Over the past few decades, Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) have collectively issued tens of thousands of pages of advice on investing and how to live a better life. Their interviews and shareholder meetings have been transcribed and distributed worldwide, allowing investors from all walks of life to benefit from their knowledge.
These two billionaires are not the only successful investors globally, but they stand out for their longevity. Buffett has been investing since he was a teenager. That means he has been active in the stock market for around seven decades. Munger started investing in stocks later than his partner, but he was an active real estate investor before he opened his first investment partnership. Thanks to their lengthy investment careers, these two investors stand out from the crowd. Thus, by studying why they have consistently succeeded decade after decade, we can try and improve our own investment process.
However, not all investors are able to stay in the spotlight decade after decade. In an interview with the Motley Fool in 2012, Mohnish Pabrai (Trades, Portfolio) was asked about his lunch with Buffett, for which he paid $650,000 in 2007. Pabrai recalled that during the meal, he had asked Buffett about Rick Guerin, who was one of the so-called "Superinvestors of Graham and Doddsville" that the Oracle of Omaha had outlined in his now-famous essay published in the fall of 1984.
The fall of Rick Guerin
Pabrai noted that Guerin worked with Munger and Buffett on several notable deals, including See's Candies and Blue Chip Stamps. However, Guerin faded into the background in the late 1980s. Pabrai wanted to know why. This is how he later described the discussion between himself and Buffett on this topic:
"Then Rick Guerin pretty much disappeared off the map. I've met Rick recently, but he disappeared off the map, so I asked Warren, are you in touch with Rick, and what happened to Rick? And Warren said, yes, he's very much in touch with him. And he said, Charlie and I always knew that you would become incredibly wealthy. And he said, we were not in a hurry to get wealthy; we knew it would happen. He said, Rick was just as smart as us, but he was in a hurry. And so actually what happened -- some of this is public -- was that in the '73, '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 out the yin-yang, and he sold his Berkshire [Hathaway] (BRK.A, Financial) (BRK.B, Financial) stock to Warren. Warren actually said, 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."
Based on the figures highlighted in Buffett's 1984 essay, Guerin's partnership lost around 42% in 1973 and a further 34% in 1974. However, in the years after, he quickly recovered his losses, earning 31% for partners in 1975 and 128% for partners in 1976. According to Buffett's essay, between 1965 and 1983, Guerin's partnership produced an annual compounded return of 32.9% excluding fees.
These figures appear to show that Guerin lost a significant amount of money in the bear market of 1973 and 1974. While it is true that he did recover partners' money in the following years, that should not be what we take away from this case study.
Guerin recovered, but he could have just as easily given up, or even worse, his partners and creditors may have pulled the plug. To put it another way, while borrowing money to get rich in a hurry might pay off on some occasions, there's no guarantee. We don't hear about the investors that lost everything and disappeared into obscurity. Both Munger and Guerin borrowed money to invest, and both made it work, but hundreds of thousands of other investors have failed uisng this method.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Why Value Investing Is Like Buying a House
- Mohnish Pabrai: Capitalism Is 'Brutal' and Investors Need to Adapt
- Mohnish Pabrai's 100-Bagger Scuttlebutts
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