Editor’s note: In volume 2 of Glen Arnold’s – a value investor and prolific author based in the UK – The Deals of Warren Buffet, readers are given ten case studies that explore the stories behind some of Buffet’s best investment deals from 1976 to 1989.
“This book describes the deals that turned a 40-something Buffett with $100m into a 59-year-old billionaire and, more importantly, it illustrates the lessons on the best approach to investing that he picked up along the way – lessons for all of us,” the book’s preface says. “While this book explains Buffett’s reasoning for making his key investments, it does not shy away from the errors he made along the way; he learned from them and so can we.”
“While this book explains Buffett’s reasoning for making his key investments, it does not shy away from the errors he made along the way; he learned from them and so can we”
“There’s all sorts of interesting, fascinating case studies in [volume 2], but you’ve also got philosophical ideas about what it means to be a value investor,” Arnold tells Opto.
The following is an excerpt from The Deals of Warren Buffet, volume 2: The making of a billionaire by Glen Arnold, published with permission.
A Distance Travelled
In 1976 you could pick up a share in Berkshire Hathaway for $40. The entire company had a book value of about $58m and market capitalisation under $40m. Warren Buffett owned over two-fifths of those shares.
Just 14 years later, you would have to pay $8,600 for one share – a rise of 21,400%. If you’d invested $10,000 in 1975, by January 1990 your Berkshire shares would be worth $2,150,000.
Valuation of Berkshire Hathaway shares now if you'd invested $10,000 in 1975
Warren Buffett still held over 40% of these shares and so was a billionaire. The transformation of Berkshire Hathaway in just 14 years is breathtaking.
At the beginning, it had an ailing textile operation which “as a significant disappointment” and did not “offer the expectation of high returns on investment.”
It also owned a small insurance underwriting business possessing a float amounting to $87.6m, mostly invested in equities such as 9.7% of The Washington Post. It could also look forward to a good flow of income from its ownership of Illinois National Bank.
Then there was its holding of a minority of the shares in Blue Chip Stamps, which in turned owned See’s Candies and 64% of Wesco.
In 1989, Berkshire Hathaway had an insurance float of $1.54bn which produced a net income from interest and dividends of over $200m.
It owned all or most of the shares in high-returns-on-capital businesses such as The Buffalo News, Fechheimer, Kirby, Nebraska Furniture Mart, Scott Fetzer Manufacturing Group, See’s Candies Borsheims and World Book.
These wonderful companies, year after year, fed profits back to the centre for Buffett and Munger to invest in other opportunities.
It also owned 18% of Capital Cities/ABC’s shares (worth $1.7bn), as well as 7% of Coca-Cola (worth $1.8bn) and over 14% of The Washington Post (worth $0.5bn).
On top of that collection, it held 51% of GEICO, which the market valued at over $1bn, and shares in Federal Home Loan Mortgage Corporation worth a nice round billion. Then there was an assortment of preferred stock, including Salomon and Gillette, totalling nearly $2bn.
But that’s not all
Warren Buffett and Charlie Munger’s personal reputations had grown. Back in 1976 only a handful of shareholders turned up to the AGM.
The press were not interested, with Berkshire Hathaway being thought of as a pretty small mixed-bag conglomerate run out of Omaha, of all places, by a couple of unconventional, even eccentric, Midwesterners.
Why would you pay attention to Berkshire Hathaway when there are far more exciting things happening on Wall Street?
But, by 1989, the name of the company, and of Warren and Charlie, were known throughout the land.
Thousands came to Omaha to listen to their wisdom expressed in a clear down-to-earth way, and thousands more read Buffett’s chairman’s letters. The press regular reported their deals and clamoured for interviews.
Buffett and Munger rubbed shoulders with the great and the good of American society, helped not least by Kay Graham and by the publicity around the saving of Salomon.
Prospective sellers of businesses often thought of Berkshire Hathaway as a safe haven for their creation, somewhere it would be nurtured and grown without loss of integrity.
“Prospective sellers of businesses often thought of Berkshire Hathaway as a safe haven for their creation, somewhere it would be nurtured and grown without loss of integrity”
Berkshire Hathaway was also becoming the go-to sanctuary for the largest companies in the land, if they needed money quickly, and needed a finance provider who would not interfere in their business, and would refuse to sell to one of those brutal Wall Street raiders.
Sure, Berkshire charged a high dividend on preferred shares issued, but at least you knew you were safe from financial distress and from constant attacks.
In short, Berkshire was in a powerful position in 1989. It was one of the largest corporations in the United States, and had plenty of money to invest in more wonderful businesses as it enjoyed the flow of income from its collection of companies.
Just as Warren Buffett was coming up to his 60th year and Charlie Munger his 66th, we find these two still tap-dancing to work. They were so excited about going into the office every day, thinking about all that cash flowing to them and thinking what else they might buy.
In the next few years, they discovered some great businesses in which to place their money, from Wells Fargo and American Express to Dairy Queen, NetJets, General Re and Moody’s. Buffett and Munger were having the time of their lives.
But these stories (and others) will have to wait for another volume in the series.
By Glen Arnold, who is the author of 14 books on investing and the financial markets, including the UK’s number one investment book The Financial Times Guide to Investing and The Great Investors. He is a former professor of investment and corporate finance but now manages an equity portfolio in the UK.
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