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The SEC did not stop its probe with Wesco. It extended the investigation to Source Capital, and when Buffett and Munger realized that their financial relationship had become so complex that it was difficult to
explain it to the SEC, they decided to restructure their holdings and simplify matters. Charlie already had closed down Wheeler, Munger and assumed the chairmanship of Blue Chip at a salary of $50,000 per year. Buffett had closed his partnership and had turned his attention to Berkshire Hathaway.

In 1975, Munger testified before the SEC about the Blue Chip case,
doing his best to convince regulators that he and Buffett only intended to
play fair when they offered the higher-than-necessary share price after the
Financial Corp. merger blew up. The SEC countered that it was a corporate investor's job to make a profit for its shareholders, not favor anonymous sellers on a stock exchange. Munger explained, with little effect,
that he and Buffett hoped that conduct demonstrating fairness would
enhance Blue Chip's reputation and this ultimately would benefit all
shareholders. Munger and Buffett particularly hoped to make a good impression on Lou Vincenti, whom they wanted to stay on at his old job as
CEO, which he did for many years. Such considerations got no favorable
reaction from the SEC.

Following a standard practice, the SEC filed and concurrently settled
a lawsuit against Blue Chip, charging that the company had purchased
Wesco not just as an investment, but to defeat the merger. It also asserted
that Blue Chip artificially propped up Wesco's share price for several
weeks after the merger collapsed. Without admitting or denying guilt,
Buffett and Munger agreed not to make the same mistake again. Blue Chip
was required to give more than $115,000 to Wesco shareholders whom
the SEC decided had been damaged by the business practices.

It was a stressful time, but as a result. Berkshire Hathaway became
a larger, simpler company. In the reorganization that followed, Blue
Chip Stamps sold its interest in Source Capital, which by then had doubled in value. Wesco, for tax purposes, was consolidated with Blue
Chip Stamps as its ownership proportion reached 80 percent. Both Diversified Retailing and Blue (:hip were merged into Berkshire, finally
giving Munger a formal position at Berkshire. Munger got 2 percent of
the stock of Berkshire and was named vice chairman, keeping his old
salary of $50,000.

Bob Denham, who worked on some of these legal maneuvers, said the
organization of the company under a single corporation eliminated almost all appearance of conflict of interest. Before they were merged, Blue
Chip and Berkshire had different shareholders, and when a true bargain
investment came along, the possibility might exist that Buffett would
allocate the bargain to one group of shareholders at the expense of the
other. That could no longer happen.

Until the merger, Blue Chip shareholders were sent their own annual
report with a message written by Munger. When the merger took place,
Buffett and Munger together wrote a letter to shareholders: "It will he
somewhat simpler for us to run a combined enterprise, reducing sonic costs. Also, simplicity has a way of improving performance through enabling us better to understand what we are doing."

By the time Berkshire and Blue Chip merged, Berkshire held 60 percent of Blue Chip stock. On July 28, 1983, Berkshire acquired the 40 percent interest that it did not already own. Each outstanding Blue Chip
Stamps share was exchanged for .077 of a share of Berkshire.

The combined assets of the merged companies amounted to $1.6 billion. Shareholders met at Omaha's former Red Lion Inn to approve the
new corporate structure. Warren and Susan Buffett held enough shares to
enact the merger on their own, but told other shareholders they would
vote for the merger only if it were approved by a majority of the remaining
shareholders."

Years later, Munger said the merger was the right thing to do. "It is so
much less complicated now. Since then we have one of the simplest structures there is. At a high level, it's one big company, Berkshire Hathaway.
But way down in the organization, there is still some complexity. Some of
our companies are owned 100 percent, some 80 percent, and some positions merely involve big blocks of stock."

What Charlie finds interesting when thinking back about all this
progress is how few big business decisions were involved in creating billions of dollars out of less than $40 million, fewer than one every three
years. "1 think the record shows the advantage of a peculiar mind-set-not
seeking action for its own sake, but instead combining extreme patience
with extreme decisiveness."

Munger's stepson Hal Borthwick gives Charlie enormous credit for
helping to work out Blue Chips' various problems. "Charlie made really
tough calls in the early days. Those guys were still cigar butt investors.
They were, you know, looking for assets on the cheap. And Charlie helped
solve those problems."

"WE MEGAN TILE 1970s wrru a single business, trading stamps, which was
destined to decline to a small fraction of its former size, and a portfolio of
securities, offsetting stamp redemption liabilities, which had been selected by previous owners and would have led to a disastrous result if
held through to the present time," Munger wrote to shareholders in 1981.

As for the original business of Blue Chip Stamps: "I presided over a reduction in trading stamp sales from over $120 million down to less than
$100,000. So I presided over a failure of 99.99 percent," said Munger.
"Even so, the company did wonderfully with the capital we invested elsewhere. But in terms of the trading stamp company, I laid an egg. So did everyone else. There is no big trading stamp company left in the United
States."9

"But we had no expectation that the trading stamp business was a big
winner-as it turned out it went bloo-ey. Meantime, we bought Sees,
Buffalo News, and Wesco and made successful investments in marketable
securities with the float and other capital. The money compounded like
crazy," said Munger.

In 1972, Blue Chip's balance sheet net worth was about $46 million;
By the end of 1981, net worth had increased to about $169 million, up
267 percent in 10 years. Return on shareholders investment in the company for the 10 years was 15 percent per year.

Later, the gains were larger, according to Munger. If Blue Chip had
remained a separate company, it would be it powerhouse today. Its former
operating subsidiaries now earn over $150 million pretax. Moreover,
Wesco has more than $2 billion in marketable securities, and by now Blue
Chip, on its own, would have owned much more.

Though it is buried deep in the filing cabinets of Berkshire Hathaway, Blue Chip remains an intact company. When people dig into the
back of their kitchen drawers or open their deceased mother's trunk and
find books of Blue Chip Stamps, they can be redeemed.

"Most trading stamp companies just disappeared. Blue Chip still exists, a minuscule stamp business-redeeming stamps issued in 1961 and
1962," explained Buffett. "The numbers say they were issued 30-odd years
ago. We keep this little redemption company. We've got a good looking
catalog. We offer the same value we did 25 years ago."

He and Munger are determined that the Blue Chip office will remain
open as long as they believe that some significant number of unredeemed
stamps are going to turn up. It also tickles them that Berkshire Hathaway
became a great investment for the small retailers who fought for a piece
of the company.

"Years ago, before Warren and I bought our stock, Blue Chip Stamps
mailed minor amounts of Blue Chip stock out to filling station operators
as a litigation settlement in the antitrust case brought against the
founders by small merchants," said Munger. "My wife told the guy who
owns the automobile repair shop where she takes her car to hold onto it.
Well, the other day when she stepped out of her car he hugged and kissed
her. So maybe we should buy into another dying business.""'

THE SECURrrIE.S ANI) EXCHANGE. COMMISSION was finally placated, but Berkshire's problems with Blue Chip were not yet fully resolved. The remaining issue involved some of those filling station and other small business owners who were issued shares in the 1970s. Some 20 years later, a tiny group
of shareholders who had forgotten about or lost track of their stock realized they'd missed out on an important event.

The shareholders claimed that their stocks were lost in transfer agent
records and that they were unaware that they were now holders of Berkshire shares. Under state laws, after a certain amount of time such shares
are escheated, or turned over to the state for care taking, which Berkshire's transfer agent did. In some cases, the states were still holding the
shares, which in the meantime had increased in value almost a hundredfold. In other cases, the states sold the Berkshire shares and held the
money in the name of the original Blue Chip shareholder.

In 1993, legislation was passed in California permitting the state to
save escheating costs by selling the stock it held as unclaimed property.
The state then placed the funds in numbered accounts to hold in trust for
future claimants. In November 1995, the State of California sold all Berkshire stock it held at $31,177.77 per share. By the time the misplaced Blue
Chip shareholders learned what happened (with the help of a bounty
hunter) and filed suit, Berkshire was selling at $37,950 per share."

The New York and San Diego law firm of Milberg, Weiss, Bershad,
Hynes & Lerach, which is well known for handling shareholder class action lawsuits, sued Berkshire for failing to make enough effort to find 400
early Blue Chip Stamps shareholders to let them know that they now
owned Berkshire shares. They wanted shareholders to be compensated
for the growth they'd missed out on after the state sold their shares.

"The issue is, they should've dropped me a note and let me know,"
said plaintiff John E. DeWitt, 61, who owned gasoline stations and delivered petroleum products in South El Monte, California. "We've been located in the same spot since 1972."'2

Although they were not listed as defendants, Munger, along with
Warren Buffett and his wife Susan, were named in the complaint.

"There is no truth to the stories that little retailers were taken advantage of," said Buffett, claiming that in some cases the shareholders simply
ignored their mail. In the end, "People got their money. They are just mad
because the state sold the Berkshire shares. We've found Berkshire holders from the 1930s. They are millionaires now."

The court threw out the shareholders suit, saying that the statute of
limitations had expired on their action. If the suit had run its full course,
Berkshire may have had no liability anyway. Some stocks were "lost" long
before Berkshire bought Blue Chip, and at any rate, due process had been
followed for unclaimed shares.']

"Some shareholders are always going to get 'lost,' meaning out of
contact with the corporate transfer agent. The inevitability of that outcome is why all advanced commercial nations have escheat laws," says
Munger. "And Berkshire works harder than most corporations in pushing
transfer agents to find lost shareholders."

As IMPLIED EARI.IER,THE RELATIONSHIP between Buffett, Munger, and Vincenti,
chief executive officer of Wesco, worked out just as Buffett and Munger
had hoped. Vincenti, one of Pasadena's best business lawyers, had become
CEO of his best client. "He was brilliant, principled, decisive, and parsimonious," said Munger. "And he stayed on as CEO for many years, loving
the business. Finally he got Alzheimer's disease. By that time we liked him
so much that we kept him coming in as CEO until he could no longer function. Betty Peters cheerfully joined in this unusual decision."

AMONG THE SHAREHOLDERS BERKSHIRE inherited from Blue Chip was legendary investor Philip L. Carret. Carret had owned Blue Chip shares since
1968 and converted to Berkshire at about $400 per share. Carret had been
involved in portfolio management for 78 years. He founded one of the
first and most successful mutual funds, the Pioneer Fund, which operated
through all sorts of economic conditions from 1928 until 1983. The annual total return for the Pioneer Fund in that period averaged 13 percent,
compared with 9 percent for the S&P 500.

Born in 1896, Phil Carret died May 28, 1998, at age 101. Just a year
earlier he'd attended the Berkshire Hathaway annual meeting in Omaha
and although he was confined to a wheelchair, Carret spent much of the
day chatting with other shareholders. Carret worked until two weeks before his death and was sharp of mind until the end.

FROM THE TIME THEY STARTED buying Blue Chip until the time it was merged
into Berkshire, Buffett and Munger slowly but surely cemented their partnership. There never had been a written contract covering the terms of
their work together. Rather, Munger and Buffett simply went forward
on trust.

"To those of us who became lawyers," said Wendy Munger, "the lesson of his business life is that you don't want to do business with people
you can't trust. The economics are irrelevant if you don't have trust. Most
people are just thinking about the economics, thinking that the contract will save you when entering into a transaction with someone you can't
trust. You must do business with high-grade people-that's all he will
deal with."

Charlie also puts it this way: "Never wrestle with a pig because if you
do you'll both get dirty, but the pig will enjoy it."