Warren Buffett Bought Leveraged Investor's Berkshire Shares for $40 in the 1973 Crash. They're Now Worth $700,000

The S&P 500 has returned to record levels and the VIX has eased, but market memory can be short. The Dow and Nasdaq have benefited from strong year-over-year momentum, with the S&P 500 up about 28% over twelve months. A cautionary story centers on Rick Guerin, a sharp investor who used leverage. During the 1973-74 bear market, the S&P 500 fell roughly 48% and Guerin’s margin loans were called. He had to raise cash and sold his Berkshire Hathaway stock to Buffett at about $40 per share. Those shares later became worth roughly $700,000 per share. The lesson is that patience compounds, while leverage can trigger losses at the bottom.

"There were three of them in the early years: Buffett, Charlie Munger, and a man named Rick Guerin. Guerin was sharp. He was, by Buffett's own description, every bit the equal of the other two on raw investment instinct. He had one fatal habit. He used leverage."

"When the 1973-74 bear market arrived and the S&P 500 shed roughly 48% from peak to trough, Guerin's margin loans got called. He had to raise cash, and the only liquid asset he had left was his Berkshire Hathaway stock. Buffett was the buyer of last resort. He paid around $40 per share."

""Charlie and I always knew we were going to be rich, but we were not in a hurry. And Rick was in a hurry," Buffett told Pabrai. Patience without leverage compounds. Patience with leverage gets liquidated at the bottom."

""If you are even a slightly above average investor, and spend less than you earn and do not use leverage, you can't help but get rich over a lifetime." Munger described the same discipline in a different idiom. He talked about standing by a stream with a spear, waiting for salmon. Extreme patience paired with extreme decisiveness."

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