In the early days of what would become one of the greatest investing partnerships in American history, there were not two names at the table. There were three. Warren Buffett, Charlie Munger, and a lesser known investor named Rick Guerin made up the original trio and by most accounts, Guerin was every bit as gifted as his two famous companions when it came to reading markets and spotting value.
But Guerin had one habit the other two did not: he borrowed money to invest.
That single difference did not matter much during the good years. It mattered enormously when the 1973–74 bear market arrived and the S&P 500 lost roughly 48% of its value from peak to trough. When the market collapsed, Guerin’s margin lenders came calling. He needed cash fast and the most liquid thing he owned was his Berkshire Hathaway stock. Buffett stepped in as the buyer of last resort, acquiring those shares for around $40 each. Today, the equivalent position in Berkshire Hathaway Class A shares is worth approximately $700,000 per share.
Why leverage is the one variable Buffett never tolerated
Investor Mohnish Pabrai recounted this story after a 2007 charity lunch with Buffett, and the details have since become one of the clearest illustrations of how leverage can undo even the most capable minds in finance.
Buffett’s explanation was simple: he and Munger were never in a hurry. They were confident they would eventually accumulate significant wealth, but they were content to wait. Guerin, despite his intelligence and instincts, was impatient and in markets, impatience combined with borrowed money is a dangerous combination.
The math is unforgiving. When prices fall and a margin loan gets called, the investor does not get to choose whether to sell. The lender makes that decision. The result, almost inevitably, is that assets get liquidated at exactly the wrong moment the bottom of the market and the opportunity for recovery is gone before the investor can act on it.
Munger captured the same principle in a different way. He described great investing as standing beside a river with a spear, waiting for the right salmon to swim past. The fish do not run every day. When they do, patience and precision are the only tools that matter. Leverage, in that analogy, is what pushes the investor into the river before the fish arrive.
Where Berkshire stands today, and why the lesson still applies
Berkshire Hathaway ended the first quarter of 2026 with approximately $380 billion in combined cash and short-term investments, $1.004 trillion in total investments, and shareholder equity of $727 billion. With total debt of $144 billion set against $1.25 trillion in assets, the company is built to function as a buyer of last resort precisely the role Buffett played when Guerin’s margin call came due more than 50 years ago.
Berkshire’s Class B shares closed recently at $486.38, down about 3% for the year and trailing the broader S&P 500, which has gained roughly 9% in 2026. That kind of underperformance during a bull market is not a flaw in the strategy. It is the strategy. Buffett’s approach is designed to hold cash and wait while others push higher on optimism, then deploy aggressively when panic forces weaker hands to sell.
Analyst Mohnish Pabrai has suggested that Berkshire’s massive cash reserve could be significantly reduced within five years, as market dislocations eventually arrive and create the kind of forced-seller conditions the company is built to exploit.
The inner scorecard that Guerin failed
Buffett has long drawn a distinction between two types of investors: those who measure success by how their portfolio looks at any given moment, and those who measure success by whether they would be comfortable holding their positions even if the market shut down for five years.
Guerin, for all his talent, failed that second test not because of poor judgment about the companies he owned, but because his lender ultimately made the decision for him. The Berkshire shares he sold at $40 to meet that margin call would have been worth $700,000 if patience had been an option. It was not, because leverage had already taken that option away.
Buffett‘s enduring argument is straightforward: an investor who is even modestly above average, spends less than they earn, and never borrows to invest will almost inevitably build meaningful wealth over a lifetime. The math does not require brilliance. It requires staying in the game long enough for compounding to do its work and making sure no margin call can ever force you out before the work is done.
