Damn Right! — Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger
A book review of Charlie Munger's biography on his 99th birthday
“Whenever you think that some situation or some person is ruining your life, it’s actually you who are ruining your life. It’s such a simple idea. Feeling like a victim is a perfectly disastrous way to go through life. If you just take the attitude that however bad it is in anyway, it’s always your fault and you just fix it as best you can – the so-called ‘iron prescription’ – I think that really works.”
The dawning of a new year is a time for optimism and hope for self-improvement, but vague wishes rarely bring about concrete results. A better approach is to seek wisdom from those who have been successful in business and in life so we can emulate what has already worked for others. One such exemplar is Berkshire Hathaway Vice Chairman Charlie Munger who turns ninety-nine years old today.
I was first introduced to Charlie Munger in the pages of Roger Lowenstein’s biography of Warren Buffett which I read shortly after it was published in 1995. The biography had a transformational effect on my life but the focus of the book was not on Charlie Munger. It took my attendance at the 2000 Berkshire Hathaway annual meeting to get a sense of Mr. Munger’s personality, intellect, and character. That is, on the relatively few occasions when he had “something to add” to Mr. Buffett’s commentary.
In 2000, Janet Lowe published Damn Right!, the only book about Mr. Munger that can be called a traditional biography. My Amazon history says that I purchased a copy in December 2000 and I remember that it left an impression.However, this was before I got over my aversion to writing in books so I do not have any notes of my thoughts.
Recently, I realized that Damn Right! is not among the hundred-plus book reviews I have written since 2009 so it seemed appropriate to re-read the book and share a few thoughts on Charlie Munger’s 99th birthday. What follows are highlights in a few areas that I thought were notable and would be of special interest to readers.
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Charlie Munger’s Early Years
“I met the towering intellectuals in books, not in the classroom, which is natural. I can’t remember when I first read Ben Franklin. I had Thomas Jefferson over my bed at seven or eight. My family was into all that stuff, getting ahead through discipline, knowledge, and self-control.”
Charlie Munger has long had a reputation as an autodidact, learning complicated subjects such as physics, biology, and psychology by reading widely on a subject and combining book knowledge with worldly wisdom accumulated during a long lifetime. However, readers of Damn Right! might be surprised to learn that this habit began in early childhood. Young Charlie had a reputation for being a star student, but he could be challenging for teachers to deal with due to his fierce independence.
Some of his curiosity must be innate, but the environment cultivated by Mr. Munger’s parents no doubt set him on the right path. A traditional midwestern upbringing during the Great Depression is a big part of Charlie Munger’s life experience. His family did not experience poverty, but poverty was visible everywhere. His desire to arrange financial affairs so as to never “go back to go” has depression-era roots.
Mr. Munger enrolled in college in the fall of 1941 shortly before the Pearl Harbor attack upended American life. He remained in college through 1942 and then enlisted in the military where he scored highly on aptitude tests and was sent to Cal Tech to study meteorology before being assigned to a weather station in Alaska. After the war, a family friend helped Mr. Munger gain admittance to Harvard Law School even though he did not have a college degree. Graduating in 1948, Mr. Munger joined a law firm in the Los Angeles area and seemed to be set for a traditional career in law.
One of Charlie Munger’s goals was to have a large family and he married very young at the age of 21. By 1953, he had three children and was going through a divorce. At this point, he had almost no money, lived in “dreadful bachelor digs”, and drove a beat up yellow Pontiac with a cheap paint job. The next year, Mr. Munger’s son, Teddy, was diagnosed with leukemia, a disease that had no treatment at the time. In 1955, Teddy died at the age of nine leaving Mr. Munger devastated by his loss.
“At age 76, Charlie Munger looks back on those years and notes that time takes some of the pain out of losing a child. If it didn’t, he says, he doesn’t know how the human race could continue. Munger believes that by coping as best he could with the tragedy of Teddy’s death, he was doing the only rational thing. ‘You should never, when facing some unbelievable tragedy, let one tragedy increase to two or three through your failure of will.’”
In 1736, Benjamin Franklin’s four year old son died of smallpox, an event that Franklin forever regretted since he could have given his son an early version of smallpox inoculation. Franklin has been Charlie Munger’s lifelong hero and I suspect that Franklin’s determination to move on after the death of his son provided inspiration. Unlike Franklin’s experience, there was nothing Mr. Munger could have done to help his son survive leukemia given the medical technology of the 1950s.
In time, Charlie Munger bounced back from tragedy, remarried, and ended up raising six children and two stepchildren. He regards all eight as simply his children without making any distinctions. Janet Lowe’s access to the Munger family provided much insight into Charlie Munger’s personality from the perspective of his wife, children, grandchildren, and friends. Although not known for extravagance, the Munger family has long enjoyed reuniting for summer vacations at a family compound at Star Island which is situated in a lake in northern Minnesota.
Munger Meets Buffett
“Like Warren, I had a considerable passion to get rich. Not because I wanted Ferraris — I wanted the independence. I desperately wanted it. I thought it was undignified to have to send invoices to other people. I don’t know where I got that notion from, but I had it.”
In 1959, Charlie Munger and Warren Buffett were introduced by mutual friends at a dinner party. The seven year age difference between the two men left them growing up in different social circles despite Charlie Munger working at the Buffett family grocery store during the 1930s. The Omaha connection and shared background no doubt had a role in the two hitting it off immediately and talking for hours at the dinner party. This began a longstanding partnership that has lasted over six decades.
The broad contours of this part of the story are quite well known. By 1959, Mr. Munger was back on his feet but had significant expenses given his large and growing family. Although he was well established in law, this was well before elite lawyers earned four figure hourly rates. As a professional working for clients, Mr. Munger’s income was correlated with his personal expenditure of time and he sought sources of income and wealth that could compound more rapidly. There might be nothing wrong with “sending invoices” for legal work, but Mr. Munger found it distasteful.
When Mr. Munger heard about the Buffett investment partnerships, he set up a partnership of his own. In addition, he went into real estate development in the Los Angeles area with Otis Booth, an endeavor that required personal attention but proved to be highly remunerative. After completing five projects, Mr. Munger had $1.4 million as a result of real estate activities by the late 1960s. The combination of real estate activities and his investment partnershipallowed Mr. Munger to give up the practice of law in 1965 after starting a firm that still bears his name today.
Would Charlie Munger have embarked on a career in business and investing if he had not been introduced to Warren Buffett in 1959? Or would he have remained in the legal profession, perhaps with a few real estate side projects? Would Warren Buffett have spent his life searching for “cigar-butt” stocks, never expanding into better business if he had not been introduced to Charlie Munger? These questions are difficult to answer. I suspect that both men would be very rich today, but not nearly as rich as they became due to combining their intellects and efforts over six decades.
The story of See’s Candies is legendary not just because it was a “lollapalooza” investment but because it is thought of as a turning point in the history of Berkshire Hathaway. Although Charlie Munger often minimizes his role in leading Warren Buffett away from “cigar butt” investing and toward commitments to high quality companies, the truth is that Mr. Munger’s role is simply undeniable.
In 1972, the Buffett and Munger duo acquired See’s Candies for $25 million, the largest purchase the two had ever collaborated on and the most expensive relative to book value.Both men acknowledge that if the price tag had been even $100,000 higher, they would have walked away from the deal!
It’s a good thing that they did not walk away. In 1999, Mr. Buffett noted that See’s Candies had earned a cumulative $857 million pre-tax since its 1972 acquisition while requiring very little incremental capital investment.In 2011, See's had sales of $376 million and $83 million of pre-tax profit.
In the decade after meeting Warren Buffett, Charlie Munger became a participant in a series of meetings with disciples of Benjamin Graham. While Mr. Munger saw a great deal of merit in Graham’s value-oriented approach, he recognized that there are situations where it makes sense to pay a significant premium to book value when a business has proven superior economics. That was certainly true of See’s Candies at the time and proved to be even more true as time went on.
A Tangled Web
Janet Lowe does an admirable job of explaining the various entities that Warren Buffett, Charlie Munger, and other close associates used to acquire control of different businesses during the 1960s and 1970s. Through entities such as Diversified Retailing, Blue Chip Stamps, and Berkshire Hathaway itself, deals were structured in ways that appeared to make the most sense at the time. However, after many years, the web of ownership interests became extremely complex and this resulted in trouble with the Securities and Exchange Commission in 1974.
In 1972, a block of stock in Wesco Financial, the parent company of Mutual Savings and Loan, was offered to Warren Buffett and Charlie Munger at fifty percent of book value. A block of stock accounting for 8% of Wesco was purchased by Blue Chip for $2 million. In 1973, Wesco announced plans to merge with another savings and loan on terms that appeared to be unfavorable. Warren Buffett personally convinced Elizabeth Peters, who controlled a large block of Wesco shares, to reject the merger.
When the merger was defeated, Wesco shares fell and Blue Chip moved to acquire control. In a “quixotic moment”, Charlie Munger decided that the right way to behave would be to offer to buy Wesco shares at $17, the price at which the stock traded prior to the defeat of the merger and considerably above what they needed to pay given the market’s reaction to the defeat. Ironically, this effort to be fair to Wesco shareholders raised alarms at the SEC that something nefarious was taking place. This led to an unpleasant investigation of the tangled web of ownership between Berkshire, Diversified Retailing, Blue Chip, and Wesco that was eventually settled for $115,000.
Lowe describes this episode in considerable detail and explains how it led to the untangling of the complex web. Although it took years, ownership interests in all of the firms were eventually consolidated into Berkshire Hathaway. The final piece of the puzzle was put into place in June 1983 when Blue Chip’s minority shareholders agreed to exchange each share of Blue Chip for 0.077 of a share of Berkshire Hathaway. At the time, the combined assets of both firms was just $1.6 billion.
In 1978, nineteen years after meeting Warren Buffett, Charlie Munger formalized his role at Berkshire Hathaway by becoming Vice Chairman. What started as an informal partnership was cemented into a formal role at Berkshire that continues to this day.
The only real criticism of Damn Right! is that it is now quite outdated. One cannot blame Janet Lowe for setting out to write a biography of Charlie Munger in the late 1990s. After all, Mr. Munger was in his mid 70s at the time and most everyone assumed that the bulk of his career was in the past. Who could have known that he would still be active in business and philanthropy nearly a quarter century later?
Following the chapters on Blue Chip Stamps and Wesco, the book covers events that are increasingly familiar to most readers who have followed the history of Berkshire Hathaway, including the rapid growth of the company throughout the 1980s and the transformation of the company in the 1990s with the General Re and GEICO acquisitions. The book was published at a time when Berkshire was increasingly out of favor with investors as the dot com boom reached its crescendo in the late 1990s.
In the decades since the publication of the book, Charlie Munger has remained active at Berkshire Hathaway. In addition, he served as Chairman of Wesco Financial until Berkshire acquired the remaining minority interests in Wesco in 2011. Most intriguingly, Mr. Munger has been very active at Daily Journal Corporation, a company unrelated to Berkshire Hathaway that I wrote about recently. The story of how Charlie Munger and Rick Guerin acquired control of Daily Journal is covered in Damn Right! and will be of interest to readers who follow the company.
The chapters of Charlie Munger’s life in the 2000s, 2010s, and 2020s deserve to be documented in a new biography. Janet Lowe would be the ideal person to write such a biography but sadly she passed away in 2019.
As Mr. Munger enters his one hundredth year, his amazing story is still not complete. In fact, he is scheduled to hold court at the Daily Journal annual meeting on February 15, 2023. The meeting will not have an in-person audience and will be webcast by CNBC with questions asked by Becky Quick. Questions may be submitted to CNBC at DailyJournalQuestions@CNBC.com.
Poor Charlie’s Almanack. Edited by Peter Kaufman. This is an outstanding book that explains the multi-disciplinary mindset expressed in Charlie Munger’s speeches and writings, several of which are presented in its illustrated pages. I highly recommend it.
Charlie Munger: The Complete Investor by Tren Griffin. Many readers familiar with Charlie Munger will find the chapters on worldly wisdom and psychology to be familiar ground, but this book presents this material in a concise and approachable manner that can be read in a short period of time. I reviewed the book in 2015.
Seeking Wisdom: From Darwin to Munger by Peter Bevelin. I read this book several years ago although I have not yet written a book review. Seeking Wisdom contains a great deal of content on human misjudgment and provides guidelines for better thinking. A summary of checklists in the appendix is also useful.
Munger’s Psychology of Human Misjudgment. Inspired by Charlie Munger’s speech on twenty-five psychological tendencies that bring about misjudgment, as presented in Poor Charlie’s Almanack, I wrote this article in 2016 and also wrote additional articles on several of the specific tendencies. My goal is to eventually write one article on each of the twenty-five tendencies.
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I apparently purchased a second copy of Damn Right! in January 2001, no doubt as a gift, although I cannot recall who I gave the book to.
Damn Right!, page 29
“Going back to go” is a reference to the Monopoly board game, first released in 1935, where bad luck can send a player “back to go” where the player must start their travel around the board all over again.
Damn Right!, page 45
Damn Right!, page 4
The Wheeler, Munger investment partnership operated from 1962 to 1975 and posted an average annual return of 24.3% vs. 6.4% for the Dow Jones Industrial Average. This was despite the fact that the 1973-74 bear market was brutal for the partnership with a loss of 31.9% in 1973 and 31.5% in 1974, far in excess of the DJIA’s decline of 13.1% and 23.1%, respectively. After posting a 73.2% return in 1975, the partnership shut down. Source: Damn Right!, Appendix A, page 251.
The law firm is Munger, Tolles & Olson which offers a wide array of services across multiple disciplines. Among the firm’s marquee list of clients is Berkshire Hathaway.
See’s Candies was purchased by Blue Chip Stamps, a company that Buffett and Munger controlled which eventually merged into Berkshire Hathaway in 1983. The price tag was three times book value, a figure that no doubt gave Warren Buffett heartburn! I highly recommend reading Charlie Munger’s letters to Blue Chip Stamps shareholders.
Berkshire Hathaway’s 1999 annual report, page 14. 1999 was the last year that Berkshire disclosed See’s results as a separate business segment. Thereafter, it was subsumed into a group of retail companies and its results were no longer disclosed granularly in Berkshire’s reporting, although some figures have been published elsewhere (see footnote 10 below).
The secrets of See's Candies by Daniel Roberts, August 12, 2012. h/t Adam Mead via TheOraclesClassroom.com
Fantastic article! Thank you.
Happy New Year, RR!
Happy birthday, Charlie!