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  AMONG THE SHAREHOLDERS BERKSHIRE inherited from Blue Chip was legendary investor Philip L. Carret. Carret had owned Blue Chip shares since 1968 and converted to Berkshire at about $400 per share. Carret had been involved in portfolio management for 78 years. He founded one of the first and most successful mutual funds, the Pioneer Fund, which operated through all sorts of economic conditions from 1928 until 1983. The annual total return for the Pioneer Fund in that period averaged 13 percent, compared with 9 percent for the S&P 500.

  Born in 1896, Phil Carret died May 28, 1998, at age 101. Just a year earlier he'd attended the Berkshire Hathaway annual meeting in Omaha and although he was confined to a wheelchair, Carret spent much of the day chatting with other shareholders. Carret worked until two weeks before his death and was sharp of mind until the end.

  FROM THE TIME THEY STARTED buying Blue Chip until the time it was merged into Berkshire, Buffett and Munger slowly but surely cemented their partnership. There never had been a written contract covering the terms of their work together. Rather, Munger and Buffett simply went forward on trust.

  "To those of us who became lawyers," said Wendy Munger, "the lesson of his business life is that you don't want to do business with people you can't trust. The economics are irrelevant if you don't have trust. Most people are just thinking about the economics, thinking that the contract will save you when entering into a transaction with someone you can't trust. You must do business with high-grade people-that's all he will deal with."

  Charlie also puts it this way: "Never wrestle with a pig because if you do you'll both get dirty, but the pig will enjoy it."

  C H A P T E R E L E V E N

  SEE'S CANDY

  TEACHES A LESSON

  Generally, I'm not in favor of a social system that throws huge rewards to people who don't improve the factories, don't invent better systems, and so forth. Of course, you can argue that I'm condemning myself. All I can say is it's almost intentional.

  Charlie Munger

  HE MUNGER FAMILY MEMBERS WERE having their first dinner together in the new "great hall" at their Star Island retreat. A cooperative design effort among the adult children, the communal gathering room had been generously funded by their father. As the Munger clan had grown, collecting spouses and grandchildren, it was increasingly troublesome to find one space where everyone could get together for dinner, or to play games, or to simply sprawl around a fireplace and gab. This lodge room will do the job. An open-beamed ceiling rises above a massive, fieldstone fireplace. A full-sized pool table at one side of the room already is surrounded by teenagers. There are two long banqueting tables for grown-ups, and a small dinner table for the younger children. As happens most evenings, the teenaged Mungers have decided to dine together-elsewhere-and have set up their own party on a picnic table near the end of one of the Munger boat docks. It's cool out over the lake and there are fewer bugs and no parents.

  Back in the lodge room, there are toasts to the new addition, allaround thank yous to the people who collaborated by fax, e-mail, and ordinary telephone to plan this expansive, woodsy room, the small kitchen, and a second small dining/workroom. A meal of mixed grill, fresh creamed corn, risotto, and salad is served from a buffet. Ice cream is the dessert. Most people hold their hands over the top of their wine glasses to keep the insects out, but those who don't are treated to a mouthful of gnats. No matter. Everyone's chattering and having fun.

  Molly Munger, who is seated next to her father, turns to him and quietly thanks him for providing the wherewithal for the family gathering, and especially for this wonderful great hall. Charlie stares straight ahead, not responding to her comment, not blinking.

  "Did you hear me, Daddy?" Molly asks persistently, quietly. "Yes," he murmurs, continuing to stare straight ahead.

  Suddenly one of the Munger children appears with a box of See's Candy, taken from a case that had been shipped from the factory in advance of the family's arrival. The guests begin poking around, looking for their favorite cream center or caramel, stopping just short of sticking a finger in to see what the filling might be. The Mungers and their guests are too polite for that, but some are tempted. Nancy Munger speaks to her husband from the opposite end of the table, "Charlie," she calls. "Charlie! He never listens to me," Nancy complains to her dinner partner. "Charlie, Charlie," she calls louder. "Tell the story about the pipes." She gets his attention. "The pipes at the See's factory."

  Now he's online and proceeds to recount an episode when See's hired a new employee experienced in candy-making and took him to review the kitchen where the candy is cooked. "The employee spent some time looking around, then puzzled, asked a manager where the water pipes were. The guy could only find two pipes, one marked `cream' and the other marked `whipping cream.' He was amazed to learn that they don't use any water when making See's, so there were no water pipes."

  WHEN SEE'S CANDY (:ELEBRATED ITS SEVENTY-FIFTH anniversary at a luncheon in Los Angeles, the crowd had surprise visitors. A man in a white jumpsuit, wearing goggles and an antique leather helmet, drove onto the stage astride See's 1920's trademark black-and-white, restored Harley Davidson motorcycle with its matching delivery sidecar. The driver hopped off the motorcycle, flung off his hat, and ripped off the jumpsuit. At the same time, a figure rolled out of the back door of the sidecar. There, before a laughing audience stood the driver, Warren Buffett, and his passenger, Charlie Munger.

  "I particularly enjoyed coming here today," Munger told the assembled employees, suppliers, and customers. "It gave me the chance to look a lot spryer than I really am. If you coil a guy up like a spring and put him in a narrow receptacle, he will pop out like a kid. While I was in that receptacle, I thought of my favorite business analogy-the mouse who says `let me out of the trap, I've decided I don't want the cheese.' There are a million business traps. You can get sloppy, you can get alcoholic, you can get megalomania, you can not understand your own limitations. There are a million ways to gum it up. To survive and prosper as long as this company has-started by a woman who was 71 [years old], that I really like. And it's an amazing example. See's has stayed out of a lot of traps."

  "The ordinary candy company puts in too many stores," Charlie continued. "You have this huge overhead you're carrying through July and August, and you just can't get well at Christmas. But See's has always had the discipline of knowing their own business. That's harder on the employees, by the way. They have this huge crunch in the stores at Christmas, but it's part of the secret of See's.

  "And of course the fanaticism about the quality of the product and service is the heart and soul of the business. I love the fact that this room is full of long time customers and long time suppliers. You get suppliers who are good and who are trusted because they deserve trust, and you behave the same way toward your own customer, then you are a little part of a civilization that is a seamless web of deserved trust. This is the way the world ought to work. It is a better example for everyone else. It is the right way to build up a state or a civilization. It was just marvelous for us to become associated relatively early in our business careers with a culture that was so fundamentally sound. It is Ben Franklin (or his business philosophy) all over again, alive and well at See's after all these years."'

  Summer is the slowest season for candy-makers, since there are no candy-centric holidays. At the La Cienega Boulevard factory in Los Angeles, the summer staff shrinks to around 110. During the Christmas to Easter season, the staff swells to 275 or more.

  The summer candy-makers are the long-termers, the lifers, and many are Hispanic. See's prides itself on a sense of family that allows mother, daughter and granddaughter, husbands and wives, brothers and sisters, to work side by side. The southern plant makes about 40 percent of the candy, concentrating most on those with hard centers. The remaining sweets are made in the South San Francisco plant. Factory workers are paid hourly wages and receive full health benefits as negotiated by their union, the Bakery and Confectionary Workers Union. Hundreds o
f See's workers have been with the company 15 years or more. At the Los Angeles factory's 1999 awards banquet, 21 workers v%i re rcco~gl,ized for service ranging from 30 to 50 years.'

  See's Candy-with its motto "quality without (,nni!)romise"-repre- sents more to Munger than an after-dinner dclicacv. The acquisition of See's Candy was among the earliest deals that he at,-1 Warren Buffett did together and it was one of the first companies zh; } purchased outright. But most important, the experience of See's taught Charlie and Warren a lesson that caused a major improvement to their investment style.

  In 1972. using the float of Blue Chip Stamps, Buffett and Munger acquired the small Los Angeles-based See's Candy for $25 million. It was a major step for Charlie and Warren because it was their biggest purchase up to that time.

  It was big news in California, where See's black-and-white candy shops arc part of the local culture. A 16-year-old Cher was working at See's when she met Sonny Bono and left her job to move in with him as his housekeeper.

  Mary See was 71 when she opened a small, Los Angeles neighborhood candy shop in 1921, although she had the help of her son Charles.]

  Charles A. See had been a pharmacist in Canada, but changed careers after his two pharmacies were destroyed when a forest fire swept through the town where he did business. He took up work as a chocolate salesman and dreamed of starting his own candy company, using recipes developed by his mother. In 1921, he moved his family, including his widowed mother, Mary, from Canada to Pasadena, the beautiful and refined Los Angeles suburb that Charlie would later adopt as home. During the 1920s, Los Angeles was a booming city of 500,000 residents. It wasn't an easy go for the Sees, since there were hundreds of competitors. See and his partner, James W. Reed, decided to concentrate on building a reputation with a high-quality product.

  When the stock market crashed in 1929 and the Great Depression hit, See was forced to cut the price of a pound of candy from 80 cents to 50 cents. He survived by persuading landlords to reduce his rents, arguing that lower rent was better than no rent. But he also saw an opportunity to expand his markets as other candy-makers went bankrupt. A second crisis came during World War II when sugar was severely rationed. Rather than compromise quality with inferior ingredients or altered recipes, See's decided to produce as much high quality candy as possible with the ingredients that were allocated to the company, and no more. Customers lined up around the block to buy the limited supply of chocolates, and once the supply was gone, the shop closed for the day. No matter what time the store closed, the sales staff was paid for a full day of work. This turned out to be a smart marketing ploy, since the waiting crowds added to the candy stores cache.

  See's was already 30 years old when Charles Huggins joined the company in 1951. The head office was then in Los Angeles, but Huggins started in the San Francisco facility.

  Huggins first saw San Francisco when he took furlough before going to Europe as a paratrooper in 1943. Huggins fell in love with the area. "I said, if I make it through the war, this is where I want to be." He made it, then enrolled in Kenyon College. After graduation, Huggins moved to San Francisco, where, after getting a referral from Stanford University's placement office, he went to work at See's.

  He was sent around to work in all the departments and even to make candy. Huggins first big opportunity came when managing the packaging department, where employees thought they were doing things wrong, but couldn't get anyone to listen. Huggins went in, took the workers' advice, and made changes that improved the process. Little by little he was given more responsibility.

  When Harry See, Mary's grandson, took over the company after his brother's death, Huggins was given responsibility for expanding the company's business. Harry See, Huggins said, "enjoyed life tremendously, was a world traveler, established vineyards in Napa Valley. After a while the family decided collectively to sell the company and cash in their chips. I was coordinator and liaison for that.

  "We started in the spring of 1970. We had a couple of very serious suitors, such as a big-four sugar company from Hawaii that owned C&H and others. The family wanted a pretty heady ransom for the company and that dissuaded several buyers."

  One company began an in-depth due diligence, examining the business, its many contracts, and so on, to the extent that even Huggins thought they were overly meticulous. "At the eleventh hour, literally at midnight the day before they were to sign the purchase agreement, they backed out. No harm was done, except the energy I expended. We've even kept in touch for years, they were such nice fellows," said Huggins.

  About that time, Robert Flaherty, an investment adviser to Blue Chip, heard that the premier chocolate chain was for sale. He contacted William Ramsey, a Blue Chip executive, who was enthusiastic about buying See's. Ramsey call Buffett from Flaherty's office.

  "Gee, Bob," Buffett said. "The candy business. I don't think we want to be in the candy business."4

  For some reason, the phone line then went dead. Ramsey and Flaherty hurriedly tried to call Buffett back. Finally, after the secretary misdialed the number and several minutes elapsed, they reconnected. Before they could speak, Buffett burst out: "I was taking a look at the numbers. Yeah, I'd be willing to buy See's at a price."'

  Warren immediately flew out to visit Harry See.

  That was in November 1971, recalled Chuck Huggins. Harry See was fond of Hawaii, and "We were preparing to open our first shop there. I was commuting back and forth between Honolulu and the mainland. I got a call from Harry saying `we've got some very serious potential buyers. I want you to come back and help me talk to them.' We were to meet them Saturday after Thanksgiving."

  Huggins hurriedly caught a flight home for the meeting, which was held in a Los Angeles hotel. Harry See, See's chief executive officer Ed Peck, and a See's attorney were already there. Huggins saw Munger for the first time when he walked into the room with Buffett, Guerin, and Flaherty.

  "So we sat and talked a couple of hours. Harry explained who they were, which didn't mean anything. Berkshire Hathaway-everyone thought that was a shirt company. Nobody knew who Charlie was and Rick was maybe involved in property development. He had some relationship with Blue Chip. Anyway, Warren made a lot of comments. Charlie would periodically interrupt and put in his comments. Rick didn't say anything. We got to a point where it was evident that they were serious about buying See's. There were two things to be resolved-how much to pay and how the business would be run. Warren said, `Harry, we need to talk to you about the price privately.' Warren then said to Harry, `If we go through with this, we don't run companies. I need to know who will run the company.'"

  Peck was ready to retire, so the question presented a problem. "Harry looked around the room and saw me, and said, `Chuck will.' That's how it happened. Warren said, `That's fine.' Charlie and Rick and I would like to meet with Chuck tomorrow."

  Huggins had some experience with such meetings already, thanks to the buyers who backed out at the last minute. He knew that Harry See had already told the potential owners all the good things about See's.

  "I prepared myself by figuring what the company had been doing up to that point. I intended to tell them all the things I thought were problems, things we were working on, my view of the competition. The bad stuff. I gave them a list of my problems and solutions."

  "Warren was very calm, down to earth," recalled Huggins. "Rick never did say much. Charlie would volunteer whether asked or not. There were Warren and Charlie talking at the same time-it gave me insight. But I liked all three of them. There was no blowing of horns about what they'd done. I knew Charlie was a lawyer. That came out. Warren is like an old shoe. Charlie's a college professor or a chief justice of the Supreme Court, and my feeling about Rick was he was hip about everything. He is completely unrelated to those two, except that he was related. He never seemed serious, but he was."

  Warren explained to Huggins that first the purchase had to be settled, but, "if that happens, here are a couple of things that are expected. First, we want
you to run See's as president and CEO, and second, we don't want any Sees left with a relationship to the company. Some of the people have been around for a long time. Make a settlement and they can go their way."

  Huggins said Warren and Charlie wanted him to have full control. "We want you to maintain company ethics and standards," said Buffett.

  The See family was asking $30 million. But because of See's low book value, Buffett and Munger decided not to go above $25 million. The talks ended, but later See called back and accepted the $25 million.' Munger and Buffett purchased See's Candy on January 3, 1972, paying three times book value, something they'd never done before.

  "I was thinking, Charlie lives in Hancock Park. Warren's going back to Omaha," said Huggins. He was worried about how he would communicate with his new employers.

  Buffett told Huggins that he realized that the sale was coming at See's busiest time, since it makes more than half of its profits at Christmas. The group would get together after the holidays, said Buffett, and talk about how to proceed next.

  "We shook hands. That was the last meeting I had until after Christmas," said Huggins. "I still didn't have a sense about Warren. I couldn't find out." Since that time, Huggins has learned a lot about both Charlie and Warren.

  "The actual contract signing was January 31, 1972," said Huggins, and within a month Charlie and Warren were back in his office. "I would be sitting at my desk, the two of them in front of me. Warren would ask questions, Charlie would inject a lot of opinions."