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By Root 3148 0

’ And he said, ‘Shoot.’ Right away, I had to start thinking of questions. He was very good with me. For ten or fifteen years I followed him. He was very Graham-like. Very Graham-like. Nobody paid any attention to him except me. He was sort of my model as to what I hoped to do for a while. It was so understandable and so obvious and such a sure way of making money. Although it didn’t make you huge money necessarily, you knew you were going to make money.”5 What interested Warren about the Wattles model: the way one company could legitimately buy cheap stock in another. “You don’t have to think of everything, you know. It was Isaac Newton who said I’ve seen a little more of the world than others because I stand on the shoulders of giants. There’s nothing wrong with standing on other people’s shoulders.”6

Eventually Wattles had merged his empire into one company, Eltra Corporation, created through the merger of Mergenthaler Linotype and Electric Auto-Lite. This stock was now a favorite of Bill Ruane’s, because the company’s earnings were compounding at fifteen percent a year.7

The Buffett-Munger companies were beginning to look a little like Eltra before its combination: Berkshire Hathaway was Diversified’s largest shareholder and also owned Blue Chip stock. Each of them also acted as a holding company for businesses that were not traded publicly. Most notably, Blue Chip owned See’s Candies, which was so profitable that it more than offset the losses from the rapidly shrinking trading-stamp business. Munger now followed up by buying twenty percent of a near-defunct investment firm, Source Capital, for Blue Chip. “We bought it at a discount from its asset value,” says Munger. “And there were two assholes who were the sellers. We had a no-asshole rule very early. Our basic rule has always been that we won’t deal with assholes. And so Warren, when he heard about Source Capital, said, ‘Now I understand the two-asshole exception to the no-asshole rule.’”8

Twenty percent is influence, not control. Munger went on the board of Source Capital with a new set of talented managers who were not assholes, Jim Gipson and George Michaelis, and started straightening out its portfolio.

Source Capital, however, was small change. Buffett and Munger were both always on the lookout for anything new they could acquire, especially something bigger that would give Blue Chip the kind of boost that See’s Candies had. They had found a sleepy West Coast savings-and-loan company, Wesco Financial. When a broker called Buffett offering some cheap Wesco stock, after a brief conversation with Munger, they grabbed it—and bought the shares for Blue Chip Stamps.9 Then Wesco announced that it was going to merge with Financial Corporation of Santa Barbara. Santa Barbara was a hot stock, with an aggressive approach that Wall Street liked. Analysts thought Santa Barbara was paying too much for Wesco.10 Yet Buffett and Munger saw the opposite. They thought Santa Barbara’s stock was overpriced, and Wesco was handing over its stock too cheap.11 Buffett went nuts. He read the terms and couldn’t believe them. “Have they lost their minds?” he asked.12

Founded by the Casper family, Wesco was located in Pasadena, Munger’s hometown. It owned Mutual Savings, a savings and loan that had prospered when the GIs came home from the Asian theater during the post-WWII building boom. Even so, Wesco had never exploited its opportunities for growth. But it was extremely profitable because it kept its costs so low.13

Betty Casper Peters, the only member of the founding family both interested and able to serve on the board, felt that Wesco’s managers condescended to her and dismissed her suggestions that they could grow the company. Instead, they used her family’s legacy as a ticket to ride at the head of the Rose Bowl parade.14 Peters, an elegantly dressed, high-cheekboned former art history student, had school-age kids, no business background, and spent much of her time tending the family vineyard in Napa. Now she drove back and forth to Pasadena on Wednesdays to attend board meetings.