The Buffett

 
 


  • Warren Buffett Stock - Investment Details since 1967

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      Period 3

    2. Wesco Financial
    3. SEC investigation
    4. Berkshire's progress 1977-1982
    5. Berkshire's earnings 1977-1982
    6. Berkshire's investment in Buffalo news
    7. Berkshire's court case with Buffalo News
    8. Buffalo News turn around
    9. Wesco Financial. It was a Savings and Loan company that went public in 1950s. By 1970s its was in tough waters. Buffett had studied the company really well. He was following it since early sixties. By 1972 Wesco was in low teens, half its book value. Blue Chip stamps snapped up 8% of the stock for $2million investment. As Wesco was temporarily in bad shape, it was planning to merge with another Financial company named Financial corp of Santa Barbara. Buffett and Munger instantly knew that Wesco was selling itself for a deep discount because its shares were undervalued as compared to the other company whose stock was overvalued. Blue Chip increased its stake in the company to 20% so that it could influence the directors against the merger. After failing to persuade Wesco's President Vincenti to vote against the merger, Buffett approached Elizabeth Peters, a major shareholder of the company. She was somewhat interested in overhauling the company. Elizabeth was mesmerized by Buffett's capitalist credo and supported his stance of going against the merger. With the help of Elizabeth's support Berkshire was able to avert the merger and save Wesco for being sold for a discount. Blue Chip initially raised its stake in Wesco to 24.9%. But Wesco's shares kept falling and Berkshire kept raising its stake and eventually by 1974 was a majority shareholder in the company.

      SEC investigation. SEC began inquiry in this deal and was investigating if Buffett and Munger had manipulated Wesco's stock price so that they could get a major holding in the company. Buffett was outright honest about his explanations. SEC's lawyers could also get a sense of Buffett's capitalist credo and were leaning towards the opinion that he was not the man in pursuit for a fast buck. But SEC could not overlook the mirage of artifacts that were entangled and confusing. It arose because of Buffett's parallel interests in Berkshire, Blue chip and Diversified retailing. In 1976 the case was settled. SEC formally charged Blue Chip of manipulating the stock price of Wesco. Blue chip neither agreed nor denied this and settled for $115,000. Blue Chip that time owned 80% of Wesco. Blue Chip was later merged with Berkshire in 1983 and Diversified retailing in 1978. The merger also formalized Buffett's relationship with Munger. Munger exchanged his holdings in Diversified retailing and Blue Chip for a 2% stake in Berkshire's stocks. He was named Vice Chairman of Berkshire and also oversaw Wesco Financials operations as its Chairman. Berkshire recovered from its woes of mid-seventies. Its stock was at a high of $95 by 1976.

      Berkshire's progress 1977-1982. Textiles continued its slide and overall the company neither made any profit nor made any loss. Insurance Underwriting was OK, but in 1982 it dealt a huge loss of $11.34million. Insurance as a whole was playing as per Buffett's plan. Out of the total operating income of $201million generated between 1977 and 1982. The income from insurance investment was $141million. This includes all the dividends and interests from the company's equity and Fixed income. The total FLOAT had increased from $139million in 1977 to $220million in 1982. Plus the realized income generated from the sale of securities was around $71million.

      Thus of the total pretax income (including capital gains) of $274million around $212million was either through insurance investment income or through sale of securities. Thus around 77% of the company's total income was generated from Buffett's desk. But Buffett was keen on adding businesses that had huge moat and were having great FREE cash Flow. With acquisitions of See's Candies, Illinois National Bank and Buffalo News. He had developed a good record of roping in businesses of diverse sectors.

      Berkshire's earnings 1977-1982 (All numbers in 000s)

      SEGMENT
      1977     1978     1979     1980     1981     1982    
      Avg Float
      $139,000     $190,400     $227,300     $237,000     $228,400     $220,600
      Insurance Underwriting
      $3,017     $1,560     $2,214     $3,637     $798     ($11,345)
      Insurance investment income
      $11,360     $16,400     $20,106     $25,607     $32,401     $35,270
      Textiles
      ($322)     $1,342     $848     $202     ($1,493)     ($862)
      Associated retail stores
      $1,429     $1,176     $1,280     $1,169     $759     $446
      See's candies
      $2,974     $3,049     $3,448     $4,212     $5,910     $6,914
      Buffalo News
      $158     ($738)     ($1,333)     ($816)     ($320)     ($226)
      Blue chip stamps - parent
      $892     $1,382     $1,624     $3,060     $2,134     $2,472
      Illinois national bank
      $3,288     $4,262     $5,027     $4,731     -     -
      Wesco financial - parent
      $419     $665     $937     $1,044     $1,590     $2,210
      Mutual savings and loan corp
      $1,946     $3,042     $3,261     $1,974     $1,536     $1,524
      Interest on debt
      ($2,129)     ($2,349)     ($2,900)     ($4,809)     ($6,671)     ($6,951)
      Others
      $48     $261     $753     $1,255     $1,936     $1,780
      Precision steel
      -     -     $723     $656     $841     $265
      OPERATING INCOME
      $23,080     $30,052     $35,988     $41,922     $39,421     $31,497
      Insurance investment income / avg float
      8.17%     8.61%     8.85%     10.80%     14.19%     15.99%
      Gain from Sale of securities
      $7,313     $9,190     $6,829     $9,907     $23,183     $14,877
      Mutual savings sale of Branches
      -     -     -     $1,293     -     -
      Net earnings after Tax(T)
      $30,393     $39,242     $42,817     $53,122     $62,604     $46,374

      Share of investment income in Berkshire's overall income. (All numbers in 000s)

      1977     1978     1979     1980     1981     1982    
      Sum of Insurance investment income and gain from sale of securities (S)
      $18,673     $25,590     $26,935     $35,514     $55,584     $50,147    
      (S) / Net Earnings after tax
      61.44%     65.21%     62.91%     66.85%     88.79%     108.14%

       

      Berkshire's investment in Buffalo news. It was founded by the Butler family in 1880. The paper had thrived for nearly a century. With the death of Kate Robinson in 1974, the paper company was up for sale by her estate. The paper was printed in evening and was preferred by readers of Buffalo who liked there news delivered to them after their work. The newspaper had a very strong Union. This crippled management's negotiating power and became a negative point for potential buyers. Vince Manno, a newspaper broker was structuring the deal on behalf of Buffalo News. After being turned down by Washington Post Co and Chicago Tribune, he reduced the asking price from $40million to $35million. Buffett liked the company but thought the price was too high. He offered $30million, finally the deal was settled at $32.5million. Buffalo News didn't have a Sunday edition because of a deal between its former owners Butler family and the Conner family that owned Courier Express.

      Buffett knew that the Sunday edition was crucial for Buffalo News' survival. So he went about spearheading a plan to launch the Sunday edition for the paper. Courier Express slapped the company with a suit stating that Buffalo News was violating Sherman Antitrust act. The issue became a hot topic in Buffalo and finally the fight became a personal one for Buffett. He desperately wanted Buffalo News to succeed.

      Berkshire's court case with Buffalo News. It was a cold and wet day in Buffalo where the courthouse was packed and the folks of the town had come to witness one of the most critical litigation affecting their lives. Buffett was grilled by the opposition lawyers. He was honest and straight forward in his replies. He simply explained his playbook of investing in businesses by solely looking at its fundamentals. He also emphasized as to how Sunday edition for Buffalo News would benefit the people of Buffalo.

      But Buffett committed a serious mistake when he expressed his opinion in a Wall Street Journal article about the economic value of a monopolistic businesses. He used the term "Toll Bridge" to compare such monopolistic business. This was enough for the attorneys to project Buffett as a shrewd businessman who was just thinking about his profits in the pretext of community's interests. On Nov-9,1977, just four days before the inaugural Sunday edition of his newspaper, judge ordered an injunction against the Evening news and slated the whole issue for a trial. The injunction did permit the publication of Sunday edition, but had loaded it with lots of conditions. More than the injunction, it was the bad publicity that hurt the business. This created an uphill task for marketing department to sell its advertising space.

      By 1977 Berkshire's share price was at $132. Making Buffett's net worth as $70million. Berkshire thru blue chip had invested $32.5 million in Buffalo News. By far Berkshire's largest investment. Berkshire's future was very much dependent on how Buffalo News would perform in near future. In response to Buffalo News?efforts, Courier express responded by upgrading its technology and giving its content a fresh look. Unlike his other investments, Buffett took personal interest in operations of Buffalo News. He showed up in company events and advised on some articles that he felt would be interesting to the readers.

      But despite all these efforts, Buffalo news was a sinking ship. In 1978 the company made a loss of $2.9million. There was some positive news in 1979 when U.S. Court of appeals on New York overruled the previous injunction. But this was not enough for the company for yet another yearly loss of $4.6 million. In 1980, Stan Lepsey, a veteran from Newspaper business was pulled in to run the operations. But he was faced with new set of problems in the form of Union negotiations. By 1982 Buffalo News had made a cumulative loss of $12million since Berkshire had bought it in 1977.

      Buffalo News Earnings 1977-1982 (All numbers in 000s)

      YEAR
          OPERATING EARNINGS  
      1977
          $751  
      1978
          ($2,913)  
      1979
          ($4,617)  
      1980
          ($2,777)  
      1981
          ($1,217)  
      1982
          ($1,215)  
      TOTAL
          ($11,988)  

      Buffalo News turn around. Munger informally declared the cumulative loss as a permanent capital loss and repented on their decision of investing in that business. But Buffett had still kept hope in the company. In early 1982 Courier Express also started having problems. Unlike Buffalo News it did not have any backing of a strong company. It could not weather the storm and had to wind down its operations in Sep-1982. This became the turning point in Buffalo News' fortune. All of a sudden it was the only major newspaper of Buffalo and thereby its readership soared. It soon started a morning edition. Its Sunday subscription topped 360,000. In the coming 5 years the company earned over $150million.

      Buffalo News Earnings 1983-1987 (All numbers in 000s)

      YEAR
          OPERATING EARNINGS  
      1983
          $19,352  
      1984
          $27,328  
      1985
          $34,736  
      1986
          $29,921  
      1987
          $39,410  
      TOTAL
          $150,747  

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