Buffett Partnership – Part Two
Warren Buffett is frequently asked about a comment he made in a 1999 Business Week article to the effect that if he was managing $1 million or $10 million he would guarantee he could make a 50% annual return. In fact, I was lucky enough to have the chance to ask him about it a few years ago during a q & a with my university. He basically said that with a small amount of money under management, he would do exactly what he did in the 1950s after he got out of college and formed his partnership. In other words, he would probably not be looking at Coke, Burlington Northern, etc. He used his 1951 Moody’s Manual to discuss Western Insurance Securities which he discovered was selling for less than 1x earnings. He also had a 2005 Korean stock guide that was given to him by a friend. On a Sunday afternoon, he found 20 or so companies selling for 2-3x earnings. He put $100 million of his personal portfolio in these ideas.
In an earlier post (http://tinyurl.com/adwb5h) I discussed Berkshire Hathaway circa 1962. Here is a company named Grinnell Corporation. They made sprinkler systems, industrial humidification systems and plumbing materials. According to the 1962 year-end statement, the Buffett Partnership held 3,727 shares of Grinnell worth $277,697 at $74.50 per share. It was the 12th largest position in the portfolio of about 50 stocks, accounting for 2.8% of assets. So why did Buffett own this stock? I have no way of knowing when he purchased the Grinnell shares, but the image below is from the 1962 Moody’s manual which is possibly the information Buffett studied before purchasing the shares. Grinnell seems to fit the Benjamin Graham description of a statistical bargain. At year-end 1961, the company had a tangible book value of $168 per share and a net current asset value (current assets – current liabilities) of $101 per share. So assuming the shares were purchased around the year-end 1962 price of $74.50, Buffett probably purchased the shares due at least in part to the fact that it was selling for about 26% below net working capital.