Wesco Financial
Issue 26 | 1973 Part 4 - Blue Chip Stamps, Gurdon W. Wattles, Charlie Munger, Wesco Financial
Big thanks to everyone who’s been riding shotgun on this journey, and a warm welcome to the new subscribers joining the fold. Your support means more than compound interest.
Before Wesco Financial joined the Berkshire Hathaway family, it was a modest savings and loan institution operating out of Pasadena, steady, conservative, and largely overlooked. However, in 1973, everything began to change.
Charlie Munger, who was already earning a reputation for identifying hidden value, had been leading Blue Chip Stamps, a trading stamp business with excess capital and aspirations beyond simple green booklets and redemption centers. Through Blue Chip, Munger recognized an opportunity to invest in Wesco, not for the thrift itself, but for its potential to evolve into a long-term compounding engine hiding in plain sight.
In this issue of "Becoming Berkshire," we explore the origins of that deal, how Blue Chip initially became involved, why Wesco stood out in a crowded financial landscape, and how a quiet thrift in Pasadena transformed into one of the most unassuming yet significant pieces on Buffett and Munger's chessboard.
Blue Chip Stamps
By the early 1970s, Buffett’s various entities had become Blue Chip’s largest shareholder, Charlie Munger was the second-largest, and Rick Guerin was somewhere behind. The three had accumulated enough shares to warrant a position on Blue Chip’s board of directors.1
I covered Blue Chip Stamps in issue 17
“Blue Chip had an ‘old boys’ board, some of whom resisted new guys, especially these smart-alecky young guys,” said Guerin. “Charlie went on the board first, then convinced them they should accept me, and finally, Warren was accepted.2
In 1971, Warren and Susan owned 13% of Blue Chip's, Berkshire Hathway, of which Buffett owned 36%, held 17% of Blue Chip's, and Diversified Retailing Co, Inc., which Buffett owned 42% of, held 16%, and Munger's partnership owned 10% of Diversified Retailing, plus 8% of Blue Chip. Guerin's partnership also owned 5% of Blue Chip. Eventually, after more purchases of Blue-Chip Stock, the liquidation of Wheeler, Munger, and the merger of Diversified Retailing into Berkshire, Berkshire's ownership reached 60%. Together, Berkshire, Buffett, and Munger owned nearly 75% of the outstanding shares of Blue Chip.3
Gurdon Wattles
The interlocking ownership of these three companies had tightened the business relationship between Buffett and Munger, and resembled the embryo of an empire built by an investor whom Buffett admired, Gurdon W. Wattles. Gurdon’s company was like a Russian doll; open it and inside find another company, and another, and another. Wattles controlled them, although he did not own 100% of any of them. From early in his career, Buffett admired the Wattles model. He frequently talked about Wattles to his friends. “ The only way to go is coattail-riding,” he would say.4
Wattles had this little closed-end investment company called Century Investors. He did this chain thing where he would be buying stock in a company at a discount, which would be buying stock in another company at a discount … The big company at the end of the thing was Mergenthaler Linotype, which was two-thirds owned by American Manufacturing. In those days, you didn't have to file with the SEC to publicly reveal that you were buying, so nobody knew, and he just would keep buying until he got control. He bought control of Electric Auto-lite, partly through Mergenthaler, and he was doing the same thing with Crane Co. Somewhere in the chain was Webster Tobacco … Everything sold at a discount, and you could just keep buying all of them and make more money every time you made a purchase … I owned Mergenthaler, I owned Electric Auto-Lie, I owned American Manufacturing. What would cause value to come out? That was always the question. But you just had a feeling you were with a smart guy, and eventually, it would.
For ten or fifteen years, I followed him. He was 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
Charlie Munger
Howard Buffett, Warren’s son, called Charlie Munger the most intelligent man he knew. To the writer Morey Bernstein, Munger was “the real mystery man,” the quirky thinker who stood a heartbeat away. Munger was Buffett’s sounding board; Munger - and only Munger — he let into the tent. The two of them had a peculiar symbiosis and, as in a good marriage, an aura of inevitability. Buffett’s daughter thought them “clones,” walking with the same foot forward and even bearing a slight resemblance.6
Yet where Buffett was cheerful, his Los Angeleno compadre was dour. He lacked Buffett’s easy grace and suffered fools not at all. Frequently, he did not bother to say goodbye, preferring to bolt from his chair at the conclusion of business.7
Munger was so deeply skeptical of his fellow man that Buffett dubbed him “ the abominable no-man.” This, in fact, provided a clue to Munger’s unique talent as Buffett’s consigliere. His approach to life, of particular use to an investor, was to ask what could go wrong. He liked to quote the algebraist Carl Jacobi: “Invest, always invert.”8
“Charlie is very funny and also very pompous,” said a member of Buffett’s circle. “He believes in the aristocratic point of view, that there is a select group of accomplished, talented people in the world, and that he is one of them.”
Charlie led a big life, fishing in the rivers and wilds of various continents for trout, bonefish, and Atlantic salmon, holding court at the California Club, and dominating a party, especially after a glass of wine. Ira Marshall recalled a scene in Bel-Air: Munger was talking his way through a rambling, sonorous monologue- something about a thousand-year orgasm - which Munger found quite funny, when the host asked Marshall, “Can you get Charlie to shut up? No one can say a word.”
Buffett had used Munger as his lawyer in a couple of acquisitions, and Munger owned a tiny slice of Diversified Retailing, which Buffett controlled. Otherwise, their careers were separate. Since the sixties, Munger had been managing Wheeler, Munger & Co. and investment partnership, located in a convenient but decrepit pipe-strewn office on the mezzanine of the Pacific Stock Exchange.9
Buffett and Munger gained control of the investment committee once they were board members, and so during the time that trading stamps were slipping from favor, the investment committee was at work building the value of Blue Chip’s float.10
Among the investments that Buffett and Munger acquired through Blue Chip was the largest block of troubled Source Capital, a closed-end investment company established in 1968 by the infamous “Go-Go” manager Fred Carr. Carr was a phenomenon for a while, but soon was discredited by the choppy stock market of the early 1970s, ah yes, the Cathy Wood of the 1960s. When Carr quit Source Capital, the fund had $18 per share in asset value but was trading at $9 per share. Blue Chip acquired a 20% stake in the fund, and Munger joined the board, where he got along well with the main portfolio managers.
Wesco
Source capital was small change. Buffett and Munger were 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.11
Buffett knew Wesco in his sleep. He had read its annual report, as he did those of hundreds of savings and loans, every year since the mid-sixties. Wesco was trading in the low teens, less than half its book value. Buffett checked with Munger, who agreed that it was cheap, and Blue Chip snapped up 8% of the shares.12
Founded by the Casper Family, Wesco owned Mutual Savings, a savings and loan that had prospered when the GIs returned home during the post-World War II building boom.
Wesco Financial was a modest and highly regulated thrift institution known initially as Mutual Savings and Loan of Pasadena. Like many savings and loans (S&Ls) in the mid-20th century, Wesco’s primary function was to gather deposits from local savers and issue long-term, fixed-rate home mortgages to borrowers within the community. It wasn't flashy or experiencing rapid growth; instead, it was a conservative and stable institution focused on residential lending in Southern California. Its profits came from the difference between what it paid depositors and what it earned from mortgages, and its balance sheet was governed by strict rules designed to minimize risk.
Savings and loans played a crucial role in postwar America by promoting homeownership. They were often referred to as “thrifts” because their mission was to encourage thriftiness and financial responsibility. These institutions were designed to be safe, straightforward, and local, similar to community banks with a specific focus on mortgages. In return for their conservative business models, S&Ls benefited from favorable regulations and access to insured deposits. At this time, Wesco embodied this concept as a no-frills, low-risk mortgage lender operating quietly in the background until Munger and Buffett recognized its potential for growth.
Betty Casper Peters, the only member of the family both interested and able to serve on the board, felt that Wesco’s managers condescend to her, dismissed her suggestions that they should grow the company, and used her family’s legacy only as a ticket to ride at the head of the Rose Bowl parade. Peters, an elegantly dressed, high-cheek boned 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. Running a savings and loan, she found, was hardly a black art. As Peter’s frustration grew, she pushed for a merger. 13
In the summer of 1972, Wesco was a minor, $2 million investment. But in January 1973, Wesco announced a plan to merge with another California savings and loan, Financial Corp. of Santa Barbara. Buffett and Munger instantly reached the same conclusion: Wesco was giving away the store. Under the merger terms, holders of Wesco would exchange their undervalued stock for shares in Santa Barabara — which seems high overvlaued.14
I read these terms, and I didn’t believe them. And I told Munger the terms as announced, and he couldn’t believe it, as I couldn’t believe it. But it was there in black and white on the Dow Jones tape. - Warren Buffett
Munger went to see Wesco's CEO, Louis Vincenti, and tried to persuade him to abandon the Santa Barbara deal. And Vincenti brushed Munger off like a flake of dandruff- not an easy thing to do.15
After being rebuffed, Munger and Buffett had no intention of launching a competing hostile Bid. Further, Munger could not imagine that such a thing would be necessary. He wrote Vincenti, appealing to his higher values. It was wrong that Wesco should sell itself too cheap; Vincenti should simply see that. Munger told Vincenti that he was Buffett and Munger's sort of fellow. "You're engaged to this other girl, so we can't talk to you, but if you were free, you're the kind of man we would like.”16
Munger's old-fashioned, Ben Franklin-esque sense of ethics and his noblesse obligation that gentlemen should agree upon the proper conduct among themselves must have sounded like Sanskrit to Vincenti. But at least Vincenti let it slip that Betty Peters was the shareholder pushing for the merger.17
Buffett sent Donald Keppel, Blue Chip's president, to talk to Peters, but she remained adamantly in support of the merger... a couple of days later, Buffett and Peters sat down in a lounge at the San Francisco airport. Buffett told her that in his opinion, Wesco stock would, in time, be worth far more than what Santa Barbara was offering. This was the refrain that Peter had heard from Koeppel, but from Buffett, it sounded more persuasive. For one thing, Buffett spoke to her as a fellow owner. His capital was on the line with hers.18
When Peters insisted that something had to be done to reinvigorate Wesco, Buffett said he would like to try it himself. He talked a bit about his relationship with other companies, which he described as being one of partnership. She asked one question, " Mr. Buffett, if I buy you, what happens if you get hit by a truck, who would save Wesco then?"19
Buffett replied that he had a partner whose ability he considered equal to his own. He had arranged for this fellow to be in charge of Berkshire in the event of a "truck."20
Legend goes that Betty Peters had just read the chapter on Buffett in Supermoney
At the next board meeting, she asked the board to reverse course and meet with Buffett & Munger. The board waved her off and voted at a special meeting to "use every effort to complete the merger with Financial Corporation of Santa Barbara." Forgetting who actually owned the company was their mistake. Peters brought her whole family around to vote against the merger. The stock went from $18 to $11.21
Feeling guilty over the collapsed share price, Blue Chip kept acquiring more shares at $17 - the price it had traded for before the deal fell through.
By March 1973, Blue Chip owned a quarter of the Wesco Stock. Blue Chip began to formally tender for Wesco's shares, this time paying $15 a share in cash until it owned more than half.22
Below is a wonderfully written review by
on Janet Lowe’s book Damn Right!
Becoming Berkshire 1930-1973:
Issue 25| 1973 Part 3- The Washington Post
Issue 24| 1973 Part 2 Katharine Graham - Personal History
Issue 23| 1973 Mr. Buffett Goes to Washington
Issue 22| 1972 Part 2 -The Nifty Fifty
Issue 21| 1972 - See's Candies
Issue 20| 1971 Part 3- The Nixon Shock
Issue 19| 1971 Part 2- Supermoney
Issue 18| 1971 Part 1- The Dean & The Disciple
Issue 17| 1970 Part 2 - Blue Chip Stamps
Issue 15| The Go-Go Years of the 60s
Issue 14| 1969- Part 2 Illinois National Bank
Issue 13| 1969 - Part 1 Buffett Retires
Issue 12| 1968 - Sun Newspaper & Blacker Printing Company
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August 2024 Review: $1,094,182
Lowe, Janet. Damn Right! (New York: John Wiley & Sons, 2000). Pg. 111.
Id.
Lowe, Janet. Damn Right! (New York: John Wiley & Sons, 2000). Pg. 112.
Id.
Schroeder, Alice. The Snowball: Warren Buffett and the Business of Life. (New York: Bantam, 2008), Pg. 333.
Lowenstein, Roger. Buffett: The Making of an American Capitalist. (New York, Random House 1995) Pg. 162.
Id.
Id.
Lowenstein, Roger. Buffett: The Making of an American Capitalist. (New York, Random House 1995) Pg. 162.
Lowe, Janet. Damn Right! (New York: John Wiley & Sons, 2000). Pg. 112.
Schroeder, Alice. The Snowball: Warren Buffett and the Business of Life. (New York: Bantam, 2008), 333.
Lowenstein, Roger. Buffett: The Making of an American Capitalist. (New York, Random House 1995) Pg. 166.
Schroeder, Alice. The Snowball: Warren Buffett and the Business of Life. (New York: Bantam, 2008), Pg. 334.
Lowenstein, Roger. Buffett: The Making of an American Capitalist. (New York, Random House 1995) Pg. 167.
Schroeder, Alice. The Snowball: Warren Buffett and the Business of Life. (New York: Bantam, 2008), Pg. 334.
Id.
Id.
Lowenstein, Roger. Buffett: The Making of an American Capitalist. (New York, Random House 1995) Pg. 170.
Id.
Id.
Schroeder, Alice. The Snowball: Warren Buffett and the Business of Life. (New York: Bantam, 2008), 336.
Id.
Really enjoyed this one!
This was an interesting read, thank you!