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Union Street Railway

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Below you will find another case study from the Buffett with “more ideas than money” years. Thanks go out to a regular reader for sending me the Moody’s sheet.

During a question and answer session with University of Kansas students in 2005, one student asked what he would do differently given his belief that “it’s a huge structural advantage not to have a lot of money.” Buffett went on to say that with small capital he would look for “little anomalies, companies that are off the map – way off the map.” An example given was Union Street Railway of New Bedford, Massachusetts that was “selling at $30 when $100 is sitting in cash.”

You will see below page 1492 of the 1954 Moody’s Transportation Manual. At the time of this publication Buffett was three years removed from graduating from Columbia and was working for his father’s brokerage firm in Omaha. I believe it was around this time when he came across Union Street, an example he frequently provides students of a small, obscure cheap cigar butt-type investment.

Union Street operated a bus service near New Bedford, an area containing about 120,000 people. The company owned 113 buses in total (more about these in Alice Schroeder’s book). Union Street was a business in decline as evidenced by the drop in revenue passengers from 27 million in 1946 to 13.9 million in 1953, to the point where the business was operating in the red. Looking to the balance sheet you would see why an enterprising Graham-Dodd investor would be interested. You will see listed in current assets, cash and U.S. government securities totaling $969,363, or $52.79 per share. As Buffett mentioned the stock was selling around $30 per share, or $32 to $38.50 in 1953. If you look in non-current assets you will see two line items labeled “Special Deposits” and “Accid. Ins. Trust” which were $386,376 and $600,000 respectively, or $53.72 per share. Adding it all up, you had $106.50 per share in cash and cash-type items. The company had no debt to speak of. There were 18,363 shares out, so at $30 per share the market cap was $550,890, which is roughly $3.7 million in today’s dollars.

Incidentally, you may notice one of Union Street’s directors listed is Seabury Stanton. Stanton was running another New Bedford-based company at the time named Berkshire Hathaway. Like Ken Lewis unknowingly saved the U.S. economy, Stanton unknowingly saved Berkshire. As the story goes, Buffett, whom owned roughly 10% of the outstanding shares, came to an agreement with Stanton to tender all of his Berkshire shares to the company at $11.50. The following week, Stanton sent a letter indicating a tender for his stock at $11.375 per share. This low-ball offer angered Buffett leading him to continue buying up more Berkshire shares, eventually gaining control of the company. If Stanton would simply have tendered Buffett’s stock at the agreed upon price, we likely would never have heard of Berkshire Hathaway.

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Written by sdinvest

December 24, 2009 at 6:21 am

Buffett Partnership, Ltd. – Dec. 31, 1962

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I look forward to two things on the first Saturday in May.  First, the Berkshire Hathaway annual meeting in Omaha and second, buying the newest version of Andy Kilpatrick’s Warren Buffett biography, Of Permanent Value. I recommend buying this book as there is no more detailed biography available on Buffett.  You can buy it on Amazon, or as I plan to, you can have Andy sign a copy at the next Berkshire annual meeting.

One of the most interesting parts of the book for me is an image of the 1962 year end statement for Buffett Partnership, Ltd. The portfolio had a total value of $9,856,297 and about 50 long and 4 short positions. The top 5 positions accounted for 52.7% of the total portfolio value, while the top 10 positions represented 72% of the portfolio.

The reason the year-end statement was published in Kilpatrick’s book is that 1962 was the year Buffett first purchased shares in a New England textile company named Berkshire Hathaway. At the end of 1962 the Partnership owned 30,752 share of Berkshire at $7.56/share.  Note: If you’re keeping track at home…those 30,752 shares are worth about $3 billion today, or about a 22.8% compounded return over 46 years.

During the partnership years, Buffett would get his ideas from the Moody’s Manuals which contained a brief summary of basically every business in America.  In those days, he was not too concerned with the quality of a business as much as he was looking for statistical bargains. Heavily influenced by the teachings of Benjamin Graham, he was looking for stocks selling below estimated liquation value, or below net working capital. Buffett now refers to this process as looking for “used cigar butts.” They are soggy and repulsive, but they are free and you can usually get one good puff out of it before you move on to the next used cigar butt (the antithesis of looking for compounding machines). Berkshire was a cigar butt in 1962.

I was able to obtain a copy of the 1962 Moody’s Industrial Manual from the library.  Out of curiosity I wanted to see just how cheap some of the stocks were that Buffett was buying in the 1950s and 1960s. Below is the Berkshire Hathaway page which shows that at $7.56 per share, it was selling well below its net working capital of $12.35 per share.

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Written by sdinvest

December 24, 2008 at 12:28 am