Question 11: If you started with $1 million today, how would you invest it?
WB: “If I had only $1 million today, then something has gone terribly wrong.” Today, with $1 million, he and Charlie would probably invest in four stocks. When he graduated from Columbia (MBA), he had 75% of his net worth invested in Geico (then called Government Employees Insurance Company).
In his own words, Mr. Buffett describes three early Buffett Partnership investments:
When I got out of Columbia the first place I went to work was a five-person brokerage firm with operations in Omaha. It subscribed to Moody’s industrial manual, banks and finance manual and public utilities manual. I went through all those page by page.
I found a little company called Genesee Valley Gas near Rochester . It had 22,000 shares out. It was a public utility that was earning about $5 per share, and the nice thing about it was you could buy it at $5 per share.
I found Western Insurance in Fort Scott, Kansas. The price range in Moody’s financial manual…was $12-$20. Earnings were $16 a share. I ran an ad in the Fort Scott paper to buy that stock.
I found the Union Street Railway, in New Bedford, a bus company. At that time it was selling at about $45 and, as I remember, had $120 a share in cash and no liabilities.
Source: 1993 talk to Columbia University students
Jeremy Miller, renowned author of Warren Buffett’s Ground Rules: Words of Wisdom from the Partnership Letters of the World’s Greatest Investor, explains the evolution of Warren Buffett in this exclusive interview with The Manual of Ideas:
(Watch the full conversation in The Manual of Ideas Members Area.)
- Greif Bros. Cooperage; originally purchased for the B&B partnership in the early 1950s
- Western Insurance; purchased for Buffett’s personal portfolio in the early 1950s, Buffett actually sold his GEICO position to raise money to invest in this company earning $29/share and selling for $3/share, “He bought as much as he could”
- Philadelphia and Reading Coal & Iron Company; controlled by Graham-Newman, Buffett has discovered it on his own and had invested $35,000 by the end of 1954; it was not worth much as a business but was throwing off a lot of excess cash; Buffett learned about the value of capital allocation with this company
- Rockwood & Co.; controlled by Jay Pritzker, the company was offering to exchange $36 of chocolate beans for shares trading at $34, a classic arbitrage opportunity; unlike Graham, Buffett didn’t arbitrage but instead bought 222 shares and held them, figuring Pritzker had a reason he was buying the stock, “inverting” the scenario; the stock ended up being worth $85/share, earning Buffett $13,000 vs. the $444 he would’ve received from the arbitrage
- Union Street Railway; a net-net he discovered through Ben Graham, had about $60/share in net current assets against a selling price of $30-35/share, Buffett ultimately made $20,000 on this investment through sleuthing and speaking to the CEO in person
- Jeddo-Highland Coal Company (mentioned as an idea Buffett investigated on a road trip)
- Kalamazoo Stove and Furnace Company (mentioned as an idea Buffett investigated on a road trip)
- National American Fire Insurance, earning $29/share, selling for around $30/share, Buffett first bought five shares for $35/share, and later realized that paying $100/share would bring out the sellers because it would make them whole (financially and psychologically) after being sold the stock years earlier
- Blue Eagle Stamps, a failed investment scheme between Buffett and Tom Knapp, they eventually spent $25,000 accumulating these “rare” stamps that weren’t worth more than their face value ultimately
- Hidden Splendor, Stanrock, Northspan, uranium plays that Buffett described as “shooting fish in a barrel”
- United States & International Securities and Selected Industries, two “cigar butt” mutual funds recommended to him by Arthur Wisenberger, a well known money manager of the era; in 1950, represented 2/3 of Buffett’s assets
- Davenport Hosiery, Meadow River Coal & Land, Westpan Hydrocarbon, Maracaibo Oil Exploration, all stocks Buffett found through the Moody’s Manuals
- Sanborn Maps, in 1958 represented 1/3 of his partnerships’ capital; the stock was trading at $45/share but had an investment portfolio worth $65/share; Buffett acquired control of the board in part through proxy leverage; ultimately he prevailed over management and had part of the investment portfolio exchanged for the 24,000 shares he controlled
- Dempster Mill Manufacturing, sold for $18/share with growing BV of $72/share, Buffett’s strategy as with many net-nets was to buy the stock as long as it was below BV and sell anytime it rose above it and if it remained cheap, keep buying it until you owned enough to control it and then liquidate at a profit; he and his proxies gained control of 11% of the stock and got Warren on the board, then bought out the controlling Dempster family, creating a position worth 21% of the partnership’s assets; the business was sliding and at one point he was months away from losing $1M on the investment, but was ultimately rescued by Harry Bottle, a new manager brought in on Charlie Munger’s recommendation; the business eventually recovered through strict working capital controls and began producing cash, which Buffett augmented by borrowing about $20/share worth of additional money and used it to purchase an investment portfolio for the company; he later sold the company for a $2M profit
- Merchants National Property, Vermont Marble, Genesee & Wyoming Railroad, all net-nets he later sold to Walter Schloss to free up capital
- British Columbia Power, selling for $19/share and being taken over by the Canadian government at $22/share, this merger arb was recommended by Munger and Munger borrowed $3M to lever up his returns on this “sure thing”
- American Express, one of Buffett’s first “great company at a good price” investments, the firm’s reputation was temporarily tarnished in the aftermath of the soybean oil scandal; Buffett did scuttlebutt research and realized the public still believed in American Express, and as trust was the value of its brand, the company still had value; Buffett eventually invested $3M in the company and it represented the largest investment in the partnership in 1964, 1/3 of the partnership by 1965 and a $13M position in 1966
- Texas Gulf Producing, a net-net Buffett put $4.6M into in 1964
- Pure Oil, a net-net Buffett put $3.5M into in 1964
- Berkshire Hathaway, the company was selling at a discount to the value of its assets ($22M BV or $19.46/share) and Buffett’s original intent was to buy it and liquidate it, which he started accumulating 2000 shares for $7.50/share; the owner, Seabury Stanton had been tendering shares with the company’s cash flow, so Buffett tried to time his transactions, buying when it was cheap and tendering when it was dear; he continued purchasing stock assuming Seabury would buy him out via tender offers, the two eventually agreed to a $11.50 tender but Seabury reneged at the last moment, changing the bid to $11 and 3/8, sending Buffett into a rage and causing him to abandon his original strategy in favor of acquiring the entire company; he eventually bought out Otis Stanton’s two thousand shares and had acquired enough to gain control with 49% of Berkshire
- Employers Reinsurance, F.W. Woolworth, First Lincoln Financial, undervalued stocks he found in Standard & Poor’s weekly reports
- Disney, which he bought after meeting Walt Disney and being impressed by his singular focus, love of work and the priceless entertainment catalog
- A portfolio of shorts to hedge against a potential market collapse in the mid 60s, totally $7M and consisting of Alcoa, Montgomery Ward, Travelers Insurance and Caterpiller Tractor
- Near the end of 1968, as the market became more and more overvalued, Buffett relented and bought some of the “blandest, most popular stocks that remained reasonably priced” such as AT&T ($18M), BF Goodrich ($9.6M), United Brands ($8.4M) and Jones & Laughlin Steel ($8.7M)
- Blue Chip Stamps, a “classic monopoly” Buffett and Munger discovered in 1968, the company was involved in a lawsuit that the pair thought would be resolved in the company’s favor, and it also possessed “float” which could be invested in more securities, Munger and his friend Guerin each purchased 20,000 shares while Buffett acquired 70,000 for the partnership, in part through share swaps with other companies that owned Blue Chip stock for their own stock; the lawsuit was eventually resolved and the $2M investment produced a $7M profit
- Illinois National Bank & Trust, a highly profitable bank that still issued its own bank notes, it was managed by Eugene Abegg, an able steward of the company whose retainer was one condition for Buffett’s investment in the company
- The Omaha Sun and other local newspapers, which Buffett figured he’d make an 8% yield on, his motivation for buying seemed to be primarily connected to his desire to be a newspaper publisher
- The Washington Monthly, a startup newsmagazine that Buffett lost at least $50,000 on, again, as a vanity project
With clever Google searching it’s possible to track down the original Moody’s Manual reports for many of these investments. Expert Jeremy Miller’s favorite early Buffett Partnership case study is Dempster Mill, explained below:
(Watch the full conversation in The Manual of Ideas Members Area.)
Lost to history, a series of personal investments in Bell Industries deserve of a quick revisit. The 1950’s era side to Warren Buffett lives on!
Bell Industries’ Stock Leaps on News of Buffett Holding
Shares in the tech company gain nearly 30% as Wall St. learns the investor held a 5.3% stake in firm as of Dec. 1.
Billionaire Warren Buffett, who has avoided investing in technology companies, saying he doesn’t understand them, has made a bet on computer services by buying a 5.3% stake in Bell Industries Inc. of El Segundo.
According to a filing with the Securities and Exchange Commission, Buffett reported that he held 506,700 Bell Industries shares as of Dec. 1. His stake in Bell had a market value of almost $3.3 million as of the close of trading Monday, when the stock was at $6.44, up $1.44 or nearly 30%, on news of Buffett’s investment. The stock has gained 28% this year.
Bell Industries last year sold its then-largest business, which focused on electronics distribution, to Arrow Electronics Inc., and now specializes in systems integration. That makes it a technology company, an area in which Buffett, who is known for holding stocks for the long term, has hesitated to tread.
Buffett Bails Out on Stake in Bell Industries
The legendary investor takes a quick profit on his 5.3% interest in the firm after a sharp share price run-up.
Famed “buy and hold” investor Warren Buffett has apparently taken the money and run, cashing in a quick profit on his 5.3% stake in El Segundo-based Bell Industries and joining other major stockholders in realizing windfalls from the recent run-up in the company’s shares.
In a telephone conversation Friday with Bell Industries President Tracy A. Edwards, Buffett said he had sold his stake in the company because his “investment goals have been met,” Edwards said. The executive said he called Buffett on a matter unrelated to the stock price and learned inadvertently of the sale.
Edwards said he did not know exactly when Buffett sold the shares or at what price.
Buffett, chairman and chief executive of his Omaha-based holding company Berkshire Hathaway Inc., was unavailable for comment. As of Monday, he had not formally notified the Securities and Exchange Commission of the stock sale.
Bell Industries shares zoomed as much as 80% after it was disclosed last month in an SEC filing that billionaire Buffett had paid roughly $2.5 million for 506,700 shares of the electronics manufacturer as of Dec. 1.
Buffett never revealed when he began snatching up Bell Industries shares. But despite the small size of the investment, Buffett’s purchase still surprised Wall Street observers because he has studiously avoided high-technology stocks.
Warren Buffett Jumps Back Into Bell Industries, Boosting Shares
The billionaire’s purchase of a 5.1% stake is once again out of his own pocket. Stock jumps $1.06 to $3.13.
Warren Buffett, the billionaire investor who caused a stir last year when he bought a big stake in tiny Bell Industries Inc., sparked a rally in Bell’s stock and then quickly sold out for a handsome profit, has once again bought a sizable position in the El Segundo company–again sending its stock sharply higher.
Buffett bought 442,200 shares, or 5.1%, of Bell’s common stock outstanding, according to a filing with the Securities and Exchange Commission. In response Wednesday, Bell’s thinly traded stock jumped $1.06 a share to close at $3.13 on the American Stock Exchange.
Buffett–who controls Berkshire Hathaway Inc., an Omaha, Neb.-based holding company for his investments and operating companies–once again bought the Bell stock with his own money, not Hathaway’s. And as investors learned the last time, that’s an important distinction for anyone evaluating Buffett’s interest in Bell.
Buffett, 70, made his wealth and reputation as a long-term, buy-and-hold investor by using Berkshire as his vehicle for buying major stakes in companies and then patiently waiting years for those investments to soar in value.
But as his earlier experience with Bell showed, that’s not always Buffett’s practice when he pulls out his own wallet. In that case, Buffett bought a 5.3% stake in Bell in early December 1999, triggered a surge in Bell’s market price, and then dumped his stake a month later for a profit of about $1 million, or 50% on his original investment.