Archive for the ‘Buffett Partnership Ltd.’ Category
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.
Here is another holding from the 1962 year-end statement of the Buffett Partnership Ltd. Black, Sivalls & Bryson, Inc. (BS&B) was the 18th largest holding (18/54) accounting for 1.8% of the net assets. Buffett owned 13,353 shares @ $13.31 per share, totaling $177,762.
This company was a cigar butt! It manufactured bolted and welded steel and wood tanks, separators and dehydrators, heaters, valves, etc., for use in the oil and gas and chemical processing industry. It also manufactured grain and propane tanks, as well as moldings and trim for the auto, refrigeration and appliance industries. The company had 510,250 common shares outstanding for a market cap of $6.8 million. In 1961, it earned just over $0.9 million after-tax, or $1.39 per share, but it was most likely the balance sheet which drew Buffett to this company. At year-end 1961, it had $36 per share in net current assets (current assets less current liabilities) and $24.25 per share in net-net current assets (current assets less total liabilities). Even if you classify the preferred stock as debt, net-net current asset value is $17.26 per share. The company had $2.84 per share in cash and owned over 750,000 square feet of real estate in Missouri, Oklahoma and Texas. I have no idea when BPL purchased BS&B, but it would appear to me that at $13.31 per share, there was a significant margin of safety in the nearly 50% discount from net-net current asset value, exactly what Buffett was looking for in those days.
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.
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.