Part I. The Partnership Years (1957–1968)
1. Buffett Partnership Limited would soon be composed of numerous individual partnerships including Buffett Associates, Buffett Fund, Dacee, Emdee, Glenoff, Mo-Buff, and Underwood between 1956 and 1969.
1. 1958: Sanborn Map Company
1. Sanborn Maps, Annual Report FY 1966, 1–2.
2. Wrigley, Robert L., “The Sanborn Map as a Source of Land Use Information for City Planning,” Land Economics, 25, no. 2 (May, 1949): 216–219.
4. D. A. Sanborn. Insurance Map of Boston. Map. New York: 1867. From Library of Congress, Sanborn Map Collections.
5. Wrigley, “The Sanborn Map as a Source of Land Use Information for City Planning.”
6. Warren Buffett to Buffett Partnership Limited, January 30, 1961, 10.
7. I assume $100,000 net income based on applying the 27 percent tax rate paid by Sanborn Map Co. in 1959 to its $132,120 operating income from its operating business, and rounding. For the purpose of showing the earnings power of just the operating business, I have excluded the income from investments. Buffett quoted “after-tax profits of the map business…under $100,000 in 1958 and 1959” in his 1960 partnership letter.
8. When looking once more at the Sanborn Map Financial Data box, the Moody’s document, a potential investor at the time would have been able to confirm the presence of this investment portfolio, but only if this investor was very detail oriented. In fact, the balance sheet figures merely show investment assets of $2.6 million at cost. One needs to see the footnote that references the market value of these assets of $7.3 million.
2. 1961: Dempster Mill Manufacturing Company
1. T. Lindsay Baker, A Field Guide to American Windmills (Norman: University of Oklahoma Press, 1985).
2. T. Lindsay Baker (Professor, Chair of Texas Industrial History, Tarleton State University), in discussion with the author.
3. We could make a rough estimate of the percentage of Dempster Mill’s revenue stemming from aftersales based on a comment by Buffett in his annual letter. In the letter he stated that when Harry Bottle, his hired manager, raised prices on spare parts, an additional $200K was generated in profits per year. If we assume he raised prices by about 20 percent, which in my experience is possible when a company moves from having no aftersales strategy to having one, we can infer that sales on spare parts would be approximately $1 million. If we assume that an equal amount of service revenue also existed, we can infer that 20 to 25 percent of total revenues came from aftersales—certainly a meaningful amount.
4. There are numerous ways of defining a net-net, and the one I used is to take only the current assets (cash, receivables, inventory, and other current assets), subtract all liabilities, and take two-thirds of this value. By this definition, the math for Dempster would look as follows: net-net value = ([$5491K − $2318K]/60146) * ⅔ = $52.75 per share * ⅔ = $35.17 per share. This is 20 percent above the $28 per share price Buffett paid.
5. Alice Schroeder, The Snowball: Warren Buffett and the Business of Life (New York: Bantam, 2008), 246.
3. 1964: Texas National Petroleum Company
1. David Johnson and Daniel Johnson, Introduction to Oil Company Financial Analysis (Tulsa: PennWell, 2005), 238–239.
2. Union Oil Company of California Records 1884–2005, UCLA Department of Special Collections.
3. I used the details given in Buffett’s annual letter to calculate projected returns based on his acquisition prices. As Buffett had purchased the securities in a span of a few months, all numbers are estimates based on gains reflecting the average rate of return we are given or specific purchase prices. I also made the assumption that the warrants and common equity were trading similar discounts to the estimated deal price.
4. Specifically on the common equity price, Buffett’s average price purchased can be calculated at about $6.92 per share. However, I assume that because he made purchases throughout the period between April and October 1962, the price of the common in April was lower, and by an amount consistent with the overall rate of return.
5. Warren Buffett to Buffett Partnership Limited, January 18, 1964.
4. 1964: American Express
1. Roger Lowenstein, Buffett: The Making of an American Capitalist (New York: Random House, 2008), 80.
2. Note that John F. Kennedy was also assassinated during this period, which had a negative impact on stock markets.
3. Lowenstein, Buffett, 81.
4. American Express, 1963 and 1964 Annual Reports. Original annual reports of American Express 1963, 1964 (hardcopies provided by Guildhall Library, London).
5. American Express, 1963 Annual Report, 2–3.
6. American Express, 1963 Annual Report, 10.
7. American Express, Case Study, 1996.
8. By owner earnings, my preferred measure is cash earnings net of maintenance CAPEX.
9. By capital employed, my preferred measure is total tangible capital and intangible capital excluding goodwill plus net working capital.
10. American Express, Case Study, 1996.
11. American Express, 1963 Annual Report, 27.
12. The term “cigar-butt” as it concerns investments generally refers to the strategy of purchasing poor quality businesses trading at extremely low valuations. Also sometimes referred to as deep value, this investment strategy is often associated with Benjamin Graham.
5. 1965: Berkshire Hathaway
1. Andrew Kilpatrick, Of Permanent Value: The Story of Warren Buffett (Mountain Brook, AL: AKPE, 2006), 153.
2. Berkshire Hathaway, 1965 Annual Report, 11.
3. Warren Buffett to Buffett Partnership Limited, January 20, 1966.
4. My thanks to the Baker Library Historical Collections at the Harvard Business School, who kindly gave me access to its original documents.
5. I calculate the EV by multiplying the shares outstanding (1,017,547) by the share price of $14.69 and adding the net cash at EOY 1965 of $3.68 million from the balance sheet of the annual report. The EV I use is $11.3 million (market cap $14.9 million). Note that during the year, Berkshire had repurchased 120,231 of its own shares in the open market from a year start shares outstanding number of 1,137,778. EPS in 1965 is calculated based on 1,017,547 shares out.
6. Warren Buffett to Buffett Partnership Limited, January 20, 1966.
7. Alice Schroeder, The Snowball: Warren Buffett and the Business of Life (New York: Bantam, 2008), 277.
8. To be precise, I should note that this business segmentation is slightly different from DMGT’s own segmentation of B2C, which includes a bit more than just the newspaper businesses.
6. 1967: National Indemnity Company
1. Alice Schroeder, The Snowball: Warren Buffett and the Business of Life (New York: Bantam, 2008), 302.
2. Robert G. Hagstrom, The Warren Buffett Way: Investment Strategies of the World’s Greatest Investor (Hoboken, NJ: Wiley, 1997), 7.
3. Warren Buffett to Buffett Partnership Limited, January 22, 1969.
4. Hagstrom, The Warren Buffett Way, 6–7.
7. 1972: See’s Candies
1. Warren Buffett to Berkshire Hathaway shareholders, March 14, 1984, for year-end 1983.
2. I define ROTCE here as NOPAT/tangible capital.
3. Warren Buffett to Berkshire Hathaway shareholders, March 14, 1984.
4. Warren Buffett to Berkshire Hathaway shareholders, March 14, 1984, 17, appendix.
5. Forty-three percent more is the amount required so that a reduction of 30 percent gets one to 100 percent, i.e., 143 × 0.7 = 100.
6. Richard A. Breadley, Stewart C. Myers, and Franklin Allen, Principles of Corporate Finance (New York: McGraw-Hill, 2010), 46.
7. Note that I use the same 10 percent discount rate as implicit with our 10 × PER fair value multiple, which assumes fair value = PV = C/0.1 → fair value = 10 × C.
8. 1973: The Washington Post
1. Roger Lowenstein, Buffett: The Making of an American Capitalist (New York: Random House, 2008), 193.
2. Washington Post, Annual Report 1972, 2.
3. The ABI publishes a guideline for share-based incentive schemes that is in line with good practices and what could be considered fair. The latest version is from November 2012. http://www.abi.org.uk.
4. Details of IPO were $15,025,000 raised from the sale of 621,375 Class B shares indicating an IPO price of $24.18 per share or a PE of 15.9 based on the preexceptional diluted eps of $1.52 per share in 1971.
5. Andrew Kilpatrick, Of Permanent Value: The Story of Warren Buffett (Mountain Brook, AL: AKPE, 2006), 201–202. Note that Kilpatrick quotes the split-adjusted prices to derive the stock unadjusted price; I multiplied by 4.
6. I calculate the EV by multiplying the shares outstanding by the share price of $22.69 and adding the net debt at EOY 1972 of $7.3 million from the balance sheet of the annual report. The EV I use is $116.3 million (market cap $109 million).
7. Lowenstein, Buffett, 193.
9. 1976: GEICO (Government Employees Insurance Company)
1. Andrew Kilpatrick, Of Permanent Value: The Story of Warren Buffett (Mountain Brook, AL: AKPE, 2006), 221.
2. Berkshire Hathaway, 2005 Annual Report, 24.
3. Robert G. Hagstrom, The Warren Buffett Way: Investment Strategies of the World’s Greatest Investor (Hoboken, NJ: Wiley, 1997).
4. Alice Schroeder, The Snowball: Warren Buffett and the Business of Life (New York: Bantam, 2008), 367.
5. Warren Buffett, memo to Carol Loomis, July 6, 1988.
6. David Rolfe, Wedgewood Partners, “GEICO—The ‘Growth Company’ That Made the ‘Value Investing’ Careers of Both Benjamin Graham and Warren Buffett,” Presented at the Value Investor Conference, Omaha, Nebraska, May 03, 2013.
7. Schroeder, The Snowball, 433.
9. The year-end yield on long-term government bonds in 1976 was 7.30 percent.
10. The above scenario is based on 26.6 million shares outstanding. After the preferred convertible share offering brokered by Salomon, there would have been a dilutive effect to the extent of 8.2 million additional shares based on $76 million raised at $9.20 per preferred shares. However, this would also have added capital to the business.
11. Warren Buffett to Berkshire Hathaway shareholders, March 21, 1977.
10. 1977: The Buffalo Evening News
1. Buffalo Courier-Express, Inc. v. Buffalo Evening News, Inc., Affidavit of Richard C. Lyons, Jr., 4–5.
2. Roger Lowenstein, Buffett: The Making of an American Capitalist (New York: Random House, 2008), 206.
3. Buffalo Courier-Express, Inc. v. Buffalo Evening News, Inc., No. CIV 77-582, U.S. District Court, W.D. New York (November 9, 1977). Exhibit 1 and note on annual gross revenue.
4. Andrew Kilpatrick, Of Permanent Value: The Story of Warren Buffett (Mountain Brook, AL: AKPE, 2006), 327.
5. Buffalo Courier-Express, Inc., 1977 U.S. District Court No. CIV 77-582.
6. Calculated based on data in Washington Post, Annual Report for Year 1977.
7. Lowenstein, Buffett, 215.
8. Buffalo Courier-Express, Inc., 1977 U.S. District Court No. CIV 77-582.
9. Warren Buffett to Berkshire Hathaway shareholders, March 14, 1984.
10. Warren Buffett to Berkshire Hathaway shareholders, 1978–1982.
11. 1983: Nebraska Furniture Mart
1. Barnaby Feder, “Rose Blumkin, Retail Queen, Dies at 104,” New York Times, August 13, 1998.
2. Warren Buffett to Berkshire Hathaway shareholders, March 14, 1984.
3. Warren Buffett, interview by Linda O’Byron, Nightly Business Report, PBS, April 26, 1994.
4. Feder, “Rose Blumkin,” New York Times, August 13, 1998.
5. Roger Lowenstein, Buffett: The Making of an American Capitalist (New York: Random House, 2008), 250.
6. Lowenstein, Buffett, 250.
7. Warren Buffett to Berkshire Hathaway shareholders, March 14, 1984.
8. Warren Buffett to Berkshire Hathaway shareholders, March 14, 1984.
9. Larry Green, “At 96, Feuding Matriarch Opens New Business,” Los Angeles Times, December 18, 1989.
10. Walmart Stores, Inc., 1983 Annual Report.
11. Walmart Stores, Inc., 1983 Annual Report. Square footage calculated based on average of 1983 year-beginning square footage of 23.921 million and year-end square footage of 27.728 million.
12. Lowenstein, Buffett, 250.
13. The corporate tax rate in 1984 was 46 percent.
14. Alice Schroeder, The Snowball: Warren Buffett and the Business of Life (New York: Bantam, 2008), 502.
15. Buffett, interview by O’Byron.
16. Warren Buffett to Berkshire Hathaway shareholders, 1993. Although it was not guaranteed, Nebraska Furniture Mart continued growing for decades to come; by 1993, its pretax earnings had grown to $22 million from $15 million in 1983.
17. Warren Buffett to Berkshire Hathaway shareholders, February 27, 1987.
12. 1985: Capital Cities/ABC
1. Warren Buffett to Berkshire Hathaway shareholders, 1977.
2. By total outreach, the measure used is area of dominance (ADI).
3. The FCC regulation at the time (1961) allowed for a company ownership of a maximum of twelve AM and twelve FM radio stations, with additional limitations on ownership of multiple dominant radio stations in one market.
4. Alice Schroeder, The Snowball: Warren Buffett and the Business of Life (New York: Bantam Books, 2008), 898n12.
5. Share price information is given in the 10-year financial summary of the Capital Cities/ABC 1985 Annual Report.
13. 1987: Salomon Inc.—Preferred Stock Investments
1. Warren Buffett to Berkshire Hathaway shareholders, February 29, 1988.
2. Alice Schroeder, The Snowball: Warren Buffett and the Business of Life (New York: Bantam, 2008), 541.
3. James Sterngold, “Salomon to Sell 12 Percent to Buffett,” New York Times, September 28, 1987.
4. Warren Buffett to Berkshire Hathaway shareholders, February 29, 1988, 17.
5. Robert G. Hagstrom, The Warren Buffett Way: Investment Strategies of the World’s Greatest Investor (Hoboken, NJ: Wiley, 1997).
14. 1988: Coca-Cola
1. Warren Buffett to Berkshire Hathaway shareholders (1988 and 1989).
2. Andrew Kilpatrick, Of Permanent Value: The Story of Warren Buffett (Mountain Brook, AL: AKPE, 2006), 241–264.
3. The Coca-Cola Company, 1987 Annual Report, 48.
4. Based on information presented in appendices of the Coca-Cola Company’s 1987 Annual Report.
5. I have adjusted the operating income in 1986 and 1987 to exclude exceptional costs related to provisions and restructuring costs and based my growth calculation on these numbers. The operating income growth based on as-reported (unadjusted) figures would have been 48 percent.
6. Warren Buffett to Berkshire Hathaway shareholders, February 28, 1989, 10.
7. This is because some of the unconsolidated entities are valued at market value but some are valued at cost-basis.
15. 1989: US Air Group
1. US Air Group, 1988 Annual Report, 21–22.
2. Warren Buffett to Berkshire Hathaway shareholders, February 28, 1997.
3. Warren Buffett to Berkshire Hathaway shareholders, February 27, 1998.
16. 1990: Wells Fargo
1. Wells Fargo, 1986–1992 Annual Reports, courtesy London Business School Library microfiche.
2. The only assets that may have seemed somewhat higher risk than ordinary loans were quantified as highly leveraged transaction loans (HLTs), which were predominantly senior secured debt used in buyouts, acquisitions, and other corporate transactions. The total exposure to this was $4.2 billion in 1989.
3. Wells Fargo, 1990 Annual Report, 24. The company reports the range and closing price of its shares in each quarter in 1989 and 1990.
4. Based on FRB’s 1992 guidelines; hence Wells Fargo was already in compliance with forward guidelines given but not mandated until 1992 for the industry.
5. Warren Buffett to Berkshire Hathaway shareholders, March 1, 1991.
17. 1998: General Re
1. For those unfamiliar with the term, a reinsurance business is a business that takes on those risks that other insurance companies pass on; hence, it is an insurance company that insures part or all of a risk from other insurances.
2. Warren Buffett 1997 letter to Berkshire Hathaway shareholders, February 28, 1998, 5.
3. Please note that this is a generic description of insurance ratios and insurance accounting. While these metrics and descriptions are generally calculated as described, there are variations in both description and accounting.
4. Swiss Re, “World Insurance in 2000,” Sigma, no. 6 (2001): figure 5, 13.
18. 1999: MidAmerican Energy Holdings Company
1. Warren Buffett to Berkshire Hathaway shareholders year-end 1999, March 2000.
2. Share buybacks have reduced the share-count even further from the approximate 74 million diluted shares on June 30, 1999.
3. Berkshire Hathaway, press release, October 25, 1999.
4. Warren Buffett to Berkshire Hathaway shareholders, February 28, 2002, 13.
19. 2007–2009: Burlington Northern
1. Union Pacific, 2008 Annual Report, 5, 10.
2. Burlington Northern Santa Fe, 2008 Annual Report, 12–13.
3. BNSF, 2008 Annual Report, Notes to Consolidated Financial Statement no. 7, 54.
4. Based on operational statistics from Association of American Railroads (www.aar.org).
5. Multiples are based on EV and earnings figures based on 2007 year-end report actual figures.
6. Multiples are based on EV and earnings figures based on 2009 year-end report actual figures; EV used was $43.1 billion based on a market cap of $34 billion and a net debt of $9.1 billion.
20. 2011: IBM
2. As reported in the Berkshire Hathaway 2011 Annual Report, 63,905,931 shares of IBM were purchased for $10.856 billion at cost.
3. As a side note, it was known to investors by the time Buffett announced his stake in IBM that Palmisano was retiring and Virginia Rometty was taking over as CEO.
21. Evolution of Buffett’s Investment Strategy
1. Alice Schroeder, The Snowball: Warren Buffett and the Business of Life (New York: Bantam, 2008), 673.
22. What We Can Learn from Buffett
1. BlackBerry (formerly known as Research in Motion) had reported revenues of CAD 24.8 billion in 2011 and CAD 4.6 billion in 2014.
2. Buffett discusses the relative abundance of opportunities in the three different categories of investments along with his ability to realize them in several different instances. One instance is the 1961 letter to the Buffett Partnership dated January 24, 1962, in which he discussed realizing relatively more control situations as his increasing capital allowed him to do so.