

Charlie and Otis noticed that the ground-floor apartments in the first
project sold out quickly, but the upstairs units seemed to sell molasses
slow. They decided to make the next project one-story, with a price that
reflected a lower density of land use. Even with a higher price tag, the single-level condos sold quickly. Munger stuck with the single-level floor
plan on a third, fourth, and fifth project, and again, despite boom-andbust real estate markets, the units were profitable.

Munger continued to practice law and was involved in other activities while he worked on the real estate ventures. For years he took no
money out, rather he invested in one project after another. Munger said
that throughout the process he was learning from Booth, and Booth said
he too learned much, especially about Munger. He came to understand
Charlie's somewhat taciturn nature.

"Charlie isn't secretive," said Booth, "but simply very compartmentalized in his communication. He follows the `need-to-know' rule."

Charlie's stepson Hal Borthwick pointed out that today lawyers seldom get involved in deals with their clients because their firms fear losses
from malpractice claims, but in the 1950s and 1960s, it was a common
occurrence.

"Relationships were more genteel," he said. "It was a different era."

With so many projects underway, Munger's free time was limited.
"The kids would spend the day with dad at the construction site. We liked
to pick up the metal plugs from the electrical boxes, like little coins," recalled Charles, Jr.

After Booth and Munger had completed their two projects, Charlie
became involved in a third deal in which Booth did not participate because he thought the conditions of the land ownership might cause problems. Charlie saw the risks, but decided he could make it work.

"I had a client who came to me after I used to beat him at the poker
table. He had shopping centers in Alhambra. Across the street, he had
ground leases on surplus property owned by the city of Pasadena," explained Munger. "He wanted to protect his shopping center from more
retail influx. He hired me to work on his legal problems, but I didn't like
the way he was doing it. I said `I quit' as his attorney. He turned the tables
and said `put on paper what you would do.' I said, `if you put up the
ground lease, I'll do all the development work, financing, etc. and give
you half the profit.'"

Rather than share in the profits, the shopping center owner preferred to have cash up front, which turned out to be a mistake. Half the
profits would have been a much better deal.

In Alhambra, Charlie and his partners built 442 one-story own-yourown apartments on two 11-acre sites. This was the lowest priced, lowestend of all the Munger projects. Each unit sold for around $20,000. Again,
the apartments went fast. By then, Munger felt he knew what buyers were
looking for. He and the builders did not cut corners on design or construction details. Then when the project was finished, they made sure the
units were attractively landscaped.

"Lush landscaping," declared Charlie. "That's what sells. You spend
money on trees, and you get it back triple. Stinting on landscaping is
building malpractice."

Munger took on a new partner when he started Alhambra Village
Green, hiring Al Marshall as an unlikely sales manager. Charlie met
Marshall because Nancy and Martha Marshall played golf together at the
Los Angeles Country Club. Charlie and Al joined them for a husband and
wife tournament. California was still a relatively small state at the time,
and families who had been around for a while often found they were connected in some way. As it turned out, Marshall, a petroleum engineer, had
been a classmate of Nancy's first husband at Stanford.

Charlie and Al were introduced at the first tee. On the second hole,
Charlie asked, "What do you do?" Marshall had worked for Shell Oil and
some small independent oil companies. The oil business was in a rocky period, and Marshall didn't want to make too much of the fact that he was
unemployed. Instead he told Charlie about some oil rights he was bidding
for. On the third hole, Charlie asked how Marshall was going about
the bidding. When Marshall told him, Charlie replied, "You're doing it
all wrong."

"I said okay, if you're so smart, why don't you do the legal and financing work and I'll do the rest," said Marshall. Munger structured the
deal in an ABC trust, which was a type of tax shelter that was legally correct at the time, but was so much abused that it has since been outlawed.
But Marshall said that their ABC trust was properly done and has held
together.

"I'm still getting two to three thousand dollars a month from that. We
only put up $1,000 each and we've each probably made a half a million
out of it."

The Marshalls still own their shares, but Munger gave his to his
children.

When the Alhambra project came along, Munger asked Marshall if he
was interested in putting up $15,000 and going into the project with him.
Marshall was still casting around for employment, and although the
money was a stretch for him, he agreed.

"The business he was in was going to hell under him, and he had five
children," said Munger. "I knew he was a great guy and he needed something else to do. I brought him in to do sales. I told him, `Build your own
department.' He'd never done it before, but he was naturally talented. He
liked what he did. It was screamingly successful."

Marshall often teased Munger that he would advertise the Alhambra
units as "Rancho Sewage," because the land had previously served as the
city of Pasadena's sewage treatment plant.

Booth had opted out because the property was not owned, but rather
came with a 49-year-lease from the city. Ordinarily lenders wouldn't issue
loans for developments with less than a 50-year-lease, but that did not
deter Munger. He knew that a local savings and loan, State Mutual, had
recently raked in $60 million by increasing its passbook rate by one-half
of 1 percent. The lender was racing to get the money out and earning interest in the form of loans. When Charlie and Al met with the loan officer
to look at the property, Al said the lender all but asked if they wanted an
even bigger loan than they had applied for.

The way Munger handled the situation convinced Marshall that Charlie had the ability to think through a future event and come to a conclusion different from what others assumed it would be, "and I've hardly
ever seen him wrong."

Charlie saw things this way: "... just out of our respective graduate
schools, my friend Warren Buffett and I entered the business world to find
huge, predictable patterns of extreme irrationality. These irrationalities
were obviously important to what we wanted to do, but our professors
had never mentioned them. [Understanding the problem of irrationalities]
was not easy ... I came to [study] the psychology of human misjudgment
almost against my will: I rejected it until I realized that my attitude was
costing me a lot of money and reduced my ability to help everything
I loved."i

Munger's originality in dealing with business problems was comforting to Marshall.

"One of the good things about working with Charlie," said Marshall,
"was that there was no doubt about who should be boss."

When Marshall agreed to run the sales and marketing operation of
Alhambra Village Green, he warned Charlie that he didn't know much
about sales. Marshall said he didn't ever want to tell prospective buyers
something that wasn't true. When customers inquired about the ground
lease, and what might happen after the 49-year-expiration date, Marshall
told them that he didn't know what would happen. It would be up to the
homeowners and the city to work something out. About two-thirds of
the potential customers hacked away at that point, but the units sold out
quickly, despite the fact that Los Angeles was going through one of the
worst real estate recessions that it had ever experienced.

Part of the attraction was the one-story units, but another advantage
was a location just 20 minutes from downtown. In time, the city changed
its policy and sold the underlying land to the homeowners' association.

Although Munger's venture into real estate came with its own set of
problems, they were relatively mild. There were never any lawsuits or
follow-on problems from the own-your-own apartments. Once they were
sold, and later when the financing was repaid, the projects were done
and behind them.

Furthermore, in the process of development, Charlie discovered that
he had the soul of an architect. He had vision and a passion that translated
itself into durable and liveable spaces. Munger enjoyed development and
construction, but it worried him that a successful builder was dependent
on debt financing on an ever-increasing scale. Charlie and Al Marshall developed one more project, but decided it would be their last.

On the final project, the Huntington Granada, Munger put up a comparatively small number of units on Huntington Drive. The land actually
was in Alhambra, but it was so close to upscale San Marino that it seemed
to be part of the more desirable address. Again, the project sold off in a flash. The hard work at last paid off. Munger walked away from the real
estate phase of his career with enough money to finance his foray into the
world of independent investing.

"When it was over, I had $1.4 million as the result of my real estate
involvement," said Munger. That was a lot of money at that time. Some
was in seconds (trust deeds), and so forth, from people who bought apartments. Later the seconds were paid. It was a substantial backlog of economic security. I did a total of five projects, then stopped. I didn't like
constantly borrowing more money. Also, it was an activity with many details, each crucial, difficult to handle as a full-time activity and extremely
difficult as a part-time activity."

CHARLIE WASN'T TOTALLY NEW TO CONSTRUCTION when he took on the projects. He had built his own home on Edgewood Drive shortly after he arrived in Los Angeles, then in 1960 he acquired a mansion on two large
lots in Hancock Park. He demolished the large house and sold one lot at a
substantial profit. On the remaining lot he built a house for his new family. The Mungers still live in the home, albeit after several extensive remodeling projects.

Emilie Munger, the youngest of the daughters, was born when the
Mungers lived on Roscomare Road in the house Nancy brought to the marriage. The family moved to June Street in Hancock Park on her first birthday. The new home made life much easier for the Mongers, since Charlie
would no longer have to drive across Los Angeles in rush hour traffic to
and from his law office.

"We rode our bikes to school and rode around the neighborhood,"
said Emilie. "Now it's in the middle of the city. Then it was like a little
town. I had eight girlfriends in the houses around us. I was lucky. There
were always kids my age. We had a happy, stable family, good friends."

Emilie attended the Third Street school near her home until the sixth
grade. She then went to the private Marlborough School for grades seven
through twelve. "Where my mom went. I loved that school. I still have a
group of girlfriends who get together all the time. Though occasionally a
movie star's child would attend, Marlborough wasn't really a Hollywood
school. It is more traditional. I had a great biology teacher. I loved that
class."

Charlie and Nancy Munger still consider the June Street house their
primary residence.

"It's pretty amazing to be 40 and to go back and have the same house.
My friends are still there-most of my friends. Many families would have fallen apart, or at least moved. It is a gift to kids to be in the same neighborhood," said Emilie Munger.

Coincidentally, Buffett too has stayed in the relatively modest house
in Omaha where his children were raised, and the Buffett children express similar feelings to those articulated by Emilie.

To SEE SOME TANGIBLE RESULT FROM his work pleases Munger, and he still
likes to be involved in construction projects. Munger often tells people, "I
don't believe in doing everything with lily white hands, nor would I care
to be like [early financier] Russell Sage, remembered only for skill in buying and selling little pieces of paper."

Remodeling, a room addition or a new dock, is almost always underway at Star Island. When David Borthwick and his wife, who like her
stepsister-in-law is named Molly, bought a country home in England,
they consulted extensively with Charlie before making an offer on the
property. Munger financed the remodeling of Molly Munger's home in
Pasadena from a trust fund set up for her, and he grumbles that Wendy
won't agree to do the same with her big old house in South Pasadena. She
likes her home the way it is and thinks it is suitable for the neighborhood.