The Rational Investor #035: The Miracle of Compound Interest & the Perils of Debt
Happy Saturday to you,
Welcome to the 35th edition of The Rational Investor Newsletter.
This week, I read the book Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe. While I think there are better books about Munger, it offered a detailed look at his business dealings, who Charlie was as a person, and also acted as a concise business biography of the Berkshire Hathaway empire.
In the book, Lowe shared a lot about the lesser-known “third partner” to Charlie Munger and Warren Buffet. His name was Rick Guerin. The reason that so few people know about Guerin is that he was much less involved after he was forced to sell his 5,700 shares of Berkshire stock in 1973-74. FYI, the first paragraph of the quote below details a different poor Guerin decision from 1990, while the second paragraph references his forced sale of Berkshire stock that occurred in 1973-74.
Onto the main event…
Here’s Janet Lowe on the Perils of Debt:
“In 1990, Berkshire acquired a 11.04 percent stake in PS Group, for $18.68 million. The 603,275 shares were purchased for an average price of $30.96. Four months after the original purchase, Buffett increased his ownership to 22.5 percent.
Some experts believe that Buffett bought the shares to bail Guerin, vice chairman of PS Group, out of a tight spot. Over the years, Guerin had his financial ups and downs. At one point he was forced to sell 5,700 shares of Berkshire at a relatively low price to pay off bank debts.”
I’ll admit that on the surface, this section/quote may not seem all that interesting (and I’ll come back to Guerin’s forced sale in a second), but a footnote associated with this quote led me to an incredible article published in 1998 by Forbes called The Berkshire Bunch, which stands in stark contrast to Rick Guerin's experience.
The Berkshire Bunch details the incomprehensible wealth that normal people accumulated through their ownership of Berkshire stock and the Buffett/Munger partnerships. Many people in the article accumulated hundreds of millions or billions of dollars by doing nothing more than compounding their money with Berkshire.
FYI, every dollar figure in the article from 1998 would be 10X higher today for anyone who has stayed invested alongside Buffett in the time since—meaning that literally every single person highlighted in the article would be a billionaire today. All from humble beginnings, thanks to the value of time and compounding.
Now, let’s return to Guerin. According to the investing legend Monish Pabrai, Guerin was forced to sell the 5,700 shares of Berkshire stock noted in the quote above to pay off bank debts during the 1973-74 bear market as his margin loans were being called. Buffett bought those shares from Guerin for a meager $40 per share—shares that, at the time of Guerin’s death in 2020, were worth $350,000 a piece!
If Guerin hadn’t leveraged his positions and had, instead, owned the Berkshire stock until his death in 2020 as the Berkshire Bunch did, just the 5,700 shares he was forced to sell would have been worth $2 billion.
And if his heirs had held onto the shares, as so many Berkshire families do, they’d be worth almost $4 billion today.
The point here today is that the ultimate difference between the wealth of the Berkshire Bunch and the “investing expert” Guerin is/was nothing more than a willingness to let compounding do its work and the avoidance of bad debt.
Pretty wild.
Thanks for reading. I’ll be back again next week with more timeless wisdom from great investors.
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