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Charlie does not consider himself more daring than Buffett where investments are concerned. "Warren is very adventurous when it relates to
his lifelong interest. When it has to do with Berkshire, he'll try new
things. But when it comes to trying the leg of lamb versus the prime rib,
he's not at all interested."

Molly Munger said during the time he was building his business, her
father became acutely aware of the impact of taxes when capital gains
were compared to ordinary income. "He made a lot of money in this or
that deal and didn't have to pay as much in taxes. He said, `If I'm a lawyer I have to pay more. The capital gains tax is less, and in my case it doesn't
seem fair.'"

DURING THOSE YEARS AT WHEELER, Munger, Charlie and Warren kept up the
telephone conversations. Although they didn't always buy the exact same
securities in the same quantities, their portfolios overlapped in part. They
shared investment in two chains of retail stores owned through a
company named Diversified Retailing. Together with Rick Guerin, they
bought working control of Blue Chip Stamps. Buffett was the largest
shareholder and Munger the next largest in the California retail trading
stamp company.

"We were of a `raiders' generation," observed Guerin. "That of Sol
Steinberg, Harold Simmons, and so forth. But we are not like them." The
group never made a tender offer without management's consent and
never engaged in a proxy fight.

By the time he quit practicing law in 1965, "1 had more confidence
that Wheeler, Munger would work out, and I had much greater wealth,"
said Munger.

"I was not particularly surprised when he gave up law," said Munger's
sister Carol. "That's what happens ... when someone finds something
that is his real love."

Munger was getting close to his dream of financial independence observed his stepson David Borthwick. "He needed to work for himself.
Even with friendly partners in a law firm, you're still in service of clients
who call on your time to fit their schedules."

In his book The Big Test, Nicholas Lemann said that Daniel DeFoe,
not Benjamin Franklin, was behind Munger's lust to be his own man.
When Charlie's grandparents read and reread Robinson Crusoe to him,
they planted a notion in his head. "He wanted to be rich so he could be
completely independent, like Crusoe on his island, and not have to do
what anybody else said."3

IN AN ESSENTIAL WAY, HOWEVER, Charlie Munger remained in the service of
clients-those clients being the other investors in Wheeler, Munger. The
fact that many of the investors were family members, former colleagues,
or friends did not ease the pressure. As fate would have it, during
Wheeler, Munger's existence, while the stock market had ups and downs,
the overall direction was sideways. By the late 1960s, Buffett was talking
about getting out and eventually, at the end of 1969, did liquidate his partnership. Munger and Guerin stayed in longer, especially with a large
investment that was made late in 1972, a registered investment company
named Fund of Letters.

Bob Denham had arrived at Munger, Tolles, and part of his early work
for Munger was the acquisition of the Fund of Letters. The stock market in
the late part of the 1960s-the go-go years-had been torrid. A popular
investment at the time was "letter stock." a security sold without SEC registration and therefore not saleable for an extended period of time in ordinary stock market transactions. Under the securities laws, it was
necessary to put it rider on the stock saying that the investor was not allowed to sell until an SF3C registration or some other key event had occurred.

The Fund of Letters was a venture capital fund that its founders had
formed in a highly touted initial public offering allowing liberal sales'
commissions to stockbrokers. When it was first organized, the fund raised
$60 million, but when underwriting fees and other costs were subtracted,
only $54 million remained for investment purposes.

"It was as if," said Charlie "the customers had asked their brokers
'What shall I do with my money?' and the brokers had responded: 'First,
give 10 percent of it to me.'"

Because the Fund was it closed-end registered investment company,
no new shares were sold once it was established. The Fund grew only if
its money was invested wisely and its asset value increased. As typically is
the case with it closed-end fund, the Fund of Letters soon traded well
below its net asset value. Moreover, when the market went into a prolonged decline, the Fund tanked with it.

After Guerin and Munger bought control of the troubled Fund of Letters, they changed almost everything about it. They renamed it the New
America Fund, reorganized the board, and redirected the investment style
to a value approach. They quickly liquidated assets chosen by former
managers. Guerin was the chairman, but Munger's investment philosophy
was written all over the New America Fund and, as might be expected,
the philosophy ran against the pack. In 1979, Business Week published an
article entitled "Shareholder Heaven at New America Fund."

"New America eschews the common industry practice of paying fat
fees to outside investment advisors." wrote Business Week. "Instead, the
work is done internally under Guerin's supervision. What's more, the latest fiscal year, director's fees were only $25,000, and remuneration for all
officers and directors came only to $54,950.

New America Fund exhibited "a propensity for publishing and broadcasting investments," continued the article. "In recent years its record has been outstanding: The net asset value per share increased from $9.28 in
October 1974, to $29.28 on September 30, 1979. Like most closed-end
funds, New America sells at a discount to net asset value. On November
16, shares closed at $18.25, a 25.9 percent discount from net asset value
of $24.64."s

Among New America Fund's holdings were Capital Cities Communications and 100 percent of the Daily Journal Corporation, publisher of a
Los Angeles legal newspaper. Regardless of how wonderful New America
Fund looked to Business Week in 1979, its purchase by Wheeler, Munger
caused many sleepless nights.

In its first eight years, Wheeler, Munger had a stunning performance,
although, said Munger, "We never did get a large amount of money under
management. I never did manage a lot of other people's money on a compensated basis."

When the years 1962 to 1969 are measured together, Wheeler,
Munger's average annual return, before the general partners' override, was
37.1 percent per annum which beat performance of the 1)ow Jones Average
by a large margin. Then, in the three-year period ending with 1972,
Wheeler, Munger's return dropped to only 13.9 percent, barely topping the
Dow's 12.2 percent.

Discouraged by market conditions, Buffett liquidated his partnership at
the end of 1969. Within a few years, Munger probably wished he'd followed
suit. But Munger did not follow Buffett's example, and 1973 and 1974 were
a nightmare. Wheeler, Munger was off 31.9 percent in 1973 (versus a negative 13.1 percent for the Dow Jones Industrial Average) and down 31.5 percent in 1974 (compared to a minus 23.1 percent for the Dow).

"We got drubbed by the 1973 to 1974 crash, not in terms of true underlying value, but by quoted market value, as our publicly traded securities had to be marked clown to below half of what they were really
worth," said Munger. It was it tough stretch-1973 to 1974 was a very
unpleasant stretch."

Others were also finding 1973 to 1974 unpleasant. For example,
Berkshire Hathaway, still mostly a textile operation, saw its share price
fall from $80 in December 1972 to $40 in December 1974. Gloom and
doom permeated the news of Wall Street. Headlines proclaimed "The
Death of Equities."

The main cause of Wheeler, Munger's poor relative performance was
its ownership of big blocks of common stock in New America Fund and
Blue Chip Stamps. They had purchased New America's predecessor, the
Fund of Letters, during a time of stock market exuberance at the end of
1972, paying $9.22 per share, substantially under liquidation value, for their controlling block. And even after the great stock market decline, as
Business Week noted in October 1974, Fund shares had an asset value of
$9.28, a little higher than Munger and Guerin had paid in 1972. So why
Munger's agony? After all, Munger and Guerin had made a big investment
at an unpropitious time but had dodged the natural consequences, mostly
because of the "margin of safety" of the purchase as required by the principles of Benjamin Graham. Moreover, the Fund possessed a tax loss
carryforward that would enable it to make large gains for many future
years with no income taxes clue.

Munger's distress was caused by the limited partnership structure,
the fact that some borrowed money had been used in buying Fund stock,
increasing declines in partnership net worth, and the fact that by 1974,
Fund shares had a market price very much lower, indeed over 50 percent
lower, than the asset value per share that could have been paid out in a
Fund liquidation. Like it or not, Munger had to report results to his limited partners at the end of 1974 valuing the partnership's large block of
Fund stock at only $3.75 per share.

In addition, Wheeler, Munger was in a similar position with respect
to its substantial block of Blue (;hip Stamps. This stock had been purchased at an average price of $7.50 per share, had a market price of
$15.37 per share at the end of 1972, yet a market price of only $5.25 per
share at the end of 1974. Munger believed that Blue Chip Stamps stock
was virtually certain, not too far ahead and regardless of what the stock
market (lid, or whether any more trading stamps were sold," to reach a
value much higher than $15.37 per share. Yet at the end of 1974, Munger
faced a stubborn fact: the market price of Blue Chip Stamps stock was
then only $5.25, intrinsic value be damned.

As Wheeler, Munger's investment numbers went to hell, Charlie realized that sonic partners would suffer hard-to-hear distress. After all, an
investment of $ 1,000 on January 1, 1973, would have shrunk to $467 by
January 1, 1975, if the partner had never taken any money out during the
period. In contrast, a similar $1,000 investment that performed in line
with the Dow Jones Industrial Average over the same period would have
shrunk much less, leaving $668. Moreover, following precedents in the
Graham and Buffett partnerships, all Wheeler, Munger partners drew
cash from their partnership accounts at one half a percent per month
on start-of-the-year value. Therefore, after regular monthly distributions
were deducted, limited partners' accounts in 1973 to 1974 went down in
value even more than 53 percent.

At the end of 1974, after the big stock market crunch, the net asset
value of the entire Wheeler, Munger partnership was only $7 million. Of this, $4.3 million or 61 percent, was in 505,060 shares of Blue Chip
Stamps, selling at $5.25 per share, plus 427,630 shares of New America
Fund selling at $3.75 per share. Measured from this nadir, what was the
subsequent price history of these two positions?

New America Fund stock did fine. By the late 1980s, each share that
had traded at a $3.75 market value at the low point had turned into about
$100 in cash and securities. The Blue Chip Stamps stock did much better,
measured from the same low point. Each share of Blue Chip Stamps, then
valued at $5.25 became 7.7 percent of one common share of Berkshire
Hathaway. With Berkshire common stock selling in March 2000 at about
$48,000 per share, this means a former Blue Chip Stamps share was then
worth 7.7 percent of $48,000 or about $3,700 per share. Each dollar of
1974 market value thus became about $700 in year 2000 market value.
This represents an increase of about 28.5 percent per annum, compounded, for 26 years, with no income taxes due for any shareholder who
held on to the stock. Furthermore, because Blue Chip was held within a
corporate structure, there was no fee from Munger and Buffett for management services.

"Over the course of Wheeler, Munger's first 13 years of life, ending
with 1974, an investment mimicking performance of the Dow Jones Industrial Average, after counting all dividends received, would have produced a nominal return just above zero," explained Munger. After the
ravages of taxes, inflation, and withdrawals of funds for use, the real return would have been embarrassingly negative. Wheeler, Munger, during
its entire lifetime, did much better. Limited partners who stayed the
course after 1973 to 1974 fared exceptionally well and 95 percent of the
partners did stay the course. For instance, Otis Booth stood pat after 1973
to 1974, and stood pat again with securities distributed in Wheeler,
Munger's liquidation at the end of 1975."

There was one major, galling exception. A new limited partner had
put in $350,000 just before the 1973 to 1974 crash and panicked out at
the bottom. For this partner more than half the funds vanished. Charlie
could not talk the partner out of the decision to withdraw. "A lawyer is
supposed to be an expert in persuasion, and I flunked a persuasion test
that I think I should have passed," said Munger. "There was something in
the mix of personalities, including a low pain threshold and a strong will
in the limited partner, that somehow made me fail."

When dealing only with his own money, investment losses never
bothered Munger much. To him it was like a losing night in a regular
poker game where you knew you were one of the best players-you'd
make up the difference later. But he now found that reported, temporary quotational losses in the Wheeler, Munger limited partnership accounts
gave him tremendous pain. And so, by the end of 1974, he had resolved,
like Buffett, to stop managing money for others in a limited partnership
format. He would liquidate Wheeler, Munger after its asset value made a
substantial recovery. And he would liquidate soon enough so that he
would not take any general partner's override when the main investment
positions were distributed.