Buffett's Forgotten Third Partner Sold Berkshire for About $70 a Share

There used to be three of them. Warren Buffett and Charlie Munger, the investors behind Berkshire Hathaway, once worked with a third investor named Rick Guerin.

In the 1970s, Guerin blew up. He had bought stocks on margin, which means he had borrowed money from his broker to buy them, using the stocks themselves as collateral. When prices fell, the broker demanded its money back, a margin call that leaves an investor no choice but to sell in a hurry. In other words, a loan that looks manageable when stocks rise becomes a demand for cash at the worst moment.

That forced sale is the account offered by Cedric Chin, founder of the business publication Common Cog. Guerin had to let go of his Berkshire shares for what was recalled as something like $70 a share. One share is now worth tens of thousands of dollars.

Berkshire started as a failing textile business that was headed for collapse, and Buffett built it into a multibillion dollar conglomerate. Guerin's borrowing left him exposed when prices fell.

Years later, someone asked Buffett what he thought of Guerin, the old partner from the days when they were a trio and now were a duo. Buffett answered, "You know, the difference between Rick and Charlie and me is that Charlie and I were always sure that we were going to get rich."

In Chin's telling, that remark sounds ridiculous on its face. Ask startup founders today whether they are completely certain they will get rich, and few could honestly answer yes. For most of them, Chin says "if certain key events had gone wrong, there was no way they would have gotten rich."

Buffett and Munger were different. Chin says, "they were never at risk of anything, of blowing up."