Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger
by Janet Lowe John Wiley & Sons © 2003 304 pages
Focus Leadership & Mgt. Strategy
Take-Aways • Charlie Munger’s Midwestern family valued hard work and integrity. • He started his career as a lawyer but moved gradually into the life of an investor.
Sales & Marketing Corporate Finance
• Family has always mattered to Charlie; he has eight children from two marriages.
Human Resources
• Charlie Munger and Warren Buffett met in 1959 and got along immediately.
Technology & Production
• The successes of Charlie’s law firm, Munger, Tolles, and his hedge fund, Wheeler, Munger & Co., founded in 1962, furthered his career as an independent investor.
Small Business Economics & Politics Industries & Regions Career Development Personal Finance
• Munger and Buffett built an informal partnership, investing together throughout the 1970s. • The two created the present structure of the Berkshire Hathaway holding company in the early 1980s, and have been profitably investing in companies ever since. • Charlie has always been an honest businessman, and is the first to admit to his mistakes.
Concepts & Trends
• He promotes social causes, including abortion rights and quality health care. • He earned his status as one of the world’s foremost investors.
Rating Overall
7
(10 is best)
Applicability
6
Innovation
Style
8
7
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Relevance What You Will Learn In this Abstract, you will learn: 1) The life story of Charlie Munger; 2) How he became a billionaire through investments in real estate and corporate acquisitions; and 3) How he helped Warren Buffett make Berkshire Hathaway successful. Recommendation Charlie Munger’s life story is a version of the classic American Dream: a hard-working young man builds a billion-dollar fortune through hard work and honest business deals, all the while raising eight children with the help of an intelligent, devoted wife. Author Janet Lowe brings this story and Munger’s personality to life with well-chosen anecdotes from family, friends and business associates. These include, most notably, Warren Buffett, with whom she already enjoyed a rapport thanks to her work on a previous bestseller, Warren Buffett Speaks. Because Munger’s business history is so complex, the chapters are organized thematically rather than strictly chronologically, which can be a bit confusing. Thankfully, Lowe provides a handy timeline in an appendix. getAbstract.com suggests this book to investors, Buffett fans (who may underestimate the contributions others such as Munger have made to the Berkshire Hathaway empire) and to those dismayed by corporate corruption who could use this tale of honest success to renew their faith in capitalism.
Abstract The Early Years On January 1, 1924, Charles Thomas Munger was born in Omaha, Nebraska. His mother, Toody, came from a wealthy family of intellectuals, and gave her son his voracious hunger for reading and learning. His father, Al, a successful lawyer, was the son of Judge T. C. Munger, a self-educated man who rose from abject poverty to become a federal judge. “If (investing) weren’t a little difficult, everybody would be rich.” — Charlie Munger
“Without numerical fluency, in the part of life most of us inhabit, you are like a one-legged man in an asskicking contest.” — Charlie Munger
Young Charlie was steeped in the family values of hard work and self-discipline. Though he worked briefly at Buffett & Son, a grocery store owned by Warren Buffett’s grandfather, he didn’t cross paths with Warren, who is five years his junior, until years later. Charlie left Omaha to attend the University of Michigan in 1941, and left school in 1943 to enlist in the Army Air Corps. He was sent to Caltech to train as a weatherman, then to Alaska. Though he never saw combat, his training proved lifechanging in another way: during it, he met and married Nancy Huggins, his sister’s roommate at Scripps College. The young couple moved to Boston so Charlie could attend Harvard Law School, his father’s alma mater. Despite having no undergraduate degree, Charlie graduated magna cum laude. In 1949, Charlie, Nancy, and their son and two daughters moved to California where he joined the law firm Wright & Garrett (later Musick, Peeler & Garrett). In 1953, the Mungers divorced. The children lived with their mother, but remained close to their father. Around this time, Charlie invested in a business for the first time, buying part of a troubled transformer company owned by one of his legal clients. The financial pressure came at a difficult time; Munger’s nine-year-old son, Teddy, died of leukemia in 1955.
The Road to Riches In 1956, Charlie married Nancy Borthwick (friends joke that Charlie wouldn’t be able to remember her name if it wasn’t the same as his first wife’s), and took her two sons from a Damn Right!
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previous marriage into his family. They soon had four more children. Charlie spent much of his children’s early lives at the office, but family has remained very important to him. “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.” — Warren Buffett
“There are always people who will be better at something than you are. You have to learn to be a follower before you become a leader.” — Charlie Munger
“I don’t spend much time regretting the past, once I’ve taken my lesson from it. I don’t dwell on it.” — Charlie Munger
“It is remarkable how much long-term advantage people like [Warren Buffett and myself] have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” — Charlie Munger
Charlie’s father passed away in 1959. When he went back to Omaha to help his family, he met Warren Buffett through mutual friends. He and Buffett hit it off instantly. After Charlie returned to California, he and Buffett spent hours on the phone, talking over possible investments. Gradually, Charlie took over the role of business partner and investment advisor formerly occupied by Benjamin Graham, Buffett’s mentor and an originator of value investing. Charlie entered a real estate partnership with a client in 1961, building the own-your-own apartments that were coming into vogue in southern California. In 1962, he founded a new law firm, Munger, Tolles, with some of his sharpest colleagues from his old firm. That year, he and client Jack Wheeler started their investment partnership, Wheeler, Munger & Co. Charlie’s first real estate development proved immensely profitable when he sold it in 1967, and he continued to invest in similar projects with various partners, including Otis Booth and Al Marshall. Success enabled him to indulge in his passion for architecture, as well as to hone his business skills by spotting real-estate trends and introducing new ideas to sell his projects. Many of Munger’s business associates eventually became very successful. Rod Hills, a Munger, Tolles founding partner, later became chairman of the SEC. Hill’s wife, Carla Anderson Hills, served in the cabinets of both Gerald Ford and George H. W. Bush. Other top lawyers in the firm included Chuck Rickershauser, Ron Olson and Robert Denham. One of the firm’s early clients was Warren Buffett, along with the companies that later became Berkshire Hathaway. Though Munger stopped practicing law in 1965, his imprint was deep. The firm’s reputation as an intellectual powerhouse is part of Charlie’s legacy, as is its democratic compensation structure, under which salaries are determined by open ballot. Wheeler, Munger & Co. was a hedge fund in the same vein as the Buffett Partnership, often investing in the same companies and securities. Indeed, Charlie formed it partly at Buffett’s urging. Rick Guerin started his investment career both imitating Charlie and doing deals with him. Al Marshall joined the firm and later replaced Wheeler. Even counting the terrible returns of the 1973-1974 stock market downturn, Wheeler, Munger averaged an annual return of 24.3% from 1962 to 1975, soundly beating the Dow Jones Industrial Average annual return of 6.4%.
The Genesis of a Giant During the late 1960s and early 1970s, Munger, Guerin and Buffett gradually acquired a controlling interest in Blue Chip Stamps. This small company issued trading stamps, which merchants distributed. Customers collected and redeemed the stamps for merchandise. The investors saw untapped potential in the company’s float account — the difference between stamps issued and stamps redeemed. Using this pool of capital, Blue Chip’s controlling investors acquired several other companies: •
Wesco Financial — At first, Blue Chip bought part of the company, but it owned 80% by 1974. The acquisition led to an SEC lawsuit alleging that Blue Chip manipulated Wesco stock to fight off another merger. The suit was settled, and Berkshire Hathaway’s dense tangle of ownership interests was subsequently simplified, with Blue Chip becoming a wholly owned subsidiary. Munger was named Berkshire’s vice chairman, his first formal position with the company.
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• “Playing poker in the Army and as a young lawyer honed my business skills … What you have to learn is to fold early when the odds are against you, or if you have a big edge, back it heavily because you don’t get a big edge often.” — Charlie Munger
“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.” — Charlie Munger
“A first-rate man should be willing to take at least some difficult jobs with a high chance of failure.”
“Munger takes seriously the obligation of the fortunate to support the needs of society that cannot be met by market capitalism.”
•
See’s Candy — Munger and Buffett bought See’s in 1972 for $25 million, a premium of three times the firm’s book value. At first Buffett was reluctant to pay more than book value, because he was schooled in value investing, which teaches investors to find stocks trading at a discount to book value. But Munger helped him recognize the soundness of See’s business. The new managers solidified the firm’s competitive advantages and savored the pleasure of acquiring a well-run company. The Buffalo Evening News — In 1977, Blue Chip bought this Buffalo newspaper. Charlie called on his legal skill when a competitor brought an antitrust suit against the paper. The competitor folded in 1982, but even without competition, the paper struggled during a recession. Charlie’s personal fondness for newspapers led him to stick with it, and now it is among the most profitable newspapers in the U.S.
Charlie experienced some difficult personal problems in 1977. His mother passed away, and a bungled cataract operation left him blind in one eye. He did not let it stop him. Berkshire Hathaway acquired companies rapidly in the late 1970s and throughout the 1980s. Having learned from See’s that some companies were worth a premium price, Munger and Buffett expanded their horizons. Their investments include GEICO, Nebraska Furniture Mart, Boersheim’s (an Omaha jeweler), ABC, Gillette, USAir, SAFECO Corporation, Champion International and Coca-Cola. In the 1990s, Berkshire’s growing reputation allowed it to make more deals on preferred terms, concentrating on the insurance industry. The $22 billion buyout of General Reinsurance gave Berkshire Hathaway the highest net worth of any U.S. company, and solidified its position as an insurance giant. Berkshire pays officers and directors relatively low salaries and keeps its overhead to a bare minimum. Buffett’s private jet is named “the Indefensible” in response to Munger’s jabs. The management philosophy relies on a few simple ideas — recognize value, closely scrutinize deals, face trouble head-on — rather than complicated, mysterious growth formulas. Over time, the firm and its management have developed what can only be called a cult following.
Doing Honest Business Charlie’s business integrity stands out in two examples: his battle with the savings and loan industry in the 1980s and his role in the turnaround of Salomon Brothers in 1991. As Wesco Financial’s chairman, Charlie predicted the S&L crisis of the late 1980s. As early as 1983, he warned that government deregulation of S&L lending powers could lead to increasingly unsustainable loan practices. Wesco gradually moved out of the S&L business and recreated itself as a holding company. Munger invested in Salomon Brothers and the Federal Home Loan Mortgage Corporation (Freddie Mac). Hence, Wesco was not hit very hard when S&Ls began to fail, prompting a massive government bailout. Charlie was outraged by the lobbying practices of the U.S. League of Savings Institutions, the S&L trade group. The lobbyists, he charged, wanted to preserve unsound regulations and resist accountability for the industry’s problems, at a huge cost to taxpayers, investors and public faith in savings institutions. He took Wesco out of the League in 1989, and gave up its S&L charter in 1992, all while calling publicly for strong governmental reforms. The League ultimately collapsed, confirming Charlie’s predictions. In August 1991, Munger and Buffett, both members of Salomon Brothers’ board of directors, discovered that a trader at that firm made illegal bids for U.S. Treasury securities. To make matters worse, the company’s top executives, John Meriwether Damn Right!
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“Charlie recognized Warren’s genius before anybody. If I had… listened to Charlie about Warren I’d be a lot richer now.” — Al Marshall, Munger’s investment partner
“Though Munger can be self-willed, preoccupied and abrupt, says Buffett, ‘He’s just the best pal a guy could have.’”
and John Gutfreund, had known of the violation for four months but had withheld information from the board. Munger pressed for full disclosure and the resignations of the officials who had known of the illegal trades. Grasping the legal implications, he brought in top lawyers, such as his old partners Denham and Olson. Due in part to Munger’s tireless work, the case damaged Salomon but did not break it. The firm was fined $290 million but no criminal charges were filed. Denham eventually became CEO, turned the firm around and sold it to Travelers Group Inc. for $9 billion in 1997. A fascinating postscript: A group of unhappy Salomon employees left to form a hedge fund called Long-Term Capital Management (LCTM). Due to flawed real estate investments and an unsound leverage, the fund came perilously close to collapsing and causing serious damage to the U.S. economy. Although Buffett offered to bail out the fund, LTCM rejected the deal and was afterward rescued — under government pressure — by a bank consortium.
Charlie Puts His Money Where His Mouth Is Munger believes in financially supporting social causes. Though he is a Republican and tends to social conservatism, he has staunchly supported abortion rights, with farreaching consequences. He first became involved in 1969, when he convinced Munger, Tolles to defend Dr. Leon Belous, who was convicted of referring a woman to an abortionist. He persuaded many top lawyers to sign a friend-of-the-court brief, and the doctor was acquitted in a reversal of California’s anti-abortion law. This case was one of the building blocks for the Roe v. Wade case three years later. Charlie later became a trustee and chief financial officer of the Los Angeles chapter of Planned Parenthood, and his views have stayed the same. Charlie also directly champions the cause of health care. A friend asked him to join the board of the not-for-profit Good Samaritan Hospital, and he soon became chairman. He treated its short-sightedness and mismanagement just as he would have treated corporate corruption: he fought it. Though some doctors left, Munger recruited many more. Good Sam, as it is fondly known, has grown into a well-respected hospital that ranked among the best in the country in a 1998 U.S. News & World Report study. The transition was long and difficult, but Munger believes it was worth it. Charlie was a millionaire by 1970, but he continued to reinvest his money as each deal paid off. When Berkshire Hathaway reorganized in the early 1980s, Munger owned 2% of its stock, for which he had paid approximately $40 per share. Today each share is worth more than $60,000. Although he owns several homes across the U.S., he likes to keep his expenses minimal and refuses to conform to standard business practices, like accepting exorbitant director fees that cost shareholders money. It is fair to say that he got his wealth the old fashioned way — he earned it.
About The Author Janet Lowe, an investment writer and author, wrote Warren Buffett Speaks, as well as Welch: An American Icon and The Man Who Beats the S&P: Investing with Bill Miller. She has served as editor of the San Diego Daily Transcript and financial editor of the San Diego Tribune. In addition, she has published more than 200 business articles.
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