B000U5KFIC EBOK (48 page)

In fact, Munger went so far as to suggest that investors could have 90
percent of their wealth in a single company, if it was the right company.
"Indeed, I hope the Mongers follow roughly this course. And I note that
the Woodruff Foundations have, so far, proven extremely wise to retain
an approximately 90 percent concentration in the founder's Coca Cola
stock. It would be interesting to calculate just how all American foundations would have fared if they had never sold a share of founder's stock.
Very many, I think, would now be much better off." 15

Although Munger asserted that the vast majority of professionally
managed money, after taking into account the impact of fees and transaction costs would be better off in index funds, he ended by throwing out
an alternate point of view:

Does that mean you should be in an index fund? Well, that depends on
whether or not you can invest money way better than average or you can
find someone who almost surely will invest money way better than average.
And those are the questions that make life interesting.

If everyone put their money in index funds, Munger conceded, the
prices of indexed stocks would be forced beyond intrinsic value, and the
process would become meaningless.

It was this disenchantment with the management of money, in part,
that led to Buffett and Munger's objection in the mid-1990s to the creation of mutual funds made up entirely of Berkshire Hathaway stock.
Companies that wanted to establish the funds said it was a way to give average investors access to an exceptional investment.

Five Sigma Investment partners L.P. of Bala Cynwyd, Pennsylvania,
had filed with the Securities and Exchange Commission to sell Berkshire
through a vehicle called the Affordable Access Trust. The trust would require an initial deposit as small as $300. Berkshire shares at the time were
trading for about $35,000 each. Another group, Nike Securities of Lisle,
Illinois, planned a similar unit trust. 16

"Frankly, what we are doing is to make Berkshire available to average
people," said Sam Katz, a principal at Five Sigma. "Just because someone
is not wealthy doesn't mean they don't have the aptitude or sophistication
for this business." 17

One broker involved in the deal declared, "Buffett and Munger turned
out to be control freaks."'s

Berkshire submitted a 24-page memorandum to the SEC in December
1995, saying that the securities sale would mislead investors. The memorandum, which was prepared at Munger, Tolles, also was distributed to
state regulators.

"I've been in one aspect or another of investment management for
what, 44 years or so, and trying not to disappoint anyone," said Buffett.
`And in the process of not disappointing anyone, one of the key factors
is having them have the proper expectations and being knowledgeable about what they're getting and what they're not getting. Neither
Mr. Munger nor I would function as effectively if we had tens of thousands of people who were in one way or another disappointed with us.
That's not Berkshire."'9

In addition to registering a complaint with the SEC and then coming
up with an alternative of their own, Munger sent a stinging letter to Five
Sigma:

Warren Buffett does not regard the current market price of Berkshire stock
as a price that makes new investments in Berkshire attractive. If he were
asked by a friend or family member whether he advised a new purchase of
Berkshire shares at the current price, Mr. Buffett would answer, No.20

To make the investment trusts less attractive, Berkshire took the
unusual step of creating a B-class share, which would represent onethirtieth the value of the original shares, which now would be called A
shares. The structure of the B shares, and the way in which they were presented, was unique. The deal was set up so that brokers could make very
little commission money, thus discouraging them from pushing the shares
onto their clients. Additionally, the underwriting syndicate for the shares
included two discounter brokers, Schwab and Fidelity. By including discounters, initial shares would be more readily available to all investors.

Critics claimed that Buffett and Munger created the B shares because
they could not tolerate losing control of Berkshire's shareholder policy.
"This is a small problem that Mr. Buffett approached in a big way," said
James K. Mulvey, an analyst with Dresdner Securities in New York.21

For starters Buffett and Munger planned to offer 100,000 B shares,
but said they would keep adding to the offering until the public demand was met. The number of shares in the public offering increased four
times, until ultimately 517,500 shares were sold at $1,110 per share, doubling Berkshire's shareholder base to 80,000 individuals. The offering
added $600 million to Berkshire's capital.

Nike Securities went forward with its trust, but the Berkshire trust
never became the phenomenon that the originators had hoped it would.

MICHAEL LEWIS, AMONG OTHERS, HAS accused Munger and Buffett of spouting high moral standards for the investment world, while not holding
their own investments to the same requirements. They particularly point
to the fact that Berkshire once invested in the stock of a company that
does not serve the public good-a tobacco seller.

"We have set ourselves up, to some extent, as a moral censor of our
own activities," Munger agreed, "but we have never had the attitude that
when we buy a little piece of a company in an insurance portfolio, that we
are a moral censor for the world.""

In April 1993, Berkshire took a sizable stake, approximately 5 percent, in UST, a leading maker of smokeless tobacco. The shares were trading at between $27 and $29 per share at the time. A 5 percent stake
would have been worth more than $300 million. UST makes Skoal and
Copenhagen, and also produces wine, including Chateau Ste. Michelle. At
the same time, Berkshire sold its holdings in RJR Nabisco, which is a combined food and tobacco company.

To some it is splitting hairs, but to Munger, there is a big difference in
buying stock in a corporation and owning the entire shebang. He follows
different rules for each.

"If we're buying stock in major companies that are out there,
(Buffett) doesn't make his judgment based on some moral overview of
their whole business. We do that in judging and controlling our own
behavior." 23

Munger said that though it once held tobacco company shares, Berkshire turned down a chance to buy a tobacco company outright.

"We don't want to be in the business of selling addictive drugs, with
us being the controlling owners," Munger said. "It's not the way we do the
game. We'll own shares, because if we don't own them, somebody else
will. But we'll never have Berkshire in a controlling interest. 1124

That said, Munger admits that he and Buffett have made many investment errors. "If I were ordaining rules for running boards of directors, I'd
require that three hours be spent examining stupid blunders including
quantification of effects considering opportunity costs."

Despite his criticism and his insistence that there are corrupt practices afoot in the business world, Munger feels that overall, America and
its businesses usually are honorable.

"I would not agree that things are generally going to hell," said
Munger. "Sure we've got some pockets of social pathology in our big
cities, and we've got pockets of social pathology in the high reaches of
business, but averaged out, I would say it's pretty good. If you take engineering integrity in products, when was the last time your automatic
transmission went out? We've learned to do a lot of things with enormous reliability. You take a company like Boeing and all the hours that
the airplanes stay in the air and the three back up systems behind every
system that navigates that airplane. I would argue that there is a lot to admire in American business and a lot that's done right, And that these oldfashioned values, averaged out, are winning, not losing. It's too bad we
have all that social pathology-hut we have it in the high reaches of politics, why shouldn't we have it in the high reaches of business."25

A SHAREHOLDER ONCE ASKED BIIFFETT how he spent his days. Warren said he
mostly read and talked on the telephone. "That's what I do. Charlie, what
do you do?"

"That [question] reminds me very much of a friend of mine in World
War II in a group that had nothing to do," replied Munger. "A general
once went up to my friend's boss, we'll call him Captain Glotz. He said,
'Captain Glotz, what do you do?' His boss said, 'Not a damn thing.'"

"The General got madder and madder and turned to my friend and
said, `What do you do?'"

"My friend said, 'I help Captain Glotz.' That's the best way to describe what I do at Berkshire."

Charlie talks as much as he always did, the only difference is,
now people listen.

Nancy Munger

F ANCY MUNGER HAS PLANNED A boat trip up to Little Rice Lake, one
of the seven small lakes to which Cass Lake is connected. David
Borthwick, her son from her first marriage, will drive the boat. Nancy and
Charlie will be tour guides. It is an August day when the sky seems twice
as wide as usual and the lake shimmers in the sun like blue lace woven
with spun silver. The party motors out in the largest of Munger's boats,
up the lake to examine the narrow reedy stream that is the infant Mississippi River, trickling down from its headwaters. There is a dam on the
lake where the Mississippi leaves Cass Lake, but this year, 1999, the water
is so high that a canoer could paddle right over the top. It's easy to imagine being a sixteenth century explorer or a French fur trapper first discovering the area. Borthwick motors up another small river, past a rustic
inn, under a bridge where youngsters line up to wave at passing boats,
and then jump into the river when all is clear. On and on, into more and
more remote landscapes. Rice Lake lives up to its name, a pristine pond
edged by wild rice paddies. The reeds ruffle in the breeze and here and
there is a beaver dam.

"Let's throw out a line and fish," says Charlie, instructing David to
pull the boat near the mouth of a water course that is bigger than a stream
but not quite a river. "Aren't we too close to the edge," a worried Nancy
asks repeatedly. "Naw," says Charlie. He urges David to pull to one side of
the stream, then let the boat drift across the mouth of the inlet, and then
quickly motor back when the boat nears the shallow, reed-thick edge of
the lake. It doesn't take long for an extra strong gust of wind to drive the boat into the deep, thick growth of rice plants. David whips the motor on,
but stalks and weeds quickly wrap around the boat's propellor, making
the motor whir uselessly, throwing out the smell of something that is
about to burn. Charlie, David, and a houseguest bend over the back of the
boat, stripping long green shreds from the propellor, trying repeatedly to
clear a spot where the motor can run long enough to push the boat into
deeper water.