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  Charlie changed, the profession of law was changing, but even if he had stayed in the practice, he probably would have been dissatisfied. There is now more money to be made from law, but less time to enjoy it.

  "I think many lawyers now have love-hate relationships with themselves and their profession and it is definitely the case now that you really have to work very hard to have traditional relationships with your clients," said Borthwick. "Because things have really changed a lot in law practice. It is now a business where you have to he a good lawyer and a good businessperson to survive. Before, you could just be a nice person with a good sense of values."

  Borthwick, a member of Charlie's hang out, the California Club, says that 20 to 25 years earlier, after lunch the club lounges were full of men playing cards or dominoes. Today there is practically nobody there in the early afternoon. The lawyers and brokers and other professional people often take lunch at their desks, or if they do go out it is for a business lunch and they rush back to their offices as soon as possible. "It's a different deal now," said Borthwick. "The gentility has gone out of these things and you have to make the best with a limited amount of time."

  Although Munger is disassociated from the profession of law, his connection with his former firm remains solid.

  "You know, even though he hasn't drawn any income out of that firm for probably 35 years, he's always had his name on the door, he's always had an office there or near," Borthwick continued. "He's used that firm heavily. He's just changed his relationship to the firm. He's a client instead of a lawyer."

  Ron Olson says that the lawyers at MTO consider Munger a resource as well as a client. The lawyers gather for lunch in the office's cafeteria three times a week, and on Mondays they bring in an outside speaker. The speakers have included the mayor of Los Angeles, a writer for the television show Frasier, Robert Kenney, Jr., and of course, Munger. "He will periodically be asked to talk to the assembled lawyers. He does this about once a year. We have yearly retreats to discuss longer term issues, and he has participated in those as a panelist. He's part of our social life. He comes to the annual holiday party."

  And because Berkshire Hathaway leases office space there for Charlie to use, "He's physically here, very accessible, his door is always open. He likes it, is stimulated by it. He loves to think about problems."

  As for Munger's name still being on the door, Bob Denham said, "From the firm's standpoint, it would be crazy to change it. From Charlie's point of view, it gives him a certain satisfaction."

  As HIS LAW CAREER WAS PHASING. OUT, Munger discarded the elements from his life that no longer worked for him, and built upon those he found valuable. Relationships with his colleagues continued to be central to his success.

  When Molly Munger returned to Los Angeles to begin her own legal career, she said, "The law firm was up and running. It was prestigious. I quickly learned it was a very hot firm. I've benefitted my whole career from being Molly Munger. Nobody in my business life realized my father wasn't over at Munger, Tolles practicing law."

  Molly once thanked the managing partner at Munger, Tolles for building such a respected firm, one that even though she didn't work there, allowed her to walk proudly in its reflected light.

  "It's okay," said the lawyer. "In the early days, Charlie put me in his business deals. I think we're square."

  C H A P T E R N I N E

  OPERATING WHEELER,

  MUNGER OUT OF

  A UTILITY ROOM

  The opulence at the head office is often inversely related to the financial substance of the firm.

  Charlie Munger, paraphrasing Parkinson

  'r-. USED TO PLAY cc>u' in a pick-up foursome. You know how personable and charming Charlie can be," said one of his earliest business partners, Al Marshall. He and Charlie would meet someone new and the four of them would have a great game of golf. "The next day we'd be in the elevator at the office, and one of those golfers would get on the elevator and say hello to us. Charlie would just stare straight ahead.

  "Why didn't you say hello to that guy?" asked Marshall.

  "What guy?"

  "The guy we played golf with yesterday," Marshall explained.

  "Oh. I didn't see him," Charlie replied.

  "This was even before he had his eye operation," said Marshall. People sometimes became angry at Charlie when he seemed to ignore them, especially members of the California Club or the Los Angeles Country Club, places where members don't expect to be snubbed. Marshall, usually without success, would explain to the offended party that Munger did not act with malice, but simply was lost in a world of his own thoughts. But, conceded Marshall, Charlie also occasionally needled people consciously, subtly, and with a purpose in mind.

  "We used to play golf with this Army officer, a West Point guy," recalled Marshall. A few moments before the officer was to address the ball, out of the clear blue sky, Charlie commented, "I don't know, but I think a little communism is good for the military." The West Pointer's face reddened and he missed his putt.

  WHEN THE 1960s dAWNED, the young John F. Kennedy was the newly elected president of the United States and the Viet Nam War was still a whisper in the back halls of the Pentagon. Charlie Munger was 36 years old, practicing law and was in the midst of promising real estate development projects. The connection he had made with money manager Warren Buffett proved deep and abiding, and Buffett assured Munger that he, too, could earn a living as an independent investor. Charlie realized, however, that he would be taking a big risk.

  When he'd ventured into real estate, said Munger, The situation seemed less risky. "I never thought I'd lose everything. Real estate took leverage, but the development process always had risk limits in place. The big loans had clauses that we'd guarantee completion, but we didn't have to pay the money back if the completed project couldn't be sold above cost." In case the condominiums didn't sell, the bank might take ownership of the property and Munger would be dented but he would not be ruined. However, Munger was not satisfied with his dual career as a member of a new law firm and a real estate developer. In 1962, Munger made the commitment to spend at least part of his time acting as a professional investor using other people's funds. He took the step that Buffett had repeatedly suggested to him. Charlie, along with his poker pal and legal client, Jack Wheeler, established Wheeler, Munger & Company, an investment partnership similar in format to Buffett's partnership. Wheeler, a Yale graduate, was by profession a stock exchange floor trader and a coowner of two specialist posts at the Pacific Coast Stock Exchange.

  Wheeler, Munger acquired the specialists posts, locations on the exchange floor where buy and sell orders are called out and trades are made. The posts help smooth out the market, making certain that there are ready buyers and sellers for listed securities. Often, one post is the exclusive market-maker for a particular stock, and in that case, owning a post can be highly profitable. The posts generated a generous amount of excess income and when that was combined with the capital Charlie raised from family, friends, and former clients, there were funds well above those needed for trading. It was Charlie's job, with help from his law partner Roy Tolles, to invest the excess capital.

  Wheeler, Munger, and many of the people at the Pacific Coast Stock Exchange were small operators who purchased memberships so that they could maximize their trading profits.

  "In the 1960s there was a fixed commission system," said Rick Guerin. "The only way to beat that was to be a member of the stock exchange. You could then trade without commission. Those little costs are significant."

  It was a low-budget, make-do arrangement. Wheeler and Munger worked out of a tiny mezzanine office at the stock exchange, which was on Spring Street amid the headquarters of major financial institutions, but also very near the Skid Row section of Los Angeles. Munger and his partner shared it pipe-riddled, but larger front office while their secretary worked in a tiny private room in the hack, adjacent to the toilet. The entire office suite had only two windows, each look
ing out over a grubby alley. It suited Munger because the rent was cheap, $150 per month with all utilities included.

  The penny-pinching wasn't entirely necessary. When Wheeler, Munger was formed, Munger had accumulated a net worth of about $300,000, which was more than 10 times his annual rate of personal expenditure. A fair amount of the money had come from investments in securities.

  By the time Charlie started Wheeler, Munger, he and Buffett were talking often, discussing approaches and spinning investment ideas by one another. Nevertheless, Jack Wheeler was Munger's first formal partner in the securities game. Before and after this, Munger also invested informally with others, among them, Rick Guerin and Roy Tolles. He met Guerin while he and Wheeler were setting up their business.

  "In 1961 it friend called and said he was going to buy into a downtown (LA) trading firm because someone was selling out," said Guerin. Rick decided that he too would join in the investment and would help run the company.

  The seller was Jack Wheeler who was disposing of his portion of Wheeler, Cruttenden & Company because he planned to go into a new arrangement managing money with Charlie Munger. When Guerin arrived to settle the deal, Munger was present. They started to talk. "I was just going to this meeting for the closing. I was going to deliver a check and take a stock certificate. We were joking with Munger, when this light went on in my brain. `I'm on the wrong side of this transaction.' "

  Guerin realized he wanted to be where Wheeler was going, not where he had been. Guerin's intuition was correct. In part, Wheeler was selling his interest because he was not seeing eye-to-eye with his partner. Arrangements between investment partners are tricky and rely on a combination of brains, judgment, and trustworthiness. If partners are incompatible in any of these areas, even a small issue grates like sand in a shoe. Munger had advised Wheeler to simply get out of his former arrangement and concentrate full-time on Wheeler, Munger. Using the only $40,000 he then had, Guerin bought into the less promising half of a splitting partnership and later lost the entire investment.

  "But by then," said Munger, "he'd learned a lot and was doing very well."

  WITH THE ADVENT OF WHEELER, MUNGER, Charlie's business life took on a new direction, as did his social life.

  "Charlie started to go down to the stock exchange very early every day," said Buffett. "First he would check the hoard, then he and his friends would roll dice to see who would pay for breakfast. They had a ritual of eating breakfast at the Stock Exchange Club on the top floor of the Stock Exchange Building. Rick had some fairly modest job there but was always listening in. In it sense, he was attending class."

  Guerin was learning, and he, like Munger, was making new buddies. Guerin would become another of Munger's many "best friends," but the one least like Charlie. "My mother was a seamstress, a Rosie the riveter," explained Guerin. She died from alcoholism when Rick was a teenager. Guerin trained to be an Air Force pilot but dropped out, although for years afterward he flew his own plane. He spent three years at IBM, then five to six years as a stockbroker.

  "It took me three years to extricate from that (early) partnership," said Guerin. "Charlie-and Jack Wheeler to some extent-became my mentors. I then founded my own partnership, modeling it after the Buffett and Munger partnerships."

  J.Y. Guerin & Co. imitated Wheeler, Munger in every way including the operation of a specialist post. In his famous essay, The Superinvestors of Graham and Doddsville," Buffett described Rick Guerin's investment record. "Table 6 is the record of a fellow, a pal of Charlie Munger's-another nonbusiness school type-who was a math major at USC. He went to work for IBM after graduation and was an IBM salesman for a while. After I got to Charlie, Charlie got to him," Buffett wrote. "This happens to be the record of Rick Guerin. Rick from 1965 to 1988, against a compounded gain of 316 percent for the S&P, came off with 22,200 percent, which probably because he lacks a business school education, he regards as statistically significant."'

  Guerin did deals with Munger and Buffett, but also invested independently. He became a major shareholder and director of Pacific Southwest Airline, which in 1988 was merged into USAir. Guerin says that he learned from Munger how to make deals, but he also began to think deeply about the importance of personal values.

  "I think I've been affected by Charlie," said Guerin. "It was in me to see these values and to respond to them immediately, but he shaped me. Being around Charlie and Warren has made me a better man." Guerin saw how clearly logical it is to be ethical, rational, and honest. "It is easier to tell the truth."

  Guerin is Buffett's age and is married to a woman 26 years younger than himself. They have a five-year-old son. Rick also has a 42-year-old daughter. Between them, he and his wife Fabienne have seven childrenfive girls and two boys. Munger, Guerin, and Otis Booth still play bridge at the Los Angeles Country Club with a circle of friends that sometimes includes Mayor Richard Riordan. In addition, Munger and Buffett once played bridge at nearby Hillcrest Country Club with the late comedian George Burns, then in his late 90s. To accommodate Burns' cigars, the Hillcrest posted its rule: "No smoking by persons under 95."

  Charlie admires a long-standing practice of the Hillcrest Country Club of demanding a generous charitable giving history as a condition of membership. "I have heard that, long ago, a big-time theater owner tried to join, delivering a yellowing newspaper clipping reporting on a World War II savings bond rally held in one of his theaters. Back came the reply of the membership committee: `This is a very useful piece of paper. For instance, you could wipe your ass with it. But it won't get you into this Club.' "

  THE REAL ESTATE DEALS WERE WRAPPING UP, the law firm doing well, and about that time, Charlie approached Al Marshall and asked him if he would like to come into Wheeler, Munger as business manager. Munger had discovered that his style differed from Jack Wheeler's, and he needed someone around who was more compatible.

  Wheeler "was not from Omaha but he was a very smart man," said Marshall. "He once told me that he'd taken a course in [late 1920s style] pools and the management of pools, which of course are totally illegal today. He was a big spender, lived big. He was very good at what he did, but he also would suffer big reverses once in a while, which did not appeal to Charlie."

  Finally Charlie persuaded Wheeler to turn the operation of Wheeler, Munger over to himself and Marshall, and they would pay Wheeler a cut of the profits. "There was no acrimony between them," insisted Marshall. "Wheeler just sort of retired."

  Marshall, who ultimately became a general partner, wasn't surprised that Charlie approached him a second time to join in a business venture. "If he trusts you, he trusts you completely," said Al. It still amazes Marshall that for years Charlie listed him as a signatory on a personal checking account. Charlie knew Al's character and didn't think for a minute that Marshall would run off with the money, and of course he didn't.

  Munger, ever the absent-minded professor, had Nancy to keep things straight at home. At the office he needed a lieutenant like Marshall. "We had a secretary named Vivian," said Marshall. "When she left, we had two or three secretaries after her, but Charlie just kept calling all of them Vivian. I've always said it's a good thing his second wife was named Nancy, too. Otherwise he'd never have remembered her name."

  Marshall liked his new position, but it also had drawbacks.

  "One of my more obnoxious jobs was to watch the specialist posts," said Marshall. Floor traders tend to be action-oriented individuals who have a lot of adrenaline in their systems. Once one of Marshall's traders objected to something that had been said and jumped up and slugged another trader. It took Marshall several days to negotiate a peaceful settlement with the battered trader and the exchange's governors. But the traders also were clever and creative. One of Wheeler, Munger's men set up a complex four-way arbitrage in the securities of the pharmaceutical company, Alza, which at the time was just a start-up. Marshall established a $2 million line of bank credit to finance the arbitrage, but at one point, the credit line was drawn out to $3 m
illion. A banker came over to the stock exchange to investigate and to ask Marshall, again, what the credit line was being used for. Even after Marshall explained, the banker went away confused. The trader unwound the arbitrage after three weeks with a profit of $600,000.

  Marshall recalled that one evening he needed to talk to Charlie about a business situation, so he went over to the Mungers' June Street home. Marshall had five children of his own so he knew what a busy household was like, but even he was surprised that Charlie could concentrate under the circumstances. Charlie was sitting in a big chair, and "One kid was climbing on his shoulder, another was pulling his arm. Another was yelling. It was bedlam, but he didn't send them out or correct them. It didn't bother him a bit."

  WHILE WHEELER kEPT AN EYE on the specialist posts, Charlie concentrated on investing the surplus capital. Sometimes he, Buffett, or Guerin-or all three together-invested in the same companies. They scoured the exchanges, the newspapers, and talked to friends, searching for deals. Buffett described both-Buffett Partnership and Wheeler, Munger-as classic hedge funds, similar to those that again became popular in the late 1990s.

  "We bought some operating businesses," said Munger, "including a company that made automotive chemicals. At one time, as part of a bargain-priced package, we bought a manufacturer of car wash machines and a group of loans to car wash operators. Every time it rained, people called Marshall to explain why they weren't paying. That was not one of my happier moments. So we had a lot of experiences, good and bad."

  Because the companies they bought were small and sometimes closely held, the investors became involved in peculiar situations. This was the case with the tiny automotive chemicals company, K&W Products.