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  This, despite Munger's love and respect for science. Additionally, Charlie began to realize that buying high quality businesses has certain advantages: "It's not that much fun to buy a company that you hope liquidates at a profit just before it is destined to go broke."

  He also learned how to define a good business: "The difference between a good business and a had business is that good businesses throw up one easy decision after another. The had businesses throw up painful decisions time after time."

  CHAPTER S I X

  MUNGER MAKES

  HIS FIRST MILLION

  The rabbit runs faster than the fox, because the rabbit is running for his life while the fox is only running for his dinner.

  Richard Dawkins, The Selfish Gene

  T WAS A BALMY NOVEMBER DAY in Southern California, cool enough to be comfortable, warm enough to go jacketless, Charlie Munger eased his sleek black Lexus LS400 between a row of garages, revisiting the Pasadena condominium projects where he made his first real money.

  Maneuvering the car wasn't as easy as it looked. At 75, Munger is blind in his left eye and has little peripheral vision in the other. He has adapted, developing tricks to figure out where traffic is, and when he has a clear shot to enter or exit the flow. A powerful automobile engine allows him to act on his decisions quickly.

  After searching for a while along the streets of a working-class Los Angeles suburb that has changed little over the past 30 years, Munger next located Alhambra Village Green, his largest real estate development project. On this (lay three decades later, Charlie is visibly pleased to see that the lawns are clipped, the spa and pool area swept, and several elderly ladies are gliding back and forth in the blue water, doing their daily exercise laps.

  "Those olive trees?" he said, pointing across the grass. "We paid less than $100 each for them. Got them from an olive grove that was being torn out." Like the women swimming their laps, the olive trees had retired long ago, but they were still going strong.

  Leaving Alhambra Village Green, Charlie looked around for somewhere to have lunch. "Usually a shopping center has some place," he said, gunning the Lexus across the street to a strip mall that has obviously had several facelifts over the years. It was still no Houston Galleria, but it swarmed with shoppers. He found a Baker's Square coffee shop and told the hostess, "Oh, seat us anywhere," then changed his mind and asked for a booth. A cheerful young Hispanic waiter introduced himself and enthusiastically described the chicken stir-fry salad, the stir-fry pita sandwich with french fries, and the plain old stir fry. "Those are my favorites," said Gabriel. Charlie ordered a club sandwich with french fries and iced tea. "Save some room for pie," advised the zealous waiter. At the end of the meal, Gabriel explained that although Charlie hadn't requested it, he'd given him the senior citizen's discount.

  "I'm not old enough for that," Munger chortled.

  Charlie picked up the check and stopped at the cash register. Gabriel dashed forward, "I'll take care of that for you, sir."

  The young waiter had no idea that the gentleman in the chino pants and tweed jacket built the entire city block of condominiums opposite the coffee shop. He did not know that he'd just served a sandwich to a billionaire, and it was obvious that it wouldn't have mattered if Gabriel did know. He would give the same service to anyone.

  "Are you our waiter?" blurted Munger.

  "Yes, sir."

  "Well, keep the change then," said Charlie, shoving two $10 bills across the counter for a bill that couldn't have been more than $15. Munger then charged for the door.

  "I don't look at waiter's faces, so I never recognize them later," grumbled Charlie. "It's a terrible habit to live with. Very embarrassing."

  Why doesn't he look at people?

  "I'm always thinking about other things. I forget to look around."

  "Charlie has enormous powers of concentration," said Otis Booth, Munger's partner on his first two real estate projects. "When he concentrates, everything else goes away."

  AT THE 1998 BERKSHIRE HATHAWAY ANNUAL MEETING, a shareholder asked why Warren and Charlie shied away from real estate investments:

  "Here's an area in which we have a virtually perfect record extending over many decades," said Munger. "We've been demonstrably foolish in almost every operation having to do with real estate that we've ever touched. Every time that we had a surplus plant and didn't want to accept the bid of some developer that planned a development, we'd have been better off later if we'd accepted the bid and done something with the sales proceeds in a field where we had expertise."

  It is true that Berkshire seldom puts money into real estate ventures as a passive investment, although after Munger made this statement Buffett invested an undisclosed sum in motels operated by the Red Roof Inns chain. While it is quite possible that Berkshire has a poor record in managing the real estate properties that become surplus to normal operations of its companies, it is misplaced modesty to say that Munger personally has a certified record of failure in real estate.

  In fact, the story is quite different. While Charlie was at first fascinated with industrial companies, he found that making money in manufacturing was fraught with danger. On the other hand, people were moving to Los Angeles at the rate of 1,000 per week in the 1960s. With Southern California's explosive growth and plentiful land, Munger could see that people were becoming wealthy as land developers.

  "How IT HAPPENHI) Is AN INTERESTING s,rcniv," recalled Munger. "I had a client-two, a father and son. The father's father had owned the end of a city block across from Caltech. The father had no use for the propertywe were supposed to sell it off in probate."

  Those clients were Otis Booth and his father. Otis Booth is a greatgrandson of Harrison Gray Otis, who in 1894 founded the Los Angeles Times. Booth calls himself a "shirt tail" cousin to the Chandler family, who recently sold the newspaper to the Tribune Co., owners of the Cbicago Tribune. Booth's father was an oil wildcatter and rancher and once worked fora talc-mining company. Like Munger, Booth went to the California Institute of Technology, where he earned an engineering degree. He and Munger attended college at the same time though they were in different programs and didn't know one another. Later Booth went to Stanford business school, where he may have met the second Nancy, but didn't get to know her well.

  Booth first met Munger in the late 1950s when he went to consult with his father's attorney. Roy Garrett, because he hoped to buy a printing plant. "Roy said, 'I've got a young guy here about your age, why don't I turn you over to him.' " Munger and Booth were both in their mid-thirties.

  "Charlie was the same then as he is now," said Booth. "Hungrier, more aggressive. We did run around, the two of us together, and made this deal, which was buying a rotogravure printing plant. The printing plant's major customer was the Los Angeles Times Sunday magazine, then called the Home magazine."

  Because Booth worked at the newspaper and the Times was the plant's largest customer, he, of course, had to advise his employer of his intentions. Booth planned to quit the Times and run the printing plant. Because the Times had no labor unions and the plant was unionized, Booth thought that the newspaper's management would not want to buy it and would be pleased to have him own it as a reliable supplier of services to his former newspaper.

  "But at that juncture in the Times' history they were just beginning to diversify their holdings. They brought in McKinsey & Co. to advise them. The partner in charge was Jack Vance. Jack looked at the terms of the deal and said, 'Hell, you didn't buy it, you stole it.' He said, `we'll take it. You'd better cooperate.' The LA Times was crazy to take it on, but they did buy it. I had the pleasure of bailing it out for them later," said Booth.

  "In the course of the deal, I got to know Charlie very well. It took us several visits to negotiate with the owner. We developed a considerable liking for each other. And I, at least, found we thought along parallel lines. If he started to say something, I knew what he was going to say."

  The Mungers introduced Booth to his w
ife Dody. "A couple of years after, I called him for lunch at the California Club. I said, `I want you to be the first to know-Dody's pregnant.' I wanted to have another child in this second marriage. I was 44. Charlie grinned and said, 'I think there's something you should know. Nancy's pregnant.'"

  Booth's wife gave birth to a daughter, Stephanie, and the Mungers had a son Philip and the couples became godparents to one another's children. Since those early days Booth and Munger have fished together in New Zealand, Australia, and other distant waters. Munger goes every year to a trout fishing club Booth discovered in northwest Colorado, Rio Blanco Ranch, which is on the headwaters of the White River above Meeker. They celebrated the year 2000 fishing in Tierra del Fuego at the tip of South America, where Munger caught an 18-pound brown trout.

  "He's my best friend in the world," said Booth. "Very much so."

  It was around 1961 when Booth came to Munger to handle the probate settlement, and Charlie instantly advised Booth to keep the property and develop it.

  "I said to Otis, build your own apartments." said Munger. "You should not allow those two houses forming the whole end of the block to go into other hands. You buy them. Tear them down, re-zone, build, and sell own-your-own apartment units. Otis said, `Charlie, if this is such a good idea, and you're so sure it will work, why don't you put up some of the money and join me. I won't do it without you.'"

  "He shamed me into demonstrating the wisdom of my own advice," chuckled Munger.'

  This happened not long after the own-your-own concept of apartment occupancy started to become popular in California.

  "Charlie and I went in together," said Booth. "We each owned half. We bought the other half, adjacent to Caltech. It's still there."

  When Munger and Booth joined forces in real estate development and construction, it was a totally new experience for them, but Munger fell back on principles and skills he'd learned in other businesses.

  The units across from Caltech are more than 35 years old, and have become so integrated into the neighboring landscape that they fade into the background. Yet, in a part of the country where housing sometimes seems disposable, the projects have endured and still hold their own in a respectable neighborhood.

  "We gave our occupants more land and a better size and it turned out people really liked it. Moreover we had a good location," said Munger. "It worked out very well."

  "It was slow, there was a recession we had to wait out," agreed Booth. But in the end there was a "very substantive profit - 400 percent. We put in $100,000, got back $500,000."

  When the Caltech units, completed in 1967, were sold, Charlie and Otis then went to work on a site in Pasadena on Orange Grove Avenue, a broad street where apartments now encroached on 1900-era mansions. With this project, they applied the lessons they learned on the Caltech units and made more money faster.

  Charlie and Otis noticed that the ground-floor apartments in the first project sold out quickly, but the upstairs units seemed to sell molasses slow. They decided to make the next project one-story, with a price that reflected a lower density of land use. Even with a higher price tag, the single-level condos sold quickly. Munger stuck with the single-level floor plan on a third, fourth, and fifth project, and again, despite boom-andbust real estate markets, the units were profitable.

  Munger continued to practice law and was involved in other activities while he worked on the real estate ventures. For years he took no money out, rather he invested in one project after another. Munger said that throughout the process he was learning from Booth, and Booth said he too learned much, especially about Munger. He came to understand Charlie's somewhat taciturn nature.

  "Charlie isn't secretive," said Booth, "but simply very compartmentalized in his communication. He follows the `need-to-know' rule."

  Charlie's stepson Hal Borthwick pointed out that today lawyers seldom get involved in deals with their clients because their firms fear losses from malpractice claims, but in the 1950s and 1960s, it was a common occurrence.

  "Relationships were more genteel," he said. "It was a different era."

  With so many projects underway, Munger's free time was limited. "The kids would spend the day with dad at the construction site. We liked to pick up the metal plugs from the electrical boxes, like little coins," recalled Charles, Jr.

  After Booth and Munger had completed their two projects, Charlie became involved in a third deal in which Booth did not participate because he thought the conditions of the land ownership might cause problems. Charlie saw the risks, but decided he could make it work.

  "I had a client who came to me after I used to beat him at the poker table. He had shopping centers in Alhambra. Across the street, he had ground leases on surplus property owned by the city of Pasadena," explained Munger. "He wanted to protect his shopping center from more retail influx. He hired me to work on his legal problems, but I didn't like the way he was doing it. I said `I quit' as his attorney. He turned the tables and said `put on paper what you would do.' I said, `if you put up the ground lease, I'll do all the development work, financing, etc. and give you half the profit.'"

  Rather than share in the profits, the shopping center owner preferred to have cash up front, which turned out to be a mistake. Half the profits would have been a much better deal.

  In Alhambra, Charlie and his partners built 442 one-story own-yourown apartments on two 11-acre sites. This was the lowest priced, lowestend of all the Munger projects. Each unit sold for around $20,000. Again, the apartments went fast. By then, Munger felt he knew what buyers were looking for. He and the builders did not cut corners on design or construction details. Then when the project was finished, they made sure the units were attractively landscaped.

  "Lush landscaping," declared Charlie. "That's what sells. You spend money on trees, and you get it back triple. Stinting on landscaping is building malpractice."

  Munger took on a new partner when he started Alhambra Village Green, hiring Al Marshall as an unlikely sales manager. Charlie met Marshall because Nancy and Martha Marshall played golf together at the Los Angeles Country Club. Charlie and Al joined them for a husband and wife tournament. California was still a relatively small state at the time, and families who had been around for a while often found they were connected in some way. As it turned out, Marshall, a petroleum engineer, had been a classmate of Nancy's first husband at Stanford.

  Charlie and Al were introduced at the first tee. On the second hole, Charlie asked, "What do you do?" Marshall had worked for Shell Oil and some small independent oil companies. The oil business was in a rocky period, and Marshall didn't want to make too much of the fact that he was unemployed. Instead he told Charlie about some oil rights he was bidding for. On the third hole, Charlie asked how Marshall was going about the bidding. When Marshall told him, Charlie replied, "You're doing it all wrong."

  "I said okay, if you're so smart, why don't you do the legal and financing work and I'll do the rest," said Marshall. Munger structured the deal in an ABC trust, which was a type of tax shelter that was legally correct at the time, but was so much abused that it has since been outlawed. But Marshall said that their ABC trust was properly done and has held together.

  "I'm still getting two to three thousand dollars a month from that. We only put up $1,000 each and we've each probably made a half a million out of it."

  The Marshalls still own their shares, but Munger gave his to his children.

  When the Alhambra project came along, Munger asked Marshall if he was interested in putting up $15,000 and going into the project with him. Marshall was still casting around for employment, and although the money was a stretch for him, he agreed.

  "The business he was in was going to hell under him, and he had five children," said Munger. "I knew he was a great guy and he needed something else to do. I brought him in to do sales. I told him, `Build your own department.' He'd never done it before, but he was naturally talented. He liked what he did. It was screamingly successful."

 
; Marshall often teased Munger that he would advertise the Alhambra units as "Rancho Sewage," because the land had previously served as the city of Pasadena's sewage treatment plant.

  Booth had opted out because the property was not owned, but rather came with a 49-year-lease from the city. Ordinarily lenders wouldn't issue loans for developments with less than a 50-year-lease, but that did not deter Munger. He knew that a local savings and loan, State Mutual, had recently raked in $60 million by increasing its passbook rate by one-half of 1 percent. The lender was racing to get the money out and earning interest in the form of loans. When Charlie and Al met with the loan officer to look at the property, Al said the lender all but asked if they wanted an even bigger loan than they had applied for.

  The way Munger handled the situation convinced Marshall that Charlie had the ability to think through a future event and come to a conclusion different from what others assumed it would be, "and I've hardly ever seen him wrong."

  Charlie saw things this way: "... just out of our respective graduate schools, my friend Warren Buffett and I entered the business world to find huge, predictable patterns of extreme irrationality. These irrationalities were obviously important to what we wanted to do, but our professors had never mentioned them. [Understanding the problem of irrationalities] was not easy ... I came to [study] the psychology of human misjudgment almost against my will: I rejected it until I realized that my attitude was costing me a lot of money and reduced my ability to help everything I loved."i

  Munger's originality in dealing with business problems was comforting to Marshall.