Rick Guerin is a private American investor and one of the original “Superinvestors” famously profiled by Warren Buffett. Often remembered as the lesser-known “third partner” to Buffett and Charlie Munger in their early investment ventures, Guerin's story serves as a powerful, cautionary tale for the value investing community. He was a brilliant investor who generated spectacular returns, closely mirroring those of his more famous partners by skillfully applying the principles of Benjamin Graham. However, his career path diverged dramatically, offering one of the most potent real-world examples of a lesson Buffett and Munger constantly emphasize: the extreme danger of using leverage. Guerin's experience during the brutal market downturn of 1973-74 underscores how even the sharpest investment mind can be undone by debt, making his legacy less about his phenomenal early success and more about the profound wisdom gleaned from his near-fatal financial mistake.
Rick Guerin earned his spot in investment history when Warren Buffett featured him in his 1984 speech and subsequent essay, The Superinvestors of Graham-and-Doddsville. This essay showcased a group of investors who, despite having different styles, all followed the core value investing tenets of Benjamin Graham and David Dodd and went on to achieve market-crushing results. Buffett presented their records as irrefutable proof that the market is not perfectly efficient. From 1965 to 1983, Guerin’s private partnership generated a stunning compound annual return of 22.3% for his partners, compared to just 7.0% for the S&P 500. For investors in his fund, this meant their money grew more than 32-fold over the period. This performance placed him squarely in the same league as Buffett and other legends like Walter Schloss and Tom Knapp, proving he was an exceptionally talented capital allocator.
The most enduring lesson from Rick Guerin's career is not found in his stellar returns, but in a painful chapter involving leverage and a famous chocolate company.
In the early 1970s, Guerin, Buffett, and Munger were close partners. Together, they acquired See's Candies, a landmark deal that taught them the value of buying wonderful businesses with strong pricing power. However, as the 1973-74 bear market took hold, the stock market crashed violently. Many high-quality stocks fell by 50% or more. The problem for Guerin was that he had used significant personal leverage—that is, he had borrowed money against his stock portfolio to buy more stocks. As his holdings plummeted in value, he faced a series of devastating margin calls from his brokers. A margin call is a demand to add more cash to your account or sell securities to bring your account back up to the required minimum value. Unable to come up with the cash, Guerin was forced to sell his assets at the worst possible time. This included his large stake in Berkshire Hathaway, which he sold to his friend Warren Buffett for around $40 per share—a price far below its intrinsic value.
Charlie Munger often tells this story to illustrate a critical point. He describes three friends:
Munger's conclusion is stark: “It is not a tragedy to be poorer than your friends. It is a tragedy to go broke.” Guerin's intellect was never in question, but his use of borrowed money made him a forced seller, robbing him of the ability to ride out the storm and participate in the subsequent recovery.
Guerin's story, while a footnote in Berkshire Hathaway's history, provides timeless wisdom for every investor.