The forgotten genius
Most know Warren Buffett and Charlie Munger, but what if I told you they was a third partner?
Rick Guerin started his investment career both imitating Charlie and doing deals with him. He partnered up with Buffett and Munger in the 1970s for a precise reason, an investment idea Rick had.
Rick ran his own fund called Pacific Partners and worked with Munger and Buffett to gradually acquire a controlling interest in a company called Blue Chip Stamps.Â
Blue Chip Stamps
The partnership started buying Blue Chip Stamps in 1970 and would own 47% of the company by 1973. Munger's partnership owned 8% of Blue Chip and Guerin's partnership owned 5% of Blue Chip giving them a controlling interest.
Blue Chip Stamps distributed trading stamps through merchants, which customers could collect and exchange for merchandise. Rick saw an overlooked opportunity in the company's float account, which represented the difference between issued and redeemed stamps. Leveraging this capital, the controlling investors of Blue Chip acquired multiple other companies.
In 1970, the market cap was $63,500,000. The 1970 annual report shows us the unredeemed trading stamps equaled $86 million of which an estimated 50% would stay unredeemed.
These unredeemed stamps, formed an available float for the company of about $45,000,000. Additionally, the company held marketable securities as investments equaling $72,734,000.
The partnership was buying a business trading at 50% book value which would give them an immediate and total of $117,734,000 to invest with for $63,500,000.
The best thing? they only had to have the majority stake which would bring the total down to 60% of $63,500,000 or $38,100,000.
In total, the investment would almost guarantee an instant 300% return to invest with and would eventually grow the Berkshire business to allow for its next acquirement.
Using the Blue Chip Stamps, they would buy See’s candy with $25mil of the float, Wesco financial with $25mil of the float and the Buffalo evening post using see’s candy earnings and the rest of its float.
In 1983, they merged Blue Chip Stamps with Berkshire which gave holders of Blue Chip Stamps 1 share of Berkshire Hathaway per 13 shares they held. This merger gave Charlie Munger ownership of 1.5% of Berkshire which later on would make him a billionaire.
A genius idea that gives us the ethos of Guerin.
Does this trade sound familiar?
Buffett started buying GEICO in the late 1970s which would become the company allowing Berkshire to acquire countless other great businesses through its available float over the next decades to come.
As of 2023, Berkshire's float was approximately $164 billion
Separation
After the See’s Candy acquisition in the early 1970s, Buffett and Munger became a two-man show and Guerin continued to run Pacific Partners Ltd.
Guy Spier and Mohnish Pabrai, who paid $650,000 for lunch with Warren Buffett in 2008 asked Buffett what had happened to Rick Guerin.
In an interview with The Motley Fool on January 3rd, 2013, Pabrai had this to say about Buffett’s response to his question:
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?
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.
‘Rick was just as smart as us, but he was in a hurry.’
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 stock to Warren.
Warren: ‘I bought Rick’s Berkshire stock at under $40 a piece. Rick was forced to sell shares because he was levered.
The Path Forward
From 1972, he would go on to return a total compounded return of 762.3% into 1983. Had you invested from the start in 1965, the fund would have turned $10,000 into $540,000.
Finding material on Guerin, despite his long career is difficult as he kept a low profile. Despite staying out of the spotlight there have been discussions about him by others over the years.
Rick Guerin was an adept of value investing and was not scared of what would later be called shareholder activism.
‘The idea of buying dollar bills for 40 cents takes immediately to people or it doesn’t take at all. It’s like an inoculation. If it doesn’t grab a person right away, I find that you can talk to him for years and show him records, and it doesn’t make any difference. They just don’t seem able to grasp the concept, simple as it is.
Rick Guerin, who had no formal education in business, understands immediately the value approach to investing and he’s applying it five minutes later.’
-Buffett
Daily Journal Corporation
In 1986, DJCO became a publicly traded company after being distributed to the investors of a fund previously run by Charles Munger and Rick Guerin, which was liquidated. As a result, Munger and Guerin held approximately 80% of the company's stock, with each holding a 40% stake. Rick Guerin became Vice Chairman and a director of the Company in 1977 and continued to serve on DJCO's board until his death in 2020.
As a board member Rick had influence over the investment decision which might just be the best way to characterized his investment approach.
Concentrated investment book
You won’t and do not need to get that many great ideas, however you need to step up when they do happen.
Great Ideas Are Obvious(see Blue Chip Stamps)
During their time at DJCO, the total assets grew from below $10,000,000 to $346,271,000.
In essence Rick Guerin has the same type of opportunistic and value-based approach someone like Warren Buffett or Charlie Munger has, which explains why their paths had crossed half a century ago. The combination of independent thinking, conviction and patience is an extremely potent combination that has led to decades of overperformance.
Although researching Rick Guerin may provide limited information, I believe that his investment examples and path are sufficient for us to learn from. Guerin’s approach taught me about the effective use of cash flow and float to acquire additional cash flow generating businesses, which can compound to significant amounts over time. This strategy is similar to the one used by Buffett, and seeing it applied by others for over 50 years reinforces the point that it can be highly successful
Great content and well-written as always! One can immediately tell when they stumble upon a product of a sharp mind, and I am truly impressed by your work. Two quick questions if I may -
1. Where do you acquire all this valuable knowledge?
2. Couldn't the shareholders dilute in order to increase their share size and prevent the takeover? Is it being considered by activists as a risk factor in the process of obtaining the majority stake (like in the case of Bernard Arnault vs. Gucci) or are there ways to minimize this risk?
Thank you for providing a window into your learning process and I do look forward to your 'Chat with Traders' interview and any other interview you might give. I admire the dedication; I'm new in the journey here and have been accumulating knowledge like this to prep my mindset for a long challenge in this endeavor.