The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [146]
Munger continued his law practice but bolted from his old firm together with several other lawyers, among them Roy Tolles and Rod Hills. They founded a new firm, Munger, Tolles, Hills & Wood, that suited their ideals of how a law firm should be managed.14 All along, Munger had naturally resisted following the rules of a law firm run by anyone but himself.
“It’s no coincidence that the year he started his partnership was the same year he started his new law firm. The partners at the old firm found it abhorrent that a young lawyer in their firm would want to be a member of that gambling den, the Pacific Coast Stock Exchange. When Charlie and Roy left the firm, they sat down with the senior partners and said that they wanted these senior partners to understand that the day would come when every first-rate law firm had a member of the Pacific Coast Stock Exchange. This is probably apocryphal, but you can easily picture Charlie delivering that message to them as a parting shot.”
At their new firm, Munger and Hills imposed an elitist, Darwinian ethos designed to attract the brightest and most ambitious. The partners all voted on one another’s pay, which was circulated for everyone to know. Even as the firm launched, however, Munger was already spending a significant amount of time at the Pacific Coast Stock Exchange. Within three years, when he was forty-one, he abandoned the law altogether to work full-time at investing. But he still consulted to the firm and kept an office there, where he remained an important, almost spiritual presence. Tolles, too, shifted most of his attention to investing. Hills, by far the most ambitious and dedicated to law of the three, ran the firm and kept it going.
In his new role as a money manager, Munger had to raise money to manage. Buffett had always hustled for investors in an understated way, often using others as his promoters—people like Bill Angle and Henry Brandt, who found and prepared prospects—so that he could show off his impressive track record with a pleasing modesty. But however gracefully he’d hustled, he’d still done it. Munger felt this was demeaning. “I didn’t really like raising money,” he says. “I always felt that a gentleman should have his money.” Now, however, he managed to parlay his law practice into an investing partnership by raising funds from his powerful Los Angeles business connections. While his partnership was of course much smaller than Buffett’s, the money would be enough.
Jack Wheeler had explained to him that, as a member of the exchange, under its rules he could borrow an additional ninety-five cents for every dollar invested.15 Thus, if he put up $500, he could borrow another $475 and invest a total of $975. If the investment earned a profit of twenty-five percent, the profit on Munger’s $500 of capital would be nearly double that.16 While having the potential to nearly double his returns, this borrowing likewise nearly doubled his risk. If he lost twenty-five percent, he would lose nearly half his capital. But Munger, more than Buffett—far more than Buffett—was willing to take on some debt if he was positive the odds were right.
He and Wheeler set themselves up at the exchange in a “crude, cheap” office festooned with radiator pipes and stuck their secretary, Vivian, in the tiny private back office overlooking an alley.17 Wheeler, a big spender who liked to live large, had just had a hip replacement and soon started showing up for work on the golf course most mornings.18 Munger fell into a routine, arriving at five a.m., before the market opened on the East Coast, and checking the quotation board.19 Buffett had connected him with Ed Anderson, the Graham-Newman investor who had worked for the Atomic Energy Commission and seemed so smart; Munger hired him as his assistant.
Most of the traders at the stock exchange had ignored Munger’s arrival on the scene, but one of them, J. Patrick Guerin, took