The Buffett

 
 


  • Warren Buffett Stock - Investment Details since 1967

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      Period 2

    2. Berkshire's first acquisition using float
    3. Buffett's first blues after taking over as Chairman of Board
    4. Blue chip stamps
    5. See's candies and its loyal customer
    6. A Business that needs very little incremental capital
    7. Washington Post
    8. Berkshire's first acquisition using float. Berkshire leveraged the float in making strides in media and banking industries by acquiring Sun Newspaper and Illinois National Bank. In early thirties Illinois National Bank was in the virtue of going out of business when Eugene Abegg single handedly brought it back to life. In next 30 years Abegg chiseled the bank into a financial powerhouse of Midwest, boasting assets over $100 million. Bank was his baby and at ripe age of 71 he wanted to hand it over to a person who would maintain his business the way he had maintained for all those years. Buffett was his best choice, because even after selling the bank Eugene got to run it the way he wanted.

      Buffett's first blues after taking over as Chairman of Board. In 1970 after the dissolution of Buffett's partnership, his net worth was $25 million. He and Susie had 36% of Berkshire Hathaway's stock. Other than that they also had 44% of Diversified Retailing  outstanding stock and 13% of Blue Chips outstanding stock. Buffett was truly in the driving seat now. But he had inherited a company that very badly needed a new direction. The writing was on the wall that textiles days were numbered. The operating earnings for Berkshire in 1970 told it all.

      OPERATING EARNINGS FOR 1970 (All numbers in 000s)

      Textiles
          $45  
      Insurance
          $2,100  
      Banking
          $2,600  

      Even though Buffett is considered of having nerves of steel and a true capitalist, but by heart he is more human than any other business figure. He could sense the hard work and passion put by Ken Chace and his team in keeping the lights on for the Textiles mills. So he decided not to pull the plug completely for the textile operations. Early 70s Wall Street was at its peak and Berkshire was flush with $100 million in FLOAT. But out of that only $17 million was in stocks and the rest was Cash. He had stuck to his principle of "Be Greedy when others are fearful and be fearful when others are greedy". But the Go-Go era seemed to be coming to an end and by 1973 the stocks started becoming cheaper again.

      Buffett's first association with Newspaper industry was when as a little boy he had a paper route. This bonding grew stronger when Berkshire acquired "The Sun". Buffett was looking for bigger acquisitions in Newspaper business. Washington Post's stock was in a slide. It gave opportunity to Buffett to build a large position in it. Berkshire's own stock was also under fire. After hitting a high of $87, it had lost 50% value and had slid to $40. Berkshire's investments told a similar story. Its equity holdings were worth $40million with a cost of $52million. Buffett for the first time was seeing a negative return for his investments.

      Blue chip stamps. Buffett and Munger were independently buying Blue Chip stamps for Berkshire and Munger Partnerships respectively. Blue Chip stamps' customers were large supermarkets who bought stamps from Blue chip. These were more or less like coupons. The Super markets in turn distributed the stamps to the valuable customers who then redeemed the stamps to Blue chip in exchange for household items like a toaster, mixer etc. Thus Blue chip collected money upfront and then delivered goods when the customer redeemed there stamps. This was somewhat like FLOAT and the best part was that it was not even regulated like an insurance company. So there was no hassle of having maintaining reserves and dealing with state bureaucrats. Its business was quite formidable. It was bringing in $120million as revenues per year.

      See's candies and its loyal customer. Blue Chip Stamps made use of its FLOAT by buying out companies. One such opportunity came up when See's Candies, a prominent California Chocolate co was up for sale. Buffett initially did not have much insight about company's brand. He valued it at $25million and See's owners were demanding $30million. But Luckily Buffett got his way around and the company was sold for $25million. Till this date Buffett feels that he was lucky to have his way, because the company was way more valuable than the $25million he paid for it. After 15 years of operations, See's store at Albuquerque, NM was endangered. The landlord refused to renew the lease. On top of it the landlord wanted the store to move to an inferior location and pay higher rent. Store's manager Ann Filkins urged her customers to protest the closing. Some 263 folks threatened to boycott the mall. After the story appeared in local newspaper the landlord offered See's a satisfactory deal. Chuck Huggins (CEO of See's) thanked the customers personally and also published a public thank you note in local newspaper with names of all 263 customers.

      A business that needs very little incremental capital. In his 2007 letter Buffett further highlighted the economic value of See's Candies brand and how that has steered the company to grow with very little incremental capital. In 1972 See's sold 16 million pounds of candies. In 2007 it sold 32 million pounds, a paltry growth of 2% per year. In 1972 when Berkshire bought the company of $30 million, See's sales were $25 million and pre-tax earnings was $5 million The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories. In 2007 See's sales were $383 million, and pre-tax profits were $82 million. The capital required to run the business was just $40 million. This means Berkshire had to just to re-invest $32 million back to the business since it had acquired it in 1972. The Pre-Tax earnings of See's from 1972-2007 was $1.35 billion. Thus Berkshire pocketed $1,350 - $32 = $1,318million, just with investment of $25million capital. A hallmark of Buffett's capitalist credo.

      Washington Post. In 1973 Katie Graham became Chairwoman of Washington Post co. She was the first woman head of a FORTUNE-500 company. Berkshire had accumulated 10% of the company's Class-B common stock that was publicly traded. Katie could sense Buffett's power and in order to keep him on her side she offered a seat in the Board of directors to him. In the contrary Buffett showed his trust on Katie's leadership and promised to always side by on her agenda in the board meeting. Buffett developed a very close business relationship with Katie. Pretty soon Katie recognized Buffett's insight on business analysis. She treated him as her mentor and started following his capitalist principles. Thus Washington Post's senior management was forced to keep a tight lid on the company's capital expenditures. Any acquisition proposal was looked into very deeply. Washington Post doubled its operating profit margin/share from 10% to 19% from the year 1974 to 1985. All this was just possible because management adhered to Buffett's disciplined advice of not reinvesting new capital in the business. Instead the free cash that was generated was used to retire 7.5 million shares. So even though the total profits grew 7 times, but the profit per share grew 10 times at a compounded annual rate of 37%(including dividends). Thus Berkshire's 10million investment in 1974 was worth $205million by 1985.

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