The Buffett

 
 


  • Warren Buffett Stock - Investment Details since 1967

    1. --------------------------------------------------------------------

      Period 5

    2. Berkshire's earnings 1983-1987
    3. How Berkshire generated $100million premium from a newspaper ad
    4. Nebraska Furniture mart
    5. Cap cities/ABC
    6. Completely out from Textiles by 1985
    7. Berkshire Hathaway's investments 1983-1987
    8. 1987 crash
    9. The Fechheimer Bros. Co
    10. Scott & Fetzer Co
    11. Berkshire's earnings from 1983-1987 (All numbers in 000s)

      SEGMENT
      1983     1984     1985     1986     1987    
      Avg Float
      $231,300     $253,200     $390,200     $797,500     $1,266,700
      Insurance Underwriting
      ($18,400)     ($25,955)     ($23,569)     ($29,864)     ($20,696)
      Insurance investment income
      $39,114     $62,059     $79,716     $96,440     $136,658
      Textiles
      ($63)     $226     -     -     -
      Associated retail stores
      $355     ($579)     -     -     -
      See's candies
      $12,212     $13,380     $14,558     $15,176     $17,363
      Buffalo News
      $8,832     $13,317     $14,580     $16,918     $21,304
      Blue chip stamps - parent
      ($353)     ($899)     -     -     -
      Illinois national bank
      -     -     -     -     -
      Wesco financial - parent
      $3,448     $4,828     $9,684     $5,550     $4,978
      Mutual savings and loan corp
      $1,917     $3,151     -     -     -
      Interest on debt
      ($7,346)     ($7,452)     ($7,288)     ($12,213)     ($5,905)
      Others
      $8,490     $3,476     $3,725     $8,685     $13,697
      Precision steel
      $1,136     $1,696     -     -     -
      Nebraska Furniture mart
      $1,521     $5,917     $5,181     $7,192     $7,554
      Amortization of Goodwill
      ($563     ($1,434)     ($1,475)     ($2,555)     ($2,862)
      Fechheimer
      -     -     -     $3,792     $6,580
      Kirby
      $10,508     $12,891     ($1,475)     ($2,555)     ($2,862)
      Scott Fetzer - Diversified mfg
      -     -     -     $13,354     $17,555
      World book
      -     -     -     $11,670     $15,136
      Shareholder designated contributions
      -     -     ($2,164)     ($2,158)     ($2,963)
      Other purchase price accounting charges
      ($1,656)     ($1,716)     -     ($11,031)     ($6,544)
      OPERATING INCOME
      $48,644     $70,015     $92,948     $131,464     $214,746
      Insurance investment income / avg float
      16.91%     24.51%     20.43%     12.09%     10.79%
      Gain from Sale of securities
      $45,298     $71,587     $325,237     $150,897     $19,806
      Special GEICO distribution
      $18,224     -     -     -     -
      Special Gen foods distribution
      -     $7,294     $3,779     -     -
      Special Washington post distribution
      -     -     $13,851     -     -
      Net earnings after tax
      $112,166     $148,896     $435,815     $282,361     $234,552

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

      1983     1984     1985     1986     1987    
      Sum of Insurance investment income and gain from sale of securities (S)
      $84,412     $133,646     $404,953     $247,337     $156,464    
      (S) / Net Earnings after tax
      75.26%     89.76%     92.92%     87.60%     66.71%

      INSURANCE FLOAT: As we can see above that Insurance Float more than tripled between the years 1985 and 1987 from $390million to $1,266million, As compared to a modest 58% growth in 5 years between 1977 and 1982. In 1986 Berkshire expanded its large risk pool of policies. It was able to do that because it had conserved its capital when other insurers were slashing prices in order to increase their market share.

      How Berkshire generated $100million premium from a newspaper ad? From 1980 to 1984 when other Insurers were grabbing each other's market share. Berkshire was quietly sitting in the corner and watch its annual premium dip from $185million to $134million. The industry did turn around in 1985. Many insurers left the market and the larger commercial customers fled to high quality. At that time Berkshire's balance sheet was the strongest amongst all other major insurers and had six times more capital than the average insurer. Berkshire made best use of its capital position by publishing an advertisement in leading Newspapers for customers with large commercial exposures who are willing to pay $1million or more in premium. Berkshire was able to generate $100million premium from that ad.

      Nebraska Furniture mart. "Sell cheap and tell the truth." In 1983 Buffett eyed on this furniture store in Omaha that was opposite Ross's steak house. The store was owned by Rose Blumkin. Her original name was Rose Gorelick and she was born in Russia in 1893. Because of extreme poverty, Rose never got any formal education. She married Isadore Blumkin in 1914. He set off to USA soon after the wedding. By 1917 World-War-I had broken out. Rose escaped from Russia to China e-route to Japan and finally crossed over the pacific to come to Seattle. It was there where she was re-united with her husband and in 1919 they settled in Omaha, NE.

      As she didn't know any English, nor she had any formal education, so she never had any chance of getting any kind of job. She made a minimal living by trading used clothes and small furniture. In 1937 she founded Nebraska Furniture Mart by renting a store front on Farnam street. Her business model of selling products at lower margin didn't go well with her competitors. They used there muscle power to force the manufacturers from selling products to her. Traveling by train to Kansas City, Chicago and New York, she became a proficient furniture bargain hunter by buying from large furniture stores at 5% over their cost, and still making a profit using her low markup sales strategy.

      Still, battling reluctant suppliers and a depressed Korean War economy in 1951, Mrs. B filled Omaha's City Auditorium with the store's inventory for an all-out, three-day sale. In three chaotic days, she took in $250,000 and eliminated her debt forever. The growing success led to moves to various downtown locations, and the flagship store at 2205 Farnam eventually expanded to 120,000 square feet and operated in tandem with the present 72nd street location from 1970 to 1980. Joining his mother in the business in post-war 1946, son Louie contributed immeasurably to the growth and success of the business. A devastating tornado in 1975 caused a minor blip. With millions of dollars in damage to the 72nd street store, Mrs. B and her son simply rebuilt bigger and better. Impressed with the success, business savvy and honest dealings of the Blumkins, Buffett and Mrs. B used a simple handshake to seal the purchase of 90% of the business for $60million. The 'Historic Omaha Handshake' plus a simple two-page written agreement were all that were required - no audit of the store's books, no inventory of its merchandise.

      Cap Cities/ABC : Tom Murphy was a typical Buffett kind of manager with always a sharp focus on return of capital. Berkshire had owned Cap cities stock before and had made a considerable gain on it. But Buffett regretted as to why he sold it prematurely. In 1984 Berkshire had bought 2.5% of ABC's outstanding stock. Tom Murphy wanted to acquire ABC thru his company Cap cities. He noticed that Buffett had an interest in ABC so offered him to be his partner in the takeover. Buffett could gauge the intrinsic value of the deal immediately. Most of all he admired Tom Murphy a lot. Cap cities issued 3 million shares to Berkshire at $172.50 each. Thereby raising $500million. Most interestingly this was Berkshire's largest investment till date and exceeded by its previous largest of Nebraska Furniture Mart of $60million by 8 times.

      Its very rare that someone can muscle their demand thru the Oracle of Omaha. But Bruce Wasserstein who was representing ABC in the deal sensed that ABC was being bought for a discount. Other than cash he also demanded stock warrants of Cap cities for ABC's shareholders. Buffett and Murphy were dead beat against it at the beginning. But finally agreed to Bruce's demands and Cap cities bought ABC for a total cost of $3.5bn. After this deal. Berkshire became the single largest shareholder of the combined company owning 18% of it.

      Completely out from Textiles by 1985. In 1985 Buffett pulled the plug for Berkshire's Textiles operations. It was emotionally a difficult decision, but he could no longer overlook the faltering economics of its business. As being a stellar guardian of shareholder's wealth he could no longer witness the capital that was being sucked by the Textiles business.

      In 1964 when Buffett partnership bought control of Berkshire Hathaway, its net worth was $22million. The company's intrinsic business value, however, was considerably less because the textile assets were unable to earn returns commensurate with their accounting value. From 1955-1964 Berkshire's aggregate sales were $530million, with a net loss of $10million. Textiles businesses in Southern states were non-union, thus giving them an upper hand compared to their Northern counterparts. But Buffett had put all chips on Ken Chace hoping for him to tide over the economic disadvantages. But the going was tough right from day one. In 1967 Buffett used the cash from Textiles business to fund the purchase of National Indemnity. Steadily Berkshire branched into other sectors like Newspaper publishing and Home furnishing retail. But Textiles remained close to Buffett's heart, mostly because of the following reasons stated in his 1985 shareholder's report "1) our textile businesses are very important employers in their communities, (2) management has been straightforward in reporting on problems and energetic in attacking them, (3) labor has been cooperative and understanding in facing our common problems, and (4) the business should average modest cash returns relative to investment."

      Buffett realized that he was wrong about the last point. Since 1979 Textiles was just burning cash with no signs of profitability. But he had all praise for its managers for trying their best for turning around the business. It also proved Buffett's statement that "When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact." And Buffett advised other investors that "Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks."

      Berkshire Hathaway's investments 1983-1987 (All numbers in 000s) except no of shares

      1983

      COMPANY
      No. OF SHARES     COST     MARKET    
      Affiliated Publications, Inc
      690,975     $3,516     $26,603    
      General Foods Corporation(a)
      4,451,544     $163,786     $228,698    
      GEICO Common
      6,850,000     $47,138     $398,156    
      Handy & Harman
      2,379,200     $27,318     $42,231    
      Interpublic Group of Companies, Inc.
      636,310     $4,056     $33,088    
      Media General
      197,200     $3,191     $11,191    
      Ogilvy & Mather International
      250,400     $2,580     $12,833    
      R. J. Reynolds Industries, Inc.(a)
      5,618,661     $268,918     $314,334    
      Time, Inc
      901,788     $27,732     $56,860    
      The Washington Post Company
      1,868,600     $10,628     $136,875    
      Total
          $558,863     $1,287,869    
      All Other Common Stockholdings
          $7,485     $18,044    
      Total Common Stocks
          $566,348     $1,305,913    

      (a) WESCO owns shares in these companies.

      1984

      COMPANY
      No. OF SHARES     COST     MARKET    
      Affiliated Publications, Inc
      690,975     $3,516     $32,908    
      American Broadcasting Companies, Inc
      740,400     $44,416     $46,738    
      Exxon Corporation
      3,895,710     $173,401     $175,307    
      General Foods Corporation
      4,047,191     $149,870     $226,137    
      GEICO Corporation
      6,850,000     $45,713     $397,300    
      Handy & Harman
      2,379,200     $27,318     $38,662    
      Interpublic Group of Companies, Inc
      818,872     $2,570     $28,149    
      Northwest Industries
      555,949     $26,581     $27,242    
      Time, Inc
      2,553,488     $89,327     $109,162    
      The Washington Post Company
      1,868,600     $10,628     $149,955    
      Total
          $573,340     $1,231,560    
      All Other Common Stockholdings
          $11,634     $37,326    
      Total Common Stocks
          $584,974     $1,268,886    

      1985

      COMPANY
      No. OF SHARES     COST     MARKET    
      Affiliated Publications, Inc
      1,036,461     $3,516     $55,710    
      American Broadcasting Companies, Inc
      900,800     $54,435     $108,997    
      Beatrice Companies, Inc
      2,350,922     $106,811     $108,142    
      GEICO Corporation
      6,850,000     $45,713     $595,950    
      Handy & Harman
      2,379,200     $27,318     $43,718    
      Time, Inc
      847,788     $20,385     $52,669    
      The Washington Post Company
      1,727,765     $9,731     $205,172    
      Total
          $267,909     $1,170,358    
      All Other Common Stockholdings
          $7,201     $27,963    
      Total Common Stocks
          $275,110     $1,198,321    

      1986

      COMPANY
      No. OF SHARES     COST     MARKET    
      Capital Cities/ABC, Inc
      2,990,000     $515,775     $801,694    
      GEICO Corporation
      6,850,000     $45,713     $674,725    
      Handy & Harman
      2,379,200     $27,318     $46,989    
      Lear Siegler, Inc
      489,300     $44,064     $44,587    
      The Washington Post Company
      1,727,765     $9,731     $269,531    
      Total
          $642,601     $1,837,526    
      All Other Common Stockholdings
          $12,763     $36,507    
      Total Common Stocks
          $655,364     $1,874,033    

      1987

      COMPANY
      No. OF SHARES     COST     MARKET    
      Capital Cities/ABC, Inc
      3,000,000     $517,500     $1,035,000    
      GEICO Corporation
      6,850,000     $45,713     $756,925    
      The Washington Post Company
      1,727,765     $9,731     $323,092    
      Total Common Stocks
          $572,944     $2,115,017    

      1987 Crash. Fresh from its Insurance business turnaround in 1985 and 1986, Berkshire was sitting on a mountain of cash. But Buffett was quietly siphoning them in muni bonds or other less risky stuff. He had liquidated all of Berkshire's equity positions except for his top three of Cap cities, GEICO and Washington post. Buffett could sense the overpriced market and was sticking to his rule of buying only the stocks that were selling for a discount. By August-1987 Dow had touched 2,700 and Berkshire's stock was at all-time high of $4,270. But by October, 1987 the market had reached its peak and had started declining. On the black Monday of Oct-19, 1987 there were sell orders all over. People were scrambling to their broker's offices and 11 out of 30 Dow components could not even open that day. The Dow fell by 508 points that day, falling by 22.6 %, its biggest one day fall ever. Berkshire fell to $3,170 and Buffett's net worth was down by $342million.

      The Fechheimer Bros. Co. Fechheimer, a uniform manufacturing and distribution business, began operations in 1842. Warren Heldman, Bob's father, became involved in the business in 1941 and his sons, Bob and George ), along with their sons, subsequently joined the company. Under the Heldmans?management, the business was highly Successful. In 1981 Fechheimer was sold to a group of venture capitalists in a leveraged buyout (an LBO), with management retaining an equity interest. The new company, as is the case with all LBOS, started with an exceptionally high debt/equity ratio. After the buyout, however, operations continued to be very successful. So by the start of 1985 debt had been paid down substantially and the value of the equity had increased dramatically. For a variety of reasons, the venture capitalists wished to sell and thus Bob approached Berkshire with the offer. Berkshire bought a 84% stake in the business on the basis of overall business having been evaluated as $55million

      Scott & Fetzer Co. Berkshire bought this group of 17 businesses for $315million in 1986. The cash for this came from the sale of General Foods stock that Berkshire had to sell because of Phillip Morris' takeover of the company. Berkshire had made a profit of $332million in the deal. In 1985 Scott & Fetzer co had sales of $700million. Out of which 40% was from World Book. Buffett was very impressed by its CEO Ralph Schey

    © 1996- The Buffett