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  Munger brought a business law perspective to this rich mix, but from his independent forays into the commercial world, he also understood how businesses work. "Charlie can analyze and evaluate any kind of deal faster and more accurately than any man alive. He sees any valid weakness in 60 seconds. He's a perfect partner."

  As they studied and acquired retail stores and companies such as Blue Chip Stamps and See's Candy, both Munger and Buffett were pushing themselves and venturing into higher realms. They also were learning how to be effective partners.

  "A partner ideally is capable of working alone," explained Munger. "You can be a dominant partner, subordinate partner, or an always collaborative equal partner. I've done all three. People couldn't believe that I suddenly made myself a subordinate partner to Warren. But there are some people that it's okay to be subordinate partner to. I didn't have the kind of ego that prevented it. There always are people who will be better at something than you are. You have to learn to be a follower before you become a leader. People should learn to play all roles. You can divide up in different ways with different people."

  When he worked with Rick Guerin, Munger's relationship was different from the one he had with Buffett, even though what they did was similar. In fact, Guerin was sometimes a partner in the deals Munger and Buffett put together.

  "Charlie is older than I and had legal experience," said Guerin. "He was the senior partner, you might say. He's always willing to listen. Always had an open mind. If you said 'Charlie, stop talking and listen to me, to what I'm trying to say,' he would listen."

  A friend once noted that "Charlie is about as much like Warren as you can get. One of Warren's strengths is that lie's very good at saying no, but Charlie is better. Warren uses Charlie as one last litmus test. If Charlie can't think of it reason for not doing something, they'll do it."3

  Buffett has called Munger "the abominable no man," but Lou Simpson said that's more of a joke than anything. There is more to Charlie than negativity. "Charlie thinks outside of the box. He thinks quite differently and this leads him to some interesting conclusions. He has the ability to zero in on things that are really crucial to making good decisions. Charlie will give lots of negatives, but [he and Buffetti finally come up with a similar conclusion."

  The tendency for him and Buffett to think alike hasn't always been an advantage. "If a mistake goes through one filter, it is likely to go through both," said Charlie.-'

  The relationship between Munger and Buffett, however, is more than a business arrangement. Though Munger can be self-willed, preoccupied, and abrupt, says Buffett, "He's just the best pal a guy could have."

  A LESS OBVIOUS ELEMENT OF THIS MENTAL MATRIX, one that was woven deeply into the background, was the old master of the investment game, Ben Graham. Because Graham was now living in the same town with Munger, the two became acquainted. In certain ways, the similarities between Buffet's two closest associates were eerie. Both men admired and purposely emulated Benjamin Franklin. All three, Franklin, Graham, and Munger, lost their beloved first sons to diseases that, had they occurred even a few years later, most likely would have been cured or prevented.

  Both Graham (who died in 1976) and Munger shared a wry and occasionally silly sense of humor and a deep interest in literature, science, and the teachings of the great thinkers. Both liked to quote the classics. One of Munger's favorite ideas is from Aristotle, "The best way to avoid envy is to deserve the success you get."

  Like Munger, Graham was known for his integrity and dedication to objectivity and realism. Graham often told his students that there were two requirements for success on Wall Street: the first is to think correctly and the second is to think independently.

  Munger also urges independent thought: "If, in your thinking, you rely entirely on others, often through purchase of professional advice, whenever outside a small territory of your own, you will suffer much calamity." Charlie recognizes the need to hire a doctor when he needs medical advice, an accountant or other professional help when necessary. But he doesn't take the experts entirely at their word. He considers what they say, continues his research, seeks other opinions, and in the end, reaches his own conclusion.

  As Lou Simpson pointed out, Munger probably does not realize how much his mind works like Graham's. That said, there were major differences between Munger and Graham. Graham was an unrepentant ladies man until the end of his life but Munger has no such reputation. The important women in Charlie's life are his wife and three daughters. Differences in investment philosophy became increasingly apparent as Munger's career progressed.

  Munger was among those who attended a now famous conference that Buffett organized in Coronado, California, in 1968. A group of Buffett's investing buddies met with Graham to discuss the best way to react to the flagging stock market. At that meeting, Buffett introduced Munger and his law partner Roy Tolles to friends he'd made when studying and working in New York. The Graham acolytes included Bill Ruane, founder of the Sequoia Fund, Tom Knapp of Tweedy Brown, Walter Schloss, Henry Brandt, David "Sandy" Gottesman, Marshall Weinberg, Ed Anderson, Buddy Fox, and Jack Alexander. These were investors of the high caliber that would impress Munger.

  However, Charlie did not share the special affection and admiration that Buffett felt for Graham. Some of Graham's precepts, did not impress him at all. "I thought a lot of them were just madness," he said. "They ignored relevant facts."

  Specifically, said Munger, "Ben Graham had blind spots. He had too low an appreciation of the fact that some businesses were worth paying big premiums for."s

  Yet Charlie agreed with Graham's most fundamental teachings and they have been part of the Buffett-Munger success formula from the start. "The basic concept of value to a private owner and being motivated when you're buying and selling securities by reference to intrinsic value instead of price momentum-I don't think that will ever be outdated," said Munger.

  Though Munger isn't interested in Graham's old-fashioned "cigar butt" stocks that have one puff left in them, Charlie is still too conservative to overpay for an asset. "I never want to pay above intrinsic value for stock-with very rare exceptions where someone like Warren Buffett is in charge," said Munger. "There are people-very few-worth paying up a bit to get in with for a long-term advantage. The investment game always involves considering both quality and price, and the trick is to get more quality than you pay for in price. It's just that simple."

  Buffett has had a lifelong connection with most of the people who were in Coronado with him that summer, and he gives Graham a lot of credit for what happened to them afterward. "They were all moderately well-to-do then. They're all rich now. They haven't invented Federal Express or anything like that. They just set one foot in front of the other. Ben put it all down. It's just so simple."

  It may not have been obvious in Coronado that Munger was replacing the ailing Graham as Buffett's confidant and advisor, but the transition had begun. Carol Loomis, an editor and writer at Fortune, explained that while Buffett maintained his respect for Graham's ideas, Munger helped him expand his approach, to take the next big step forward:

  When he met Buffett, Munger had already formed strong opinions about the chasms between good businesses and bad. lie served as a director of an International Harvester dealership in Bakersfield and saw how difficult it was to fix up an intrinsically mediocre business; as an Angeleno, he observed the splendid prosperity of the Los Angeles Times; in his head he did not carry a creed about "bargains" that had to be unlearned. So in conversations with Buffett over the years he preached the virtues of good businesses- By 1972, Blue Chip Stamps, a Berkshire affiliate that has since been merged into the parent, was paying three times book value to buy See's Candies, and the good-business era was launched.-

  Buffett agrees with Loomis' explanation. "Charlie shoved me in the direction of not just buying bargains, as Ben Graham had taught me. This was the real impact he had on me. It took a powerful force to move me on from Graham's limiting view. It was th
e power of Charlie's mind. He expanded my horizons."'

  Buffett says he slowly came around to Munger's point of view on many points. "I evolved," Buffett said. "I didn't go from ape to human or human to ape in a nice, even manner."

  To that Buffett has added a simple observation: "Boy, if I had listened only to Ben, would I ever be a lot poorer."'"

  In spite of what he says, it didn't take long for Buffett to put together what he had learned from Graham and what he was learning from Munger. "I became very interested in buying a wonderful business at a moderate price," he said.''

  The 1968 meeting that Buffett organized in Coronado developed into a combination study group/party held every other year. The original Buffett Group was comprised of 13 investors. Now more than 60 top corporate executives and personal friends of Buffett attend. Buffett and Munger exchange ideas with old friends like Al Marshall, Walter Schloss, and Bill Ruane, and newer friends such as Katharine Graham and Bill Gates.

  "Our group," as Buffett calls it, has met at Lyford Cay in the Bahamas; Dublin, Ireland; Williamsburg, Virginia; Santa Fe, New Mexico; Victoria, British Columbia; and more than once in Monterey, California. One year they booked the Queen Elizabeth II for a cruise to England and it rained the entire trip. Members take turns playing host, and whoever hosts the event gets to pick the location.

  The group holds seminars on public policy, investments, charitable giving, and life's toughest and silliest moments. Once Munger gave a lecture on Einstein's Theory of Relativity. Few people were interested, but most felt obligated to go. One member recalls, "If Buffett was there, he probably understood it. I don't think anyone else did." 12

  C H A P T E R E l G H T

  POUND-FOR-POUND,

  THE BEST LAW FIRM

  You know, someone once told me New York had more lawyers than people.'

  Warren Buffett

  ERTAINLY WE WERE NEVER GROOMED FOR THE LAW," said Wendy _JMunger, an attorney who teaches arbitration and negotiation part-time at the University of California at Los Angeles Law School. But, she added, "We do tend to be a pretty verbal bunch."

  Emilie Munger was definitely influenced by family tradition when she decided to enroll in law school. Law was "a way to understand the family," explained Emilie. "I think we're all analytical that way. Philip didn't chose law, but could have. He likes to read and think and analyze. He twice won the California state championship as a high school debater."

  There was no grand plan, but the Munger children have tended to follow family tradition when it comes to careers. Four of Nancy and Charlie's eight children are attorneys, and five of their children are married to lawyers.

  Molly Munger was the first of her siblings to take the step, though she probably chose law more by instinct than by reason. "My family had no particular consciousness-girls grew up and got married and you should have something to do-in case your husband died or something. That thinking had an influence on me. My last year at Radcliffe, in the spring the other girls all had the diamond rings. I didn't think `I'm going to Harvard Law like my dad,' but when I realized I didn't have a job, I thought I should go to grad school. I wasn't good enough in math for economics. Then I filled out this Harvard Law questionnaire, which asked, did any member of my family attend Harvard...."

  For Molly, a light went on. She knew it was the right thing to do. Charlie Munger, usually reticent about expressing his emotions, let his first daughter know how he felt about her decision in an indirect way.

  "Only extremely rarely had he done anything at Christmas or birthdays other than a check or cash," said Molly. "The idea of him out shopping is extremely funny. He bought us all Brooks Brothers gift certificates, He loves Brooks Brothers. Or once he was enamored with a certain type of briefcase, so he bought all of us one. He's the kind of man that when I graduated from college, I said 'I've graduated.' Then I said, 'I think it would be nice if you bought me a watch.' He looked up from his paper and said 'Oh yes, that's very appropriate. Go out and pick yourself out a watch and send me the bill.' And as I left he looked up again and said, '. . . and have it engraved, from your loving father.' So imagine my amazement my freshman year at law school, living in a seedy' Cambridge student duplex with such poor heating that one person spent the whole winter standing in front of the oven. I was unwrapping this package from my father. It's this thing. This nicely framed set of head shots of four people. My great grandfather, my grandfather, my father, and my high school graduation picture. Some little note from him. Well -love from Daddy.' I clung to that object."

  Despite her original ambivalence, Molly took to the profession deeply and happily. She worked in the U.S. Attorney's office in Los Angeles as a prosecutor, then built a private-practice career bringing suits against perpetrators of complicated financial scams. In time, she followed her heart and went into public interest law. Molly was among the leaders of a coalition in the late 1990s who made a futile attempt to defeat a proposition that eliminated affirmative action in California schools and government. In the late 1990s, she, some colleagues, and her husband Steve English, founded a public-interest law organization called the Advancement Project. There, Molly continues the sort of work she formerly did for the National Association for the Advancement of Colored People and other civil rights organizations.

  IN 1962-riiE SAME YEAR Buffett started buying shares in the beleaguered New England textile manufacturing company, Berkshire HathawayCharlie Munger helped established two new ventures in Los Angeles. The first was a law firm and the second was a securities firm called Wheeler, Munger and Company.

  A breakaway group of Musick, Peeler & Garrett colleagues prevailed upon Charlie to join them in creating a practice that quickly became known as a group of "superlawyers," a premier small firm with clients not only in Los Angeles, but across the nation. Charlie had been with Musick, Peeler & Garrett for 13 years when he and six other attorneys, including Roderick Hills (later chairman of the Securities and Exchange Commission) and his wife, Carla Anderson Hills (who in time became the U.S. Trade Representative), struck out on their own. Their idea was to be a democratic organization, meet the highest standards of conduct, recruit only the best, and build the finest law firm anywhere.

  Roy Garrett by this time had developed heart trouble and in order to ease the load on himself, brought into the firm a high-level man who Charlie described as a "control freak." Munger was among the seasoned attorneys who finally got fed up.

  "The formation of the new law firm was not at the time perceived as a pure sad loss for Musick, Peeler & Garrett," said Charlie. "Everyone hated to see Fred Warder and Dick Ebenshade leave, but many welcomed the departure of others, particularly Rod Hills and Charlie Munger. The new managing partner especially hated Rod Hills' constantly maneuvering himself into responsibilities that, at other firms, were not handled by lawyers so young."

  Nancy Munger recalls this period of rebellion as one of the most exciting phases of her life: The real estate ventures were underway and "Most of the discussion about forming the new firm went on at our house. Charlie also established his first investment company. He cut loose from our past. I didn't have sense enough to be scared. I had faith. I didn't worry a lot. I had more children and just lived."

  Her confidence in the new projects was bolstered by her knowledge of her husband: "He judges people pretty well-which ones to join with and which ones not to join," said Nancy. "He has avoided attaching himself to people who are problems-that's helpful."

  Rod Hills, rather than Charlie, was actually the driving force behind the new firm. A street-smart lawyer, Hills talks fast, and covers a lot of ground. He was horn in Seattle, but when he was still very small, his father lost his job and the family headed for California. Their car broke down in Oregon and they hitchhiked the rest of the way to Los Angeles. Hills grew up in East LA, played football well enough and earned good enough grades to get a scholarship to Stanford. He found his calling when he enrolled in law school and ended up clerking at the U.S. Supreme Court. It was
Munger who recruited Hills for Musick, Peeler, & Garrett.

  "It was not the hardest firm to get a job with," said Hills, "but they had a couple of people like Charlie who were quite unusual. After three years, the firm offered me a partnership. I decided I didn't want to accept, for a lot of reasons. We had a baby, my wife was Assistant District Attorney, there was a senior partner I didn't think much of. I decided to quit. Charlie said he'd quit, too. We'd share office space. He said he didn't really want to practice law anymore. I said okay, as long as I can use your name on the firm. Charlie is the most unique person I've ever met. In many respects, he reminded me of justice Frankfurter. He has the same kind of mind. He wouldn't accept anything on face value. His interest in almost everything can be so intense, he will have a perspective that others will not have. He's a fair person, he can understand the prejudices and weaknesses of other people and make allowances for them. He is not as judgmental as others. He wasn't a lawyer like other lawyers. He would take on clients that he cared about. He worked for people that I would not have worked for. He used to say, `Why do you insist upon being a traditional lawyer? You guys were first in your class at Harvard, Yale, and Michigan; many of you clerked in federal court. Do things that other people aren't doing.'"