Posted in Announcements on Jan 5th, 2007
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Posted in Berkshire Annual Letter, Mistakes on Jan 5th, 2007
A Mistake that Warren Buffett Made
Typically, Warren Buffett’s mistakes fall into the omission rather than commission category.
By this, we are not refering to missing out on high tech companies that Warren didn’t buy. He wouldn’t have understood them anyway. Rather, we are refering to business situations that Charlie and Warren can understand and that seem clearly attractive – but in the end they just stood there doing nothing.
Here’s an example:
In early 1988, Warren decided to buy 30 million shares (adjusted for a subsequent split) of Federal National Mortgage Association (Fannie Mae). This would have cost about $350-$400 million.
This was a company that he understood well and was very positive about the company’s future. However after he bought about 7 million shares, the price began to climb. In frustration, he stopped buying. In an even sillier move, he even sold the 7 million shares he owned as he didn’t liked holding small positions.
As of 1991, an estimate of the gain that Berkshire didn’t make – a cool $1.4 billion.
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Posted in Berkshire Annual Letter, Value Investing on Jan 3rd, 2007
Marketable Common Stocks
The majority of Berkshire’s stock holdings remain unchanged compared to the previous year. This stay-put behavior reflects Warren Buffett’s view that the stock market serves as a relocation center at which money is moved from the active to the patient.
Because of the large sums he works with, Warren Buffett considers the “searching for the superstars” method as his only chance for real success. This method includes:
1) Searching for large businesses with understandable, enduring and mouth-watering economics.
2) Run by able and shareholder-oriented managements.
3) Buying a few of the best companies at a sensible price and holding them for the long term. He certainly would not wish to own an equal part of every business in town.
If finding great businesses and outstanding managers is so difficult, why should proven products be discarded?
His motto is: “If at first you do succeed, quit trying.”
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Posted in Berkshire Annual Letter, Business on Jan 1st, 2007
See’s Candy Shops
On 3rd January 1972, Blue Chip Stamps (then an affiliate of Berkshire and later merged into it) bought control of See’s Candy Shops, a West Coast manufacturer and retailer of boxed-chocolates.
The sellers asked $40 million for 100% ownership of the company. But then the company had $10 million of excess cash, so the true offering price was really $30 million.
Back then, Charlie and Warren, were not yet fully appreciative of the value of an economic franchise. They looked at the company’s mere $7 million of tangible net worth and offered a maximum of $25 million for the company.
They were lucky that the seller agreed to it.
See’s candy sales in the same period increased from $29 million to $196 million from 1972 to 1991. The profits grew even faster than sales, from $4.2 million pre-tax in 1972 to $42.4 million in 1991.
In order to evaluate this increase in profits properly, we must look at the incremental capital investment required to produce these additional profits.
In 1991, the company has a net worth of $25 million. This means that only $18 million of earnings had to be reinvested in the company. During the 20 or so years, about $410 million of pre-tax profits were distributed to Blue Chip/Berkshire.
What did Warren see in See’s?
They saw that the business had untapped pricing power.
Add to that Chuck Huggins, a person of utmost capability and integrity, then See’s executive vice-president, whom they instantly put in charge, and they had a winner.
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