The Buffett

 
 


  • Warren Buffett Stock - Investment Details since 1967

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      Period 6

    2. Berkshire's earnings 1988-1992
    3. Berkshire's Salomon Brothers deal
    4. Berkshire's investments 1988-1992
    5. SAINTED SEVEN - Berkshire's seven businesses as of 1987
    6. Berkshire's investment in BORSHEIMS
    7. Arbitrage bet - RJR Nabisco
    8. Berkshire's issuance of zero coupon convertible debentures
    9. Berkshire's investment in Coca cola
    10. Berkshire's investment in Well's Fargo
    11. How Berkshire profited from Hurricane Hugo?
    12. How Berkshire made $2.5bn from Freddie Mac?
    13. Berkshire's entry into shoe business
    14. Credit card insurance business - Central states Indemnity
    15. Berkshire's earnings from 1988-1992 (All numbers in 000s)

      SEGMENT
      1988     1989     1990     1991     1992    
      Avg Float
      $1,497,700     $1,541,300     $1,637,300     $1,895,000     $2,290,400
      Insurance Underwriting
      ($1,045)     ($12,259)     ($14,936)     ($77,229)     ($71,141)
      Insurance investment income
      $197,779     $213,642     $282,613     $285,173     $305,763
      Buffalo News
      25,462     $27,771     25,981     21,841     28,163
      Fechheimer
      $7,720     $6,789     $6,605     $6,843     $7,267
      Nebraska Furniture mart
      $9,099     $8,441     $8,485     $6,993     $8,072
      Kirby
      $17,842     $16,803     $17,613     $22,555     $22,795
      Scott Fetzer - Diversified mfg
      $17,640     $19,996     $18,458     $15,901     $19,883
      See's candies
      $19,671     $20,626     $23,892     $25,575     $25,501
      HH Brown
      -     -     -     $8,611     $17,340
      Wesco other than insurance
      $10,650     $9,810     $9,676     $8,777     $9,195
      World book
      $18,021     $16,372     $20,420     $15,487     $19,503
      Amortization of Goodwill
      ($2,806)     ($3,372)     ($3,461)     ($4,098)     ($4,687)
      Other purchase price accounting charges
      ($7,340)     ($6,668)     ($6,856)     ($7,019)     ($8,383)
      Interest on debt
      ($23,212)     ($27,098)     ($49,726)     ($57,165)     ($62,899)
      Shareholder designated contributions
      ($3,217)     ($3,814)     ($3,801)     ($4,388)     ($4,913)
      Others
      $27,177     $12,863     $35,782     $47,896     $36,267
      Operating income
      $313,441     $299,902     $370,745     $315,753     $347,726
      Investment income / avg float
      13.21%     13.86%     17.26%     15.05%     13.35%
      Sale of securities
      $85,829     $147,575     $23,348     $124,155     $59,559
      Total
      $399,270     $447,477     $394,093     $439,908     $407,285

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

      1988     1989     1990     1991     1992    
      Sum of Insurance investment income and gain from sale of securities (S)
      $283,608     $361,217     $305,961     $409,328     $365,322    
      (S) / Total income
      71.03%     80.72%     77.64%     93.05%     89.70%

      Berkshire's Salomon Brothers deal. Gutfreund had helped Buffett during Bailout of GEICO in 1977. Since then both had developed a very close business relationship. Like Buffett, Gutfreund was very conservative in his capital allocation decisions. He had kept Salomon away from Junk bonds during eighties. In 1987 Salomon's stock was in a slide and its single largest shareholder Minerals and Resources corp (Minorco) was breathing down management's neck. Minorco was looking to sell its shares to Ronald Perelman's Revlon. Salomon's Board wanted to avoid that situation. But they could do little about it. Salomon's stock was being hammered by Wall st. Perelman was offering $38 / share for Minorco's block of shares. Totaling it to $700 million, a premium of 25% over the closing price of Sep-21 / 1987. Gutfreund's last option was to approach Buffett for help. Salomon's board had little choice and they preferred Buffett over Perelman. Thus in late 1987 Berkshire invested $700million in the form of Salomon's preferred stock having a coupon of 9% and conversion option of $38/share. Wall Street was surprised by the deal, because Buffett was always critical of the traders and was now seen cordially with their company. Even Carol Loomis of Fortune couldn't resist of criticizing the deal. She wrote "The most fascinating aspect of Buffett's Salomon investment is that it puts him in bed with Wall street pros whose general greed he has scorned in the past'".

      Salomon Brothers' founding was based on a family feud between two generations. Fredinard Salomon came to USA in late nineteenth century. He was running a family business of arranging short term credit for securities firms. Those days Wall Street used to work on Saturdays too. Salomon was a staunch Jewish who observed Sabbath on Saturdays and did not work that day. But his sons had a different approach; they parted with him and formed Salomon brothers in 1910 with a capital of $5,000. In its early days - the company tapped each bank's door every morning in assessing excess capital they had available for short term borrowing and thus started their trading business. They slowly stepped into bond trading and finally in 1917 became a registered dealer in Treasury securities. Salomon was still a second rung company and Arthur Salomon wanted it to be in the top tier with the league of JP Morgan.

      By mid-fifties Salomon had established itself as a seasoned Wall st player and boasted of a capital of $7.5million. By 1979 Salomon had $200million. It underwrote IBM's $1bn bond offering and sealed its place as a top investment bank of Wall Street. It was during that time that John Gutfreund took charge of the company. In next few years he took the company to new heights, but by late eighties the company found itself riding a high tide. Gutfreund still kept paying high bonuses to its star traders. In the year 1990 the net income of the firm dropped by $118 million, but Gutfreund's team still managed to get $120 million in bonuses. Buffett took a very rare standing of interfering in the management's decision. He voiced his opposition to the bonus plan.

      Paul Mozer was heading the government bond desk. He was one of the few folks whom the treasury approached regularly for their debt needs. Government had regulated the business by restricting 35% of awards of Treasury debt to a single party. But Mozer found a loophole in the bidding process and was able to get more than 35% of the Treasury auctions to Salomon. Though his process was not entirely illegal, but it caught the eye of Treasury officials who first sternly insisted him to stop his process. Mozer then crossed the line and started using phony orders on behalf of its customers. To the Treasury it looked as if the orders were coming from different sources, but actually they were all going to Salomon's acct. Mozer's antics were short lived. As a routine process, Treasury sent letters to Salomon's two customers Quantum fund and Mercury asset management. They were surprised to find the receipts for Treasury bills that they had never ordered.

      Mozer was cornered. He first tried to brush away the matter as some kind of an error in Salomon's system. But pretty soon the whole plot was untangled. Salomon was now under intense scrutiny from SEC and the Justice dept. All this was made public and Salomon's customers started looking at it with suspicion. Gutfreund ?who was seen as the king of Wall st, was being accused of overlooking a serious lapse on Salomon's part. In the Money management business TRUST is the single biggest asset for any company. It takes decades to build that, but it could evaporate in just few days. Salomon was a living example of this fact. Its customers started deserting it and curtailed their exposure to its business. Salomon's stock was down more than 25% in two weeks from $37 to $27. All eyes were now on Buffett and his magic wand to get the company out from its doldrums. Buffett till now was just a passive investor and a member of its board. He knew that Salomon was highly leveraged and it would be very risky to make any more commitment. But Buffett defied his gut feel and responded to help Salomon in its crisis. In August-1991 Gutfreund stepped down to make way for Buffett as the company's next chairman.

      Salomon was fighting two battles. The first was that of generating enough capital to survive, and the second was Justice Department's inquiry. Buffett took upon himself of defending the company. But he also vowed to shakeup the compensation plan of Salomon's traders. The traders reacted furiously and threatened to leave in hoards. Buffett was undeterred, he maintained his stance. Salomon's inner circles started accusing him of giving the cold treatment to its most valuable assets, its traders. All this cost cutting didn't prevent from a disastrous 1991 fourth quarter. Salomon's market share of equity underwritings had fallen to a pittance 2%. In Jan-1992, Tom Hanley, a key analyst with the company demanded his pay to be doubled. Buffett didn't agree and Tom left the company taking with him four other senior analysts. Buffett realized that his Berkshire playbook of 1967 was not applicable to Salomon of 1992. SEC finally settled with Salomon with a fine of $290 million. In June-1992 Buffett stepped down as Chairman of Salomon. Salomon stock was at $33, around 25% higher than when Buffett had taken office in Aug-1991. Bob Denham succeeded him.

      In his successive annual shareholder letters, Buffett did acknowledge his mistake of investing in Salomon. But he was lucky to have been bailed out in Nov-1997 when Travellers agreed to buy Salomon. At the end Berkshire made a pretax gain of $678 million on its initial Salomon investment of $700 million and also got its annual dividend of $63 million from 1988 to 1994.

      Berkshire Hathaway's investments 1988-1992 (All numbers in 000s) except no of shares

    1988

    COMPANY
    No. OF SHARES     COST     MARKET    
    Capital Cities/ABC, Inc
    3,000,000     $517,500     $1,086,750    
    The Coca-Cola Company
    14,172,500     $592,540     $632,448    
    Federal Home Loan Mortgage inc - preferred
    2,400,000     $71,729     $121,200    
    GEICO Corporation
    6,850,000     $45,713     $849,400    
    The Washington Post Company
    1,727,765     $9,731     $364,126    
    Total
        $1,237,213     $3,053,924    

    1989

    COMPANY
    No. OF SHARES     COST     MARKET    
    Capital Cities/ABC, Inc
    3,000,000     $517,500     $1,692,375    
    The Coca-Cola Company
    23,350,000     $1,023,920     $1,803,787    
    Federal Home Loan Mortgage inc - preferred
    2,400,000     $71,729     $161,100    
    GEICO Corporation
    6,850,000     $45,713     $1,044,625    
    The Washington Post Company
    1,727,765     $9,731     $486,366    
    Total
        $1,668,593     $5,188,253    

    1990

    COMPANY
    No. OF SHARES     COST     MARKET    
    Capital Cities/ABC, Inc
    3,000,000     $517,500     $1,377,375    
    The Coca-Cola Company
    46,700,000     $1,023,920     $2,171,550    
    Federal Home Loan Mortgage inc - preferred
    2,400,000     $71,729     $117,000    
    GEICO Corporation
    6,850,000     $45,713     $1,110,556    
    The Washington Post Company
    1,727,765     $9,731     $342,097    
    Wells Fargo
    5,000,000     $289,431     $289,375    
    Total
        $1,958,024     $5,407,953    

    1991

    COMPANY
    No. OF SHARES     COST     MARKET    
    Capital Cities/ABC, Inc
    3,000,000     $517,500     $1,300,500    
    The Coca-Cola Company
    46,700,000     $1,023,920     $3,747,675    
    Federal Home Loan Mortgage inc - preferred
    2,495,200     $77,245     $343,090    
    GEICO Corporation
    6,850,000     $45,713     $1,363,150    
    The Gillette Company
    24,000,000     $600,000     $1,347,000    
    Guinness PLC
    31,247,000     $264,782     $296,755    
    The Washington Post Company
    1,727,765     $9,731     $336,050    
    Wells Fargo & Company
    5,000,000     $289,431     $290,000    
    Total
        $2,828,322     $9,024,220    

    1992

    COMPANY
    No. OF SHARES     COST     MARKET    
    Capital Cities/ABC, Inc
    3,000,000     $517,500     $1,523,500    
    The Coca-Cola Company
    93,400,000     $1,023,920     $3,911,125    
    Federal Home Loan Mortgage corp (Freddie Mac)
    16,196,700     $414,257     $783,515    
    GEICO Corporation
    34,250,000     $45,713     $2,226,250    
    The Gillette Company
    24,000,000     $600,000     $1,365,000    
    General Dynamics Corp
    4,350,000     $312,438     $450,769    
    Guinness PLC
    38,335,000     $333,019     $299,581    
    The Washington Post Company
    1,727,765     $9,731     $396,954    
    Wells Fargo & Company
    6,358,418     $380,983     $485,624    
    Total
        $3,637,561     $9,024,220    

    SAINTED SEVEN: Even though from 1983 to 1987 Berkshire's eighty percent income came from the insurance investment income and sale of securities but it had steadily acquired some great businesses that Buffett proudly called them "sainted seven". They were Buffalo News, Fechheimer, Kirby, Nebraska Furniture mart, Scott Fetzer manufacturing group, See's Candies and World book. Other than Berkshire's insurance operations, Buffett was counting on them for Berkshire's growth. In 1988 this group together earned an astounding 67% return on capital.

    BORSHEIMS: After acquiring Nebraska Furniture Mart from Blumkins, Buffett discovered that Rose had a sister who was equally good in her business. She and her husband purchased a small jewelry store called Borsheims in 1948. In next 40 years the business grew leaps and bounds and in 1988 Berkshire bought a 80% stake in it.

    HONESTY AT ITS PEAK : As per Buffett's 1990 shareholder's letter. Borsheims jewelry stores used to send its customers assortment of jewelry out of which they used to pick whatever they want and send the rest back with payment. And Borsheims had yet to meet a dishonest customer because all its new customers were always recommended by its current customers.

    RJR NABISCO. In 1988 Berkshire bought RJR Nabisco as part of an arbitrage strategy because the company was planning to go private. But as Salomon was bidding for the company and Buffett was its director, so that restricted his opportunity to buy shares. Overall Berkshire made a quick $64million on the deal. In 1989 and 1990 Berkshire bought bonds of RJR Nabisco and sold it in 1992 for a decent gain.

    ZERO COUPON CONVERTIBLE SUBORDINATE DEBENTURES. In Sep-1989 Berkshire issued $902.6 million zero coupon convertible subordinated debentures, the bonds were issued at 44.314% of maturity value due in 15 years. This was an equivalent of 5.5% compounded return. In total Berkshire received $400million from the offering. The bonds were issued in denomination of $10,000 each and each were convertible to 0.4515 share of Berkshire Hathaway. As expected Buffett did call back these convertible debentures on Dec-16, 1992. Even though Buffett is wary about debt, but he is fine incurring it if it comes at attractive prices.

    AAA Credit rating In 1989, market finally honored Berkshire for its fort- Knox like balance sheet by giving it the AAA credit rating. During the crash of 2008, Berkshire was just one of the seven corporations that was part of this elite club of AAA rated companies. But when it acquired Burlington Northern SantaFe then S&P cut its rating by one notch.

    Why Did Buffett buy coca cola in 1988? In the fall of 1988, Coca cola was still 25% down from the pre 1987 crash level. Buffett saw a lifetime opportunity in putting his money where his mouth was.By March-1989 Berkshire was owning 7% of the company at the cost of $1.07 billion at an average price of $10.96 / share. Wall st was skeptical of Buffett's move. But the Pundits were silenced when in just 3 short years Berkshire's Coca cola investment value more than tripled to over $3.75 billion. Coca Cola's stock had been cheap on many occasions during Buffett's career. So why did he wait till 1988 to buy its stock????........ It's interesting to note that Coca cola was global well before many other American companies had thought of expanding their horizons overseas. Coca cola's first China bottling plant was opened in 1928. During World War-II the company proposed to U.S Government to open several bottling plants overseas to boost the Troop's morale. In 1949 nine Buddhist monks performed religious rites on opening of a Bottling plant in Bangkok. In 1956 a publicist trekked deep into Peru and encountered an Indian woman. He thought he could introduce Coca Cola to her. But to his amazement she pulled out a bottle of Coca cola from her bag.

    Even though, the company had established its roots all over. But it never persuaded any strategy to increase its volumes overseas. In 1981 Robert Goizueta became Chairman of the company. In early eighties he invested $13 million in Philippines bottling venture. Pretty soon Coca cola overtook Pepsi and had captured two thirds of Philippines soft drink market. Spurred by success in Philippines, company strengthened its operations in other parts of the world. It also noticed that Coca cola was a treat for its foreign customers who were ready to pay higher prices for it. Pretty soon company jacked its Unit prices overseas and saw its margins soar. All these endeavors were paying off. From 1984 to 1987 the total gallons sold overseas rose by 34%. Profit margin on each gallon rose from 22% to 27%. The foreign earnings soared from $607 million to $1.11 billion. In 1984 Coca cola had earned 52% of its profits overseas. But in 1987 it earned 75% profits from overseas. This was a clear indication that the company had found its momentum overseas and had just scratched its overseas potential. There were millions of people still waiting to become fans of their sweet syrup. On top of all this Goizueta was taking advantage of the 1987 crash and was buying back Coca cola's stock in hoards. All this was enough to convince Buffett that the stock had lot of coupons that were yet to be cashed..

    As Buffett's 1993 letter, Coke went public in 1919 at $40 per share. By the end of 1920 the market, coldly reevaluating Coke's future prospects, had battered the stock down by more than 50%, to $19.50. At yearend 1993, that single share, with dividends reinvested, was worth more than $2.1 million. As Ben Graham said: "In the short-run, the market is a voting machine - reflecting a voter-registration test that requires only money, not intelligence or emotional stability - but in the long-run, the market is a weighing machine."

    Wells Fargo. 1990 was the worst year for banking since the great depression. California Real estate bubble had burst. As Wells Fargo had a huge exposure to California real estate market, its stock was bleeding. But Buffett still had positive views about the bank. All that was accredited towards its CEO Carl Reichardt, who was an equivalent sharp cost cutter as Mrs B. or Tom Murphy. Berkshire bought 10% stake in the company for $290 million. 1991 was still worse year than 1990. Buffett, in the contrary seeked regulatory approval for increasing Berkshire's stake in the company.

    MAJOR CATASTROPHES OF 1989 AND HOW BERKSHIRE CASHED ON IT. Hurricane Hugo and California earthquake were two big catastrophes that occurred in 1989. Because of this many insurers had to leave the market. This created an immediate shortage of catastrophe coverage. Thus prices instantly became attractive and Berkshire wrote $250million of catastrophe coverage. By 1989, net worth of its insurance companies was $6bn. Second only to State Farm amongst US based P&C companies.

    FREDDIE MAC. Most of Buffett's past investments have been in companies that are still going strong. Like McDonalds, Disney, Petro China. But Freddie Mac is an exception. Even though the company is losing billions now but it did make a lot of money for Berkshire. Buffett started building a position on this company in the year 1988. He kept the stock till the year 2000 when he finally sold all of Freddie Mac shares pocketing a total Pre Tax gain of around $2.5bn. Following is how Freddie Mac fared in those twelve years.

    Berkshire Hathaway's Freddie Mac holdings 1988-1999 (All numbers in $millions)

    YEAR
    COST     VALUE    
    1988
    $71     $121    
    1989
    $71     $161    
    1990
    $71     $117    
    1991
    $77     $343    
    1992
    $414     $783    
    1993
    $307     $681    
    1994
    $270     $644    
    1995
    $260     $1,044    
    1996
    $333     $1,772    
    1997
    $329     $2,683    
    1998
    $308     $3,885    
    1999
    $294     $2,803    

    HH Brown. Berkshire acquired this business in 1991. The company specializes in work shoes and has a great margin. In 1927 a 29-year-old businessman named Ray Heffernan purchased the company, then located in North Brookfield, Massachusetts, for $10,000 and began a 62-year career of running it. By Mr. Heffernan's retirement in early 1990 H. H. Brown had three plants in the United States and one in Canada; employed close to 2,000 people; and earned about $25 million annually before taxes. Frances Heffernan, one of Ray's daughters, married Frank Rooney. He went on to become CEO of Melville Shoe (now Melville Corp.). During his 23 years as boss, from 1964 through 1986, Melville's earnings averaged more than 20% on equity and its stock (adjusted for splits) rose from $16 to $960. After retiring from Melville, Frank took over as CEO of HH Brown. After Mr. Heffernan died late in 1990, his family decided to sell the company. John Loomis ?a Buffett friend who also new Frank asked him to give a call to Buffett to see if he would be interested in buying it for Berkshire. Once Buffett new that Frank would continue running the company he quickly agreed to buy it. One unique characteristic about the company was its compensation plan. Its managers were paid an annual salary of $7,800. On top of this they were paid a share of the profits after taking out the charge on the capital. Buffett appreciated this capital centric compensation system.

    Central states Indemnity. In 1992 Berkshire acquired 82% stake in this company that insures credit card payments for people if they become disabled or unemployed. Kizer family retained 18% interest in the company. The company partners with banks that issue credit cards and charge a percentage of the outstanding balance to the customer. If the customer gets un-employed or disabled then the company pays twice the min balance every month for up to 18 months.

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