How Charlie Munger came back from a major life setback, to make his first million in his 40s.
This is a companion discussion topic for the original entry at https://commoncog.com/c/cases/charlie-munger-first-million
This is a companion discussion topic for the original entry at https://commoncog.com/c/cases/charlie-munger-first-million
There is one thing that I want to call out in relation to this case — that of the story of Rick Guerin.
The internet-friendly, overly popularised take on Rick Guerin is from Mohnish Pabrai, and it is as follows (the following snippet is from Morgan Housel’s Too Much, Too Soon, Too Fast, but equivalent takes may be found all across the internet; just google ‘Rick Guerin’):
Everyone knows the investing duo of Warren Buffett and Charlie Munger. But 40 years ago there was a third member, Rick Guerin. The three made investments together. Then Rick kind of disappeared while Warren and Charlie became the most famous investors of all time.
A few years ago hedge fund manager Mohnish Pabrai asked Buffett what happened. Rick, Buffett explained, was highly leveraged and got hit with margin calls in the 1970s bear market.
Buffett told Pabrai:
Charlie and I always knew that we would become incredibly wealthy. We were not in a hurry to get wealthy; we knew it would happen. Rick was just as smart as us, but he was in a hurry.
Too much, too soon, too fast.
Respect the most convenient state.
The details of the story are actually worse than that — to meet margin calls, Guerin sold Buffett 5700 shares of Berkshire, at $40 apiece (The 5700 number is from Janet Lowe’s biography of Munger).
Buffett apparently said to Pabrai:
Charlie and I always knew that we would become incredibly wealthy. But we were not in a hurry to get wealthy; we knew it would happen. Rick was just as smart as us, but he was in a hurry. And so actually what happened was that in the 1973-74 downturn, Rick was levered with margin loans. And the stock market went down almost 70% in those two years, and so he got margin calls, and he sold his Berkshire stock to me. I bought Rick’s Berkshire stock at under $40 apiece, and so Rick was forced to sell shares at … $40 apiece because he was levered.
And then Warren went a step further. He said that if you’re even a slightly above-average investor who spends less than they earn, over a lifetime you cannot help but get rich if you are patient. And so the lesson. My question was, what happened to Rick? The lesson was, don’t use leverage, right? And be patient. These are attributes he’s talked about plenty, but I would say that it got seared in pretty solidly after hearing the format in which he put it.
For comparison, those Berkshire shares are today priced at $601,000 apiece. So that was 5700 * $601,000 = $3,425,700,000
The problem with this story, of course, is that Buffett and Munger were in a hurry to get rich — at least in their 20s and 30s. Munger in particular, since he was starting so late with so little. It was only after he was economically secured and had his independence in the 70s (when he was in his 40s) that he slowed down and became patient. A man who runs a law firm, does multiple real estate development projects, and runs an investment partnership at the same time is definitely a man who was ‘in a hurry to get wealthy’. The Munger that had consolidated his holdings into Berkshire is not the Munger of the 50s and 60s.
I think the right takeaway here, is more “don’t get involved in situations where, if you lose, you get wiped out”, or “don’t use leverage” or “don’t use leverage stupidly”, not ‘don’t be in a hurry to get wealthy’.
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Agreed. As someone who grew up in the Midwest myself, I get the sense that “don’t be in a hurry” really means “don’t be reckless”.
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