Rick Guerin, an early Buffett associate, sold his Berkshire Hathaway shares at $40 during the 1973-74 crash due to margin calls. Those shares later hit $700,000 each. Buffett's lesson: avoid leverage, spend less than you earn, and patience beats risk.
Warren, Charlie, and Rick Guerin used to do deals together. After the early '70s, we never heard about Rick. He kind of fell off the radar. So when I met Warren for lunch, I asked him just a very innocent question. What happened to Rick? Warren said that Charlie and I knew that we would get very rich and we were not in a hurry. Rick was in a hurry, always using some leverage. And then when the '73-'74 downturn came, Rick got margin calls. I bought his Berkshire Hathaway for $40 a share, the stock that's now $700,000. So Rick was forced to sell it when it was probably the worst time to sell. Warren actually went one step further. So he says, if you're even a slightly above average investor and you spend less than you earn and you use no leverage, you cannot help but get rich in a lifetime.
