Wednesday, January 29, 2014

Warren Wednesday: 1960

I am surprised at the response I am getting from my Warren Wednesday posts. Several people asked last week "Where is my Warren Wednesday!". I'm glad to see that these are being enjoyed...

1960
Written: Jan 30, 1961
Length: 8 pages
SourceRPCPA.com
S&P 500 return: -2.97% (Dow was -9.6%)
Buffett's return: +22.8%
Major events: The first CERN particle accelerator became operational in Switzerland. Interesting to know we had these back then. 

Colonialism is on its death bed with Chad, Niger, and most of French Africa getting independence from France, the Congo gets independence from Belgium, and Nigeria from the U.K. Sadly this year also begins the cycle of military dictators taking over these countries in coups.
Elvis Presley is honorably discharged from the military and begins his music career.
The laser is first patented.
Harper Lee writes, To Kill a Mockingbird.
OPEC is formed.
Domino's Pizza was founded. Hey what can I say, I love going to Dominos' website, they ask if I want to order the same thing as last time and I one click purchase a $6 pizza to be delivered!

This letter I found incredibly interesting as Buffett goes into great detail about his large position that had 35% of the partnerships assets that he mentioned in the previous year. He exited that position and talked about it.
Sanborn Map Company made extremely detailed maps. The map of Omaha would weigh 50 lbs. This company made maps for utility and insurance companies. Now these insurance companies relied on this company so much that they had worked their way into 9 of the 14 director spots so as to protect themselves. However they only had a total stock ownership of 46 shares. Two other board members were a banker with 10 shares and Sanborn's attorney also with 10 shares. The company had 105,000 shares at the time. Quite the different make up of board of director stock ownership then we have today.

Back in the 1930s, Sanborn was doing great but business started to slow down. So they started buying other company stocks and government bonds so they could use the dividends and interest to pass on to their shareholders and keep them happy while their own business of mapping struggled. By 1958 when Buffett enters the picture the stock could be bought for $45 however they owned $66/share of investments. So Buffett steps up and buys 22.8% of the company and says "We should split the company and let investors cash out if they want." The insurance company board members could have cared less because their interests were not aligned with Sanborn. They just wanted to get rid of this noisy Buffett guy. Investors were given the opportunity to cash out by redeeming their Sanborn shares for these other company stock and US bonds. If my numbers are right then those that cashed out (including Buffett) ended up getting $76 worth of investments. The company was left with about $12/share of bonds. Buffett even got all the stocks and left the bonds. It sounds like the shares were retired because Buffett talks how the remaining shareholders were happy with a higher EPS and higher dividend rate. They probably weren't happy a couple years later when they found out those stocks they gave away were the only thing keeping the business going.

Its interesting that this is the sort of thing we hear Ackman and Icahn do now a days. I knew Buffett was on various boards of companies over the years but nothing like this.
Analyzing this investment though I can see why Buffett went in heavy with a 1/3rd of his portfolio. It was a no brainer since it was essentially buying investments at $0.50 on the dollar. If someone offered to sell you Coca Cola (KO) stock for $19 today how much of your money would you put in? Even if the company ended up not splitting the company, when you buy a company for less than 0.5 P/B it's hard to lose money.

Buffett then comments that this was the need for secrecy in what was going on with the partnership money. He calls the above scenario a "control situation".

In overall market news he comments that the majority of all investment firms were +/-5% of what the Dow did. Even back then fund managers couldn't consistantly outperform.

Buffett is all about benchmarking. He says he would rather lose -15% when the market lost -30% then have a winning +20% year and the market also did +20%. As he goes on to say "Unless we do achieve this superior performance there is no reason for existence of the parnterships.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

4 comments:

  1. Sure we're enjoying them Pully. Keep up the good work!

    Don't you know that the ownership of those stock shares was a footnote somewhere, that Buffett came across. Looking where others aren't. That's a secret to success!
    -Bryan

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    1. Thats along time ago 1960 warren buffett was just thirty years old.

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  2. It is good for shareholders when a Buffett, Icahn, or Ackman get involved. Activist investors bring out value where other wise management or the board wouldn't. In reality we should all be activist investors if we don't like something we should not invest since we don't have the influence of the big money. Buffett did this a lot in the early days... It is defiantly for the well educated and informed you have to understand the company and where the value is at. I get told the stock market is dangerous but it is like anything else the more you research and understand the less dangerous it becomes.

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  3. Talk about an awesome move. And while it seemed pretty risky to have 35% of the assets in that one position, in actuality if you read the reports close enough it was a slam dunk.

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