B000U5KFIC EBOK (34 page)

WHEN CHARLIE MUNGER AND WARREN BUFFETT MET, they were young,
Munger in his mid-30s and Buffett in his late-20s and as Nancy Munger
noted, they were men in a hurry. After they started working in tandem,
success came much faster to both. Buffett handled the East Coast clients
he inherited when Ben Graham and Jerome Newman closed their partnership and continued to recruit new investors, mostly from Nebraska. At
the same time, Munger started steering California investors in Buffett's
direction.

"Charlie recognized Warren's genius before anybody. If I had totally
listened to Charlie about Warren I'd be a lot richer now," said Munger's
former real estate and investment partner Al Marshall.

One person who did "totally" listen to Munger was Otis Booth, the
man who came to his law office seeking help in buying a printing plant
and ended up Munger's partner in two lucrative condominium construction deals. In 1963, Munger suggested to Booth that he go see Buffett.

"After I'd been in Charlie's partnership a year or two, he told me
about Warren and showed me the record from 1957 on," recalled Booth.
"In 1963 or 1964, I went back to Omaha, spent a night there and spoke to
him about investments."

The two men sat up all night talking. "I wrote a check shortly after
that. The partnership was open once a year. I think I wrote half that year
and half the next-$1 million. I wrote $500,000 on the first check, but I had earnings on that, so the next year it was less than $500,000. I also had
a million in Charlie's partnership," Booth said.

Buffett's partnership only lasted about five more years. In the late
1950s and early 1960s, Buffett began accumulating shares of a struggling
old New England manufacturer of textiles, handkerchiefs, and suit linings. Contrary to popular belief, Berkshire Hathaway never did make
shirts. Buffett bought his first shares from Tweedy, Browne, a New York
investment firm with links to Ben Graham and a reputation for its strict
value approach. Tweedy, Browne's offices near Grand Central Station,
said Munger, is a place Buffett "used to hang out when he was young and
poor."'

Buffett disbanded his partnership in 1969, explaining that the stock
market had become overblown and it was too difficult to find bargain
stocks. Shareholders received several recommendations as to what to do
with their money. Buffett suggested that investors might want to participate in his friend William Ruane's well-respected Sequoia Fund (now
closed to new investment), or they could do what Buffett was doing with
his own money.

By the time he disbanded the partnership, Buffett had accumulated
enough shares of Berkshire Hathaway to take control of the company, and
he would be transferring the fund's prized assets and most of his personal
money in Berkshire's corporate structure. It would be a leap of faith for
investors, since it wasn't clear what Buffett intended to do with the company. For 20 years he tried to run it as a manufacturing plant while making other investments simultaneously. But Munger described Berkshire as
"a small, doomed New England textile enterprise" and he was correct.'

Calling the purchase of Berkshire one of his worst financial mistakes, Buffett gave up trying to make it profitable as a manufacturer. In
1985, he liquidated the business and concentrated entirely on buying and
holding other companies. Even the loyal early investors were surprised at
how well the reconfigured Berkshire would do.

Otis Booth, Al Marshall, and Rick Guerin are just three of the people, most of them from the West Coast, whom Charlie brought into the
Buffett family of investors. Booth lives today in a gated Tudor home in
the Bel Air section of Los Angeles next door to Disney Chairman Michael
Eisner. Booth's net worth is estimated at $1.4 billion. Guerin and his
family live in a large Spanish colonial-style estate in Beverly Hills, with a
sweeping view of mountains, tree tops, and Los Angeles. Marshall and
his wife Martha are spending their retirement years in a golf course
home in Palm Springs.

Between 1976 and 1986, a number of events transpired. Both
Munger and Buffett had closed their partnerships, Blue Chip and its subsidiaries were merged into Berkshire, and life became simpler. Asa holding company for insurance and other subsidiaries, Berkshire would not be
subject to the same regulatory pressures to diversify as the typical mutual
fund or pension fund. The company owned several cash-laden companies
outright and its stock portfolio was heavily concentrated in it small group
of select companies. Munger and Buffett had laid their groundwork and
Berkshire Hathaway as we know it today was taking shape.

Even with simplification, so much was happening at once and so
many deals overlapped, the pace of acquisitions was dizzying. Within two
years after Munger and Buffett began consolidating, Berkshire's major
stock holdings included American Broadcasting Companies Inc. (ABC),
Government Employees Insurance Company (GEICO) common and preferred, and SAFECO Corporation. They soon bought outright the Nebraska
Furniture Mart and Omaha's premier jewelry emporium, Borsheim's.
There were stakes in the advertising agencies Interpublic and Ogilvy &
Mather, and in the Boston Globe, all three of which were later sold.

Buffett had owned GEICO shares when he was in college, but later
sold them. When he bought into the company again in 1976, GEICO had
been mismanaged, one of its top executives had committed suicide, and
the company was near bankruptcy. Despite Buffett's wish not to buy into
companies that needed to be rescued, he saw fundamental advantages to
GEICO's business and believed that with discipline and direction, it could
survive and prosper. A similar decision had been made in 1963 with
American Express, and that worked out well.

Between 1976 and 1981, Berkshire invested $45 million in GEICO,
which by 1995 was worth more than $1.9 billion. Eventually Berkshire
bought the whole company. Munger said there was no particular strategy
involved, except to wait and watch for opportunities.

Our rule is pure opportunism," said Charlie. "We do not have a master plan. If there is a master plan somewhere in Berkshire, they're hiding
it from me. Not only do we not have a master plan, we don't have a master
planner."