B000U5KFIC EBOK (35 page)

In 1985, Munger and Buffett snatched Scott & Fetzer from the grasp
of hostile suitor Ivan Boesky for $315 million. Scott & Fetzer is the parent
of World Book Encyclopedia and Kirby vacuum cleaners.

In the second half of 1989, Berkshire cut three big deals that signaled
once and for all that Berkshire was a sophisticated contender in the world
of finance. A $1.3 billion investment was made in Gillette, USAir, and Champion International. Buffett and Munger negotiated together with
Gillette Chairman Coleman Mockler. In July 1989, Berkshire invested
$600 million in Gillette's preferred stock, all of which later was converted into common shares. Gillette has the sort of folksy history that appeals to both Munger and Buffett. It was founded in 1901 as the American
Safety Razor Co. by King C. Gillette. The company's first office was located over a fish market on the Boston waterfront. The company changed
its name to Gillette Safety Razor Co. in 1904. Gillette dominates the
worldwide market for razors with a 40 percent market share. In addition
to the razor blade business, Gillette owns Liquid Paper, Paper Mate and
Waterman pens, and Oral-B toothbrushes. In 1996 Gillette acquire Duracell batteries for $7.8 billion, the largest purchase Gillette ever made.

Gillette's earnings grew at an impressive 15.9 percent between
1985, but in the late 1990s it invested huge amounts of research and development funds in a new razor that sold well, but not quite as well as
hoped. Its earnings eventually slumped and Gillette's subsequent poor
stock performance was one contributor to a decline in Berkshire Hathaway's share price.

CONTRARY To WHAT SOME ANALYSTS CLAIM, Berkshire Hathaway is not a
closed-end fund. "No, it never was," said Munger. "We always preferred
operating companies to marketable securities. We used float to buy other
stocks. Berkshire has a lot of marketable securities-and big operating
companies. We like that system. We generate all this cash. We started out
that way, buying companies that throw off cash. Why should we change?"

Buffett had learned the basics of insurance when he was in graduate
school studying under Graham, who at the time was chairman of GEICO.
Buffett has used that expertise at Berkshire. Way back when Munger and
Buffett were acquiring Blue Chip Stamps shares, Berkshire made its first
substantial foray into insurance, purchasing National Indemnity Company in Omaha for approximately $8.6 million. Many of Berkshire's very
large investments are made through National Indemnity.

During this activity, Munger kept agitating to buy better quality companies, ones with strong earnings potential for the long-term and ones he
believed would be less troublesome to own.

"There are huge advantages for an individual to get into a position
where you make a few great investments and just sit back," said Munger.
"You're paying less to brokers. You're listening to less nonsense.... If it
works, the governmental tax system gives you an extra one, two, or three
percentage points per annum with compound effects."

Warren Buffett, Charlie and Nancy Munger arrive at a Buffett Group gathering.

Starting with See's Candy, Munger nudged Buffett in the direction of
paying up for quality. "Charlie was very instrumental in pushing Warren
toward Coca Cola type investments-a franchise that will have carrying
value for generations," observed Ron Olson. "That is consistent with how
Charlie conducts his own life. He's not looking for a quick victory, but
to long-term success."

In 1988, Berkshire started acquiring Coca Cola stock, and within
about six months purchased 7 percent of the company. At an average
price of $5.46 a share, it was a total investment of $1.02 billion. Buffett, an addict of caffeinated soft drinks, felt confident that Coca Cola was a
quality company with superior long-term prospects. In fact, Buffett himself gave up Pepsi Cola in favor of Coke.-

"Many times, Charlie elevates Warren's thinking-such as going for a
stronger franchise. They can converse on any level," said Buffalo News
publisher Stan Lipsey. "When you have people that are thinking and living at that level, you not only get the intellectual exchange, you get ideas
that are complementary."

Apparently Munger hasn't always agreed with Buffett when it came
to personal investing, which at times worked to his advantage. When
Buffett sold Berkshire's Capital Cities Communications stock in 1978 to
1980, he later regretted the sale. Munger, however, kept some personal
holdings of Cap Cities, which performed exceptionally well'

Despite their blazing success, Buffett and Munger tried numerous
ideas that didn't pan out. Before they bought their Washington Post
shares, Buffett and Munger called on Katharine Graham and asked her to
participate in purchasing the Neu' Yorker magazine. Graham didn't even
know who these two guys from west of the Potomac River were, and she
didn't think twice before turning down their proposal.

"People used to bring projects in all the time. I just thought about
whether we wanted to be partners in the New Yorker. At the time I didn't.
I thought it needed a new editor and I didn't know how to choose one. I
sent them to see Fritz Beebe," said Graham.

The New Yorker was a lost opportunity, but probably not a huge loss.
Failures and misfires were part of the record during this period. "Some
major mistakes have been made during the decade, both in products and
personnel," Buffett wrote in Berkshire's 1977 annual report. Yet, he
added, "It's comforting to be in a business where some mistakes can
be made and yet quite satisfactory overall performance can be achieved.
In a sense, this is the opposite of our textile business where even very
good management probably can average only modest results. One of the
lessons your management has learned-and unfortunately, sometimes relearned-is the importance of being in businesses where tailwinds prevail rather than headwinds."9

Throughout the 1980s and straight through to the end of the century,
Buffett and Munger showed a knack for getting a good deal. When they
buy a company, the management usually stays with it and the acquisition
requires very little effort, except for collecting profits and allocating the
capital to its highest and best use.

"Our chief contribution to the businesses we acquire," said Munger,
"is what we don't do." What they don't do is interfere with effective managers, especially those with certain characteristics.")

"There's integrity, intelligence, experience, and dedication," said
Charlie. "That's what human enterprises need to run well. And we've been
very lucky in getting this marvelous group of associates to work with all
these years. It would be hard to do better, I think, than we've done."

Writing for an insurance publication, John Nauss, a Chartered Property and Casualty Underwriter, observed: "Warren and Charlie commented that they simply get out of the way and let their managers focus
on running their businesses without interference or concern about other
factors. But they do more. They create, perhaps, the best operating environment for businesses that exist anywhere. This environment includes
wise evaluations without extensive meetings and documents (we know
the business) as well as capital access, focused compensation, and freedom to do one's best." These methods, said Nauss, deserve greater attention from the business community."

BOTH CHARLIE AND WARREN SAY they set the example for Berkshire companies by keeping their own overhead costs at a minimum. Berkshires'
headquarters are simple and the staff is small. The company's overhead
ratio is !~s,,th that of many mutual funds.

"I don't know of anybody our size who has lower overhead than we
do," Munger said. "And we like it that way. Once a company starts getting
fancy," he said, "it's difficult to stop."

"In fact, Warren once considered buying a building on a distressed
basis for about a quarter of what it would have cost to duplicate. And
tempting as it was, he decided that it would give everybody bad ideas to
have surroundings so opulent. So we continue to run our insurance operations from very modest quarters."12

At one time Berkshire was subpoenaed for its "staff papers" in connection with one of its acquisitions, but, said Munger, "There were no
papers. There was no staff.""

But, as Munger so often says, what's right for Berkshire isn't necessarily right for all companies. "We've decentralized power in our operating businesses to a point just short of total abdication.... Our model's
not right for everybody, but it's suited us and the kind of people who've
joined us. But we don't have criticism for others-such as General Electric-who operate with plans, compare performance against plans, and
all that sort of thing. That's just not our style." He added, "Berkshire's assets have been lovingly put together so as not to require continuing intelligence at headquarters."

Berkshire Hathaway is one of the best-performing stocks in the history of the market. Its shares have underperformed the S&P in only five of the past 34 years, and book value has never had a declining year. An investor who put $10,000 into Berkshire shares in 1965 would have been
worth $51 million on December 1, 1998, versus a worth of $132,990 if
the money had been invested in the S&P. In 1999, PaineWebber insurance
analyst Alice Schroeder estimated Berkshire's intrinsic value at $92,253
per share. Using a more conservative approach, Seth Klarman of the
Baupost Fund estimated Berkshire to be worth between $62,000 to
$73,000 per share. At that time, the shares had retreated from their historic high in the $90,000 range, to around $65,600, and the price declined
even lower before recovering.

Shareholders are understandably loyal to a company with such a
record. Some families have invested with Buffett for two, three, and four
generations. Not only did Dr. Ed Davis and his wife benefit from Berkshire Hathaway, so did the Davis children and their families. Willa and
Lee Seemann have been with Berkshire since 1957. "People say the stock
is so high-I say yea, and it's going higher. The way to make money is to
get a damn good stock and stick with it," insisted Seemann.

JusT AS THE COLLECTION OF Berkshire holdings built over time, so has the
crowd at the annual meeting. "I remember when the attendance at the
Berkshire annual meeting was not much of anything," said Stan Lipsey.
"Warren said `we'll have a board meeting (actually, just a lunch), and said
come on up,"' and that was about it.

Otis Booth attended the meeting in 1970, when by happenstance he
was returning from the East Coast and Buffett suggested he stop in
Omaha. "There were only six or eight people present, Fred Stanback,
Guerin, Munger, and a few others. We all went out to dinner later," Booth
recalled.

Around 1990, Berkshire, Buffett, and to some extent Munger, began
developing a noticeable reputation. "I heard Charlie say for the first time
he was getting worried about adulators-movie star, rock star-type adulators. That was more than 10 years ago, when we met at the museum," said
Lipsey. At that same meeting, Lipsey got more of a glimpse into Munger's
character. "I had rented a normal-sized car, then I noticed Charlie had
rented a smaller one."

The number of people attending Berkshire's annual meeting grew
from 250 in 1985 to more than 11,000 in 1999. Most of Omaha gears up
for the Berkshire weekend. Gorat's, Buffett's favorite steak house, ordered
an extra 3,000 pounds of tenderloins and T-hones to feed the 1,500 people who were expected to dine there.14

In the audience at the Berkshire Hathaway meeting are apt to be
some impressive, though barely noticeable, people. Among them-former
FCC chairman Newton Minnow; Microsoft founder Bill Gates, and sometimes his father Bill Sr.; Disney's Michael Eisner; Abigail (Dear Abby) Van
Buren, and Chicago billionaire Lester Crown.15

The rise in attendance isn't entirely unwelcome. Buffett enjoys seeing the shareholders and goes out of his way to put on a good show. The
Berkshire Hathaway business meeting only lasts five to ten minutes, but
the question-and-answer period can last up to six hours, with as many as
80 questions posed by shareholders. At the meeting, it is Munger's designated role to play stoic straight man to Buffett's one-liners. Nevertheless it
was clear that Munger's influence on Berkshire continued to be strong. In
1997, Berkshire's Los Angeles lawyer Ron Olson was named to the Berkshire board.

Buffett and Munger hold court, dispensing corporate wisdom-and
as Charlie likes to remind people-facing the world as it really is. A
shareholder once complained that there were no great franchises like
Coca Cola left, meaning that Berkshire's style would be cramped in the
future. Munger replied, "Why should it be easy to do something that, if
done well two or three times, will make your family rich for life?"'6

Munger, like Buffett, is a fan of Berkshire-owned products. He drinks
Coca Cola, though not as much of it as Buffett does. Unlike Buffett, who is
a teetotaler, Munger doesn't mind substituting his Coke with an occasional beer or glass of wine. At the 1994 annual meeting, Munger put in a
plug for World Book Encyclopedias: