The "Third Partner": J.P. Guerin and the Parable of Berkshire Hathaway

Executive Summary: The "Third Partner" and the Price of Impatience#

This report addresses the query regarding the "third guy" who, alongside Warren Buffett and Charlie Munger, managed the investments that formed the foundation of the modern Berkshire Hathaway. That individual was J.P. "Rick" Guerin Jr. (1929-2020). This report establishes that Guerin was not a minor associate but a formidable investor in his own right, whom Buffett publicly celebrated as one of the "Superinvestors" and whose intellect Buffett and Munger considered equal to their own.

Guerin's story is the quintessential investing parable, providing a stark illustration of the critical difference between getting wealthy and staying wealthy. While Guerin possessed the genius for the former, he lacked the specific temperament-namely, extreme patience and a total aversion to financial leverage-required for the latter.

This report will analyze the catastrophic 1973-1974 market crash, during which Guerin's use of margin loans led to a forced and financially devastating sale of his Berkshire Hathaway stock to Warren Buffett. This event permanently severed him from their shared financial destiny. However, this report will also reveal a comprehensive and largely untold "second act". The common narrative that Guerin "disappeared" is false; he went on to have a long and highly successful career, which included a decades-long business reunion with Charlie Munger at the Daily Journal Corporation.

Part I. The Making of a "Superinvestor": The Life of J.P. Guerin#

1.1 A "Self-Made Man" of the Great Depression#

J.P. "Rick" Guerin Jr.'s formative years established the "self-made" ethos that would define his entire life. He was born in Los Angeles in 1929. Raised by a "hard-working, Irish-Catholic single mother" during the Great Depression , his drive was apparent from childhood. His work ethic began at the age of six, when he delivered ice and newspapers.

This relentless drive propelled him to graduate from Loyola High School at just 16. Immediately after, he "fibbed about his age to join the Navy" and was deployed to the South Pacific at the conclusion of World War II. His military career was extensive and varied; after the Navy, he joined the Army and served as a "code breaker," before transitioning to the Air Force for "fighter pilot training".

This early-life sequence is not merely biographical trivia; it forms a distinct psychological blueprint. A young man who fabricates his age to enter military service, demonstrates the analytical skill to crack codes, and possesses the nerve required for fighter pilot training is inherently an individual with a high tolerance for risk and a preference for high-action, high-stakes environments. This character trait, forged in his youth, stands in stark contrast to Warren Buffett's famously cautious, "sit and wait" temperament and serves as a crucial precursor that helps explain his later willingness to use aggressive financial leverage.

1.2 The Path to Money Management: From IBM to the "Inoculation"#

After his military service, Guerin attended college on the GI Bill. His original dream was to attend medical school, but he "could not afford" it. Instead, he pursued a more practical path aligned with his analytical skills, majoring in math at the University of Southern California (USC) and ultimately graduating from the University of California, Los Angeles (UCLA).

Like many math majors of his era, Guerin accepted a conventional, high-status job at IBM as a salesman. His entry into the investment world was a direct result of his friendship with Charlie Munger. As Buffett would later tell it, after he convinced Munger to leave the legal profession for money management, "Charlie got to him [Guerin]". Munger, his "pal" , convinced Guerin to do the same: leave the security of his IBM job and start managing money.

Guerin was a natural. Buffett explicitly identified him as a "non-business school type" who, unlike many academics, "understands immediately the value approach to investing and he's applying it five minutes later". Buffett described this quality as an "instant recognition" or an "inoculation". This places Guerin in the very small, elect group of investors Buffett considered to have the correct intellectual framework. Guerin's subsequent failure was, therefore, not one of intellect or philosophy-he was a true value investor-but one of temperament (impatience) and risk management (leverage).

Part II. The Buffett-Munger-Guerin Trio: The "Blue Chip" Years (1960s-1970s)#

2.1 The "Third Partner" and the Trio's Investment Vehicle#

During the 1960s and 1970s, Guerin was widely known in their investment circle as the "third Berkshire partner". While Buffett and Munger were based in Omaha and Los Angeles, respectively, Guerin ran his own highly successful fund, **Pacific Partners, Ltd..

The three men operated as a close-knit partnership. Guerin worked "with Munger and Buffett to gradually acquire a controlling interest in a company called Blue Chip Stamps". Blue Chip Stamps was a declining trading stamp company, an early "loyalty points" program for grocery stores and other merchants. The trio's genius was not in the business itself, but in identifying and gaining control of its "float"-the significant amount of cash accumulated between the time the stamps were sold to merchants and the time they were redeemed by customers. They then used this float "to fund other acquisitions".

This strategy of using the float from an operating business to acquire other, unrelated businesses is the exact strategic template Buffett would later perfect with Berkshire Hathaway's insurance company float. This fact demonstrates that Guerin was not just a passive partner; he was a principal co-architect in developing and executing the core business model that defined the early, pre-insurance conglomerate.

2.2 The See's Candy Acquisition (1972)#

Using the float generated by Blue Chip Stamps, "the main acquisition they then partnered on was See's Candy in 1972 for $25 million".

Guerin's role in this landmark deal was active and strategic, not merely financial. The historical record confirms: "In fact, Munger, Buffett, and Guerin together interviewed Chuck Huggins to be the CEO of See's Candy at that time". Guerin's obituaries corroborate this, stating he "united with Charlie Munger and Warren Buffett in ownership of See's Candy".

The See's Candy purchase is legendary in investing history. It marks the pivotal shift in Buffett and Munger's philosophy, moving them away from Ben Graham's "cigar-butt" investing (buying terrible companies at cheap prices) and toward their modern philosophy of buying wonderful companies at fair prices. The fact that Guerin was in the room, participating in the operational and management diligence by interviewing the CEO, implies he was an active participant in this critical philosophical evolution. This elevates his historical importance from a mere capital-allocator to a key strategic partner during the most formative moment of the modern Berkshire Hathaway philosophy.

2.3 Pacific Partners, Ltd.: The "Superinvestor" Record#

To fully understand why Guerin took the risk that led to his divergence, one must first understand his monumental success. Guerin's personal fund, Pacific Partners, Ltd., had a spectacular record.

Buffett was so impressed that he formally included Guerin in his famous 1984 speech and essay, "The Superinvestors of Graham-and-Doddsville". In the essay, Buffett praised Guerin's "discount-from-value approach".

The data behind this praise is staggering. From 1965 to 1983, his fund achieved a staggering 22,200% total return , against a 316% return for the S&P 500 in that same window. Buffett's essay cites a 19-year annual compounded rate of 32.9% for the overall partnership. However, Buffett also noted that Guerin's portfolio was "concentrated in very few securities," which made his record "much more volatile".

This volatility is the central piece of evidence for the entire Guerin parable. While his long-term record was brilliant, his performance during the 1973-1974 downturn, as shown in the table below from Buffett's essay, was catastrophic.

Data sourced from Buffett's 1984 "Superinvestors" essay, Table 3. Note: The 1973 and 1974 returns are slightly different from other sources citing Pabrai's recollection (e.g., -42% and -34% ), but the cumulative effect is the same: a catastrophic, multi-year drawdown.

This data proves the paradox: Guerin was a certified genius (the 22,200% long-term return) but was simultaneously reckless (the 1973-1974 cumulative drop). This table makes the abstract story of his "fall" concrete and data-driven.

Part III. The Great Divergence: The 1973-1974 Crash#

3.1 "Rick Was in a Hurry": The Psychology of Impatience#

This section addresses why the partnership dissolved. The story was a closely-held secret for decades until investor Mohnish Pabrai won a charity lunch with Warren Buffett in 2007. At the lunch, Pabrai asked, "Whatever happened to Rick Guerin?".

Buffett's explanation is the key to the entire story. He replied: "Charlie and I always knew that we would become incredibly wealthy. But 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".

This statement is a profound psychological diagnosis. In the Buffett-Munger philosophy, impatience ("in a hurry") is the cardinal sin. It is a temperamental flaw, not an intellectual one. This impatience leads directly to the second cardinal sin: the use of leverage. Guerin's "hurry" led him to "maximize" short-term gains, while Buffett and Munger were focused on "optimizing for endurance".

3.2 The Anatomy of a Catastrophe: Leverage in a Bear Market#

Guerin's "hurry" manifested in how he invested. To accelerate his returns, he "was levered with margin loans".

This decision proved fatal during the 1973-1974 market downturn, when the stock market "went down almost 70% in those two years". As Guerin's concentrated portfolio plummeted-losing a cumulative of almost 62% in those two years -he "got margin calls out the yin-yang".

Leverage is the tool that "can turn minor setbacks into catastrophic losses". Buffett and Munger also suffered massive paper losses during this period; Berkshire Hathaway's own stock price fell by more than 50%. The only difference was that their lack of leverage meant they could not be forced to sell. Guerin, by using margin, had lost control. He was forced to violate a key axiom of investing: "sell equities when you want to and not when you have to".

3.3 The Margin Call and the Forced Sale#

This is the climactic event of the partnership. Facing margin calls that he could not meet, Guerin "was forced to sell shares".

The buyer of those shares was Warren Buffett. The asset he was forced to sell was his Berkshire Hathaway stock.

The price: Buffett bought Guerin's shares at "under $40 apiece".

This single transaction, forced by leverage, cost Guerin a legendary fortune. Those same shares, sold for $40, are worth well over $450,000 each today. This event is the precise reason "nobody talks about Rick anymore" ; it is the moment that the trio's paths permanently diverged and Buffett and Munger "became a two-man show".

3.4 The Lesson: Getting Rich vs. Staying Rich#

Guerin's fall became a cornerstone of the Buffett-Munger philosophy. As one analysis aptly puts it, "Charlie, Warren, and Rick were equally skilled at getting wealthy. But Warren and Charlie had the added skill of staying wealthy".

The use of leverage, more than the losses themselves, "lost Guerin the faith and trust of Buffett and Munger" , as it violated their prime directive: survival at all costs. Buffett's advice to Pabrai, inspired by Guerin's story, was: "if you're an even slightly above-average investor who spends less than they earn, over a lifetime, you cannot help but get rich, if you are patient".

Guerin's failure is not a footnote; it is the negative space that defines Berkshire's success. His story is the real-world, high-stakes proof of their iron-clad, non-negotiable aversion to leverage.

Part IV. Life After the "Fall": The Untold "Second Act" of Rick Guerin#

The common narrative, referenced in multiple accounts, is that after 1974, Rick Guerin "vanished" or "disappeared off the map". This is the report's single most important correction: this "disappearance" is a myth. The biographical and corporate data proves that Guerin went on to have an incredibly successful, multi-decade "second act."

4.1 A Quiet Reunion with Munger: The Daily Journal Corporation#

This is the most surprising and revealing twist in Guerin's story. The "dissolved partnership" was not a total severing of ties, at least not with Charlie Munger.

Just three years after the 1974 margin-call debacle, Guerin became a director and Vice Chairman of the Daily Journal Corporation in 1977. He served in this role for decades alongside his friend, the company's Chairman, Charlie Munger.

This was not a ceremonial position. SEC filings for the Daily Journal explicitly state that the board "utilized his [Munger's] judgment and suggestions, as well as those of J.P. Guerin, the Company's vice chairman, when selecting investments". They actively co-managed the firm's burgeoning investment portfolio.

This completely reframes the narrative. While Buffett may have severed financial ties (viewing the use of leverage as an unforgivable sin), Munger clearly did not. He valued Guerin's "ferociously smart" mind enough to make him his Vice Chairman and co-manage an investment portfolio with him for decades. Their partnership didn't die; it moved from the Berkshire orbit to the Daily Journal orbit.

4.2 The Boardroom Polymath#

Guerin's "second act" was vast. Far from "disappearing," he served on the boards of over 20 private and public companies. He was not a "fallen" investor; he recovered and became a major captain of industry, particularly on the West Coast.

His high-profile positions included:

1. Chairman of the Pacific Coast Stock Exchange.

2. Chairman of Pacific Southwest Airlines.

3. Chairman (1985-1991) and Vice Chairman (from 1997) of PS Group Inc. (now PS Group Holdings Inc.).

4. Director of Lee Enterprises Incorporated, a newspaper company.

4.3 From Wall Street to Hollywood: Founder of Tapestry Films#

In a fascinating "third act" that further demonstrates his dynamism, Guerin also pivoted to Hollywood. He "helped found Tapestry Films".

As a producer and executive producer , he was a creative force behind several major, commercially successful films. His most notable productions include:

• "Point Break" (1991)

• "Pay it Forward" (2000)

• "Wedding Crashers" (2005)

This successful creative and entrepreneurial pivot reinforces the psychological profile from Part I. The man who was a code-breaker, fighter pilot trainee, and "in a hurry" investor was not suited to a quiet retirement. As Munger would later say, "He did what he liked doing".

4.4 The Final Chapter (1929-2020)#

J.P. "Rick" Guerin Jr. died on October 13, 2020, at the age of 90. His obituaries also note a remarkable 15-year period where he served as a reserve police officer for both the Los Angeles Police Department and Los Angeles Sheriff's Department.

The most telling insights into his life and his relationship with Munger come from Munger's quotes in Guerin's obituaries. Munger, his lifelong friend, said: "He was a self-made man... He succeeded because he was ferociously smart". And: "If he liked the police, he did the police".

These warm, admiring quotes provide the final, nuanced conclusion. They prove that their friendship and mutual respect were lifelong, surviving the 1974 financial separation. It suggests that while Guerin failed the one, singular "Buffett-Munger test" of absolute risk aversion, he was, by any other metric, deeply admired by Munger as a brilliant, successful, and honorable man.

Conclusion: Reconciling the "Superinvestor" with the Man Who Sold Too Soon#

J.P. "Rick" Guerin Jr. is the "third guy," a "Superinvestor" who was a true intellectual and strategic partner to Warren Buffett and Charlie Munger in their most formative deals, including Blue Chip Stamps and See's Candy.

His story is a tragedy of temperament. His one tragic flaw, in the eyes of his partners, was impatience , which led him to use leverage , the one tool his partners forbade. This single error, in the face of the 1973-1974 crash , cost him his place in financial history, forcing him to sell his Berkshire shares for $40.

However, his "disappearance" is a myth. The true story is one of resilience. He built an impressive "second act" as a major corporate chairman on the West Coast , a successful Hollywood producer , and, most poignantly, as Charlie Munger's long-time Vice Chairman at the Daily Journal Corporation.

The final analysis is that Guerin's legacy is twofold: he is the man who proved the Buffett-Munger philosophy by so spectacularly failing it, and he is the man who proved his own "ferociously smart" and "self-made" character by building a new, different, and remarkable legacy on his own terms.

Works cited#

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