Showing posts with label Warren Buffett's Historical Investments. Show all posts
Showing posts with label Warren Buffett's Historical Investments. Show all posts

Saturday 13 March 2010

The Evolution of Warren Buffett


The Evolution of Warren Buffett

After a very fruitful and successful investment career, Warren Buffett has reached what might be considered an "endgame" position. His original 1956 investment partnership of $105,000 has morphed into Berkshire Hathaway Corporation (BRK.ABRK.B), worth well over $100 billion. Depending on the market values on a given day, Berkshire is now one of the ten or so largest market cap stocks in the United States, having passed up former stalwarts like Citigroup (C) and General Electric (GE). As such, Berkshire can make meaningful investments in only stocks of say, the S&P 100, or outright purchases of stocks in the S&P 500, or their equivalents abroad. It will be difficult for Buffett to continue to beat the market, assuming that he can do so.
There are basically three ways for him to try. The first is to substitute faster-growing foreign stocks for large cap U.S. stocks. That is, he may try to beat Exxon Mobil (XOM) using the stocks of PetroChina (PTR) (owned in the past), or Petrobras of Brazil, to play the emerging markets theme.
The second way to try to beat the market is to try to time purchases near lows. or obtain special terms, as Berkshire did with its large stakes in General Electric and Goldman Sachs (GS).
The third way is to avoid stocks of clearly dying "leading" companies such as International Paper (IP), General Motors, and Eastman Kodak (EK), a quasi-index strategy that, if successful, would still lead to modest outperformance. All in all, Buffett has come a long way from his early days.
Imitating Ben Graham
Buffett's early investments were clearly in the Graham and Dodd mold. The first major one, in 1957, was National Fire American Insurance, operated by the Ahmanson brothers (the older, H.F., also gave his name to a savings and loan). The brothers tried to buy in the stock for $50 a share (just above its annual earnings), but Buffett sent an agent all over to Nebraska with a counteroffer of $100 a share. Even at this higher price, he just about doubled his money.
In 1958, Buffett put 20% of the partners' money in Commonwealth Bank of Union City, at a price of $50 a share, because he estimated its stock value at $125 a share, and the company was growing at 10% a year. This was a more than adequate (60%) "margin of safety." If the gap between price and value closed in 10 years, he would realize some $325, or a return of about 20% annualized. But he sold a year later at $80 a share, earning 60% in a year, while the ten-year return had fallen to "only" an annual 16%.
In 1959, he placed 35% of the partners' money in Sanborn Map, a company that produced detailed city maps of buildings, whose users were insurance companies, fire stations, and the like. This had been a prosperous business in the 1930s and 1940s, before a cheaper substitute rendered it unprofitable in the 1950s. Nevertheless, the stock had fallen from $110 a share to $45 a share in 20 years, even though the company had built up an investment portfolio worth $65 a share during that time using excess cash. In Ben Graham style, Buffett's partners and two allies obtained 46% of the stock and forced management to distribute most of the portfolio to shareholders, at a 50%-ish (pre-tax) gain to the investors who elected this option.
Going into the 1960s, Buffett continued to buy companies at a discount to asset value Graham style. These included Berkshire Hathaway, a struggling textile producer with per-share working capital approximating its $15 share price, Dempster Mills, and Diversified Retailing. Buffett bought all of these companies with the expectation of getting the underlying businesses for "free." This was true only for Dempster, a badly-managed company that was turned around in less than three years for triple the investment. In the case of Berkshire, at least, even "free" was too much to expect.
But Buffett eventually used Berkshire's cash flow to acquire Diversified, and then redeployed the two companies' cash elsewhere. What's more, when he distributed partnership assets pro rata in 1970, he had effectively changed the form of his investment vehicle from a partnership (where capital gains were taxed every year), to a corporation (where gains were taxed only when realized).
There was one investment during this period that signalled Buffett's eventual departure from the Graham style. That was the purchase of the stock of American Express, whose main business was credit cards, but whose stock suffered when the firm's warehousing operation vouched for the value of "salad oil" deposited by a crook. This man,Tino deAngelis, borrowed (and lost) money on the strength of phony collateral, leaving Amex holding the bag. The stock took a hit when Amex paid out $60 million, its entire net worth, to settle the resulting claims.
But Buffett realized that he was really getting the credit card business at a discount. Late in the 1960s, he sold his Amex stock for between three to five times his acquisition cost, three to five years after he had bought it.
Transition to a "GARP" Style
Warren Buffett then evolved into what we would call a "GARP" (growth at a reasonable price) investor, albeit one with a strong value bent. This transition occurred during the early years of his "new" (post Buffett partnership) incarnation, after he had hooked up with Charlie Munger, who believed that it was better to buy a great company at a good price, rather than a good company at a great price..
What happened in the early 1970s was that certifiable growth companies got not only into value, but deep value territory (great companies at great prices). One of them was Washington Post That company had publishing and broadcasting assets worth perhaps $400 million in 1970, but which sold in the market for $80-$100 million. Buffett bought some 12% of the company, which not only closed the gap between market value and asset value, but also grew earnings per share in excess of 15% over the next decade.
GEICO, a low cost insurer, had represented one of Buffett's first investments as a boy. Started with $100,000 in seed capital in 1936, it was worth about $3 million when Ben Graham bought a controlling stake in 1948. From there, it advanced in spectacular fashion to a peak of over $500 million, over 100 times, in two and half decades, before falling onto hard times in the early 1970s.
By 1976, it was near bankruptcy when Buffett had Salomon Brothers organize a rescue via a $76 million capital infusion. Berkshire provided $19 million of it, and basically co-underwrote the convertible preferred offering with Salomon. Adding this to an earlier $4 million investment in common gave Buffett a 33% stake in a company that would grow per-share earnings at about 15% a year over the next two decades.
Other, less celebrated, long term holdings from the period include Affiliated Publications, the Interpublic Group (IPG), Media General, and Ogilvy and Mather.
Buffett also experimented with cheaply priced leaders of their respective industries: Safeco for insurance, General Foods (GIS) in food, and the former Exxon in energy. There was a group of inflation hedges in the form of Alcoa (AA), Cleveland Cliffs Iron (CLFQM.PK), GATX, Handy and Harman, and later Reyolds Aluminum. Finally, there were arbitrage operations in Arcata Corporation and Beatrice Foods.
Buffett also dabbled in larger media companies such as ABC (DIS), Capital Cities, and Time Inc (TWX). He made a proposal to the management of the latter company that he take a large blocking position, to prevent a takeover, which Time rejected, to its later regret. (A takeover attempt by Paramount forced it into an ill-advised merger with Warner Communications.)
Both ABC and Capital Cities came back onto Buffett's radar screen when the chairman of the former retired, and the chairman of the latter, Buffett's good friend Tom Murphy, wanted to acquire the former, a move that had the blessing of the outgoing chairman. On its own, Capital Cities had no chance to acquire ABC, but an over $500 million investment from Berkshire provided the "equity" slice that made the leveraged deal possible. It also had the effect of making Berkshire a nearly 20% shareholder in the combined company, discouraging a takeover. At 16 times earnings, it was not a Graham investment, and had no margin of safety on the balance sheet.
But Tom Murphy reduced the combined companies' debt by over $1 billion (nearly half) within a year, while growing earnings at a mid-teens rate. (The stock grew at nearly 20% a year for a decade, because of multiple expansion, before the company was taken over by Disney.
Buffett's next moves were among the most controversial of his career (and foreshadowed his recent purchases of General Electric and Goldman Sachs preferred). Not finding any cheap common stocks around the run-up to Black Monday (1987), Buffett bought converitble preferred stocks in Champion International, Gillette, Salomon Brothers and US Airways (UAUA) issued specifically to him.
Champion was a mediocre investment and U.S. Air was a money-losing one. Salomon fell onto hard times and had to be personally rescued by Buffett. Gillette was a fundamentally strong company that paid out essentially all of its net worth in a special dividend to avoid a takeover (before Buffett's investment recapitalized it). In this regard, it was much like American Express (AXP) of the 1960s. Buffett returned to American Express in the mid 1990s with a similar $300 million investment in convertible preferred.
During this time, Buffett completed his transformation as a GARP investment by buying Coke (KO). With a mid-teens P/E ratio, this was not a classic Graham and Dodd investment, but the company was selling at "only" 1.25 times the market multiple, a ratio that expanded to 3 times in a decade, tripling the absolute multiple. Earnings more than tripled during this time, making Coke a huge winner for Berkshire.
In recent years, Buffett has added "international" to his repertoire, investing in Guinness (drinks) and Tesco (TSCDY.PK) (retail) of Britain, Posco (PKX), the South Korean steel company, PetroChina and the Brazilian real.


Sunday 7 June 2009

Warren Buffett's Historical Investments (Part 9)

Warren Buffett's Historical Investments (Part 9)

Warner-Lambert Company: This is a pharmaceutical, consumer health care, and gum and mint company. It has such brand-name products as Listerine, Bromo-Seltzer, Halls cough tablets, Rolaids antacids, Schick and Wilkinson Sword razors and blades. its gums and mints division owns Dentyne, Trident, Freshen-up, Bubblicious, Mondo, Cinn-a-Burst, Clorets, and Certs. Its over-the-counter drugs are protected by patents. The ROE is consitently above 30% and per share earnings have been growing at 11% annually for the last 10 years. During the 1990 bubble it traded at a PE of between 30 and 45. If you can get it for a PE of below 17, the economics really work. In the early nineties, when it looked as if the federal government was going to start regulating drug prices, rumour had it that Buffett was buying into this company at a PE of 13. He then sold out because he couldn't establish the large positions that would give him greater weight in dealing with management. In 2000 the company merged into Pfizer.

ROE: > 30% (for last 10 years)
Per share earning annual growth rate: 11% (for the last 10 years)
PE in 1990 bubble: 30 - 45
Price bought: PE of 13 (in early 90s, when fed was going to start regulating prices)



Washington Post: The Washington Post was Buffett's first taste of owning a monopoly newspaper and the incredible profits that it can earn. This one had a majority owner who kept a close eye on things, namely Katharine Graham. She and Buffett hit it off big after he bought into the paper in 1973. He coached her on the virtues of share repurchases and how not to venture into areas of business outside the company's circle of competence. A quick learner, she caused the stock to rise from the $5.60 a share Buffett paid for it in 1973 to more than $500 a share today. The ROE for this company fluctuates between 13% and 19%. Its per share earnings have been growing at approximately 9% annually. In addition to the newspaper, the Washington Post Company owns Newsweek magazine, six TV stations and numerous cable TV systems in eighteen states. It is doubtful that the company will do anything stupid that would create a buying opportunity, so you are going to have to wait for a recession in advertising rates or a general stock market decline to buy. Since the long-term picture of the company looks sound, any price under $400 a share should be a good buy, and any price under $300 a share is a screaming bargain. Buffett bought the Washington Post during the 1973-74 crash for $5.69 a share against earnings of $0.76 a share, which equates to a PE of 7.5. During the 1972 and 1999 bubbles it traded at a PE of 24. Katharine has passed on, but her life's work, the Post, remains a fantastic business.


Price bought: $5.69 a share (at PE of 7.5, during the 1973 - 74 crash)
Earnings: $0.76 a share
ROE: 13% - 19% (for last 10 years)
Per share earnings annual growth rate: 9%
Price in 2001: $500 a share



Wells Fargo: This is the bank of banks and it is growing by leaps and bounds. Buffett bought into it during a banking recession in which just about every major bank in the nation took a bath over bad real estate loans. The stock market, being shortsighted, exited stage right and drove the bank's stock down to $15.75 a share. Buffett, exploiter of short-term folly that he is, jumped on this one with $497.8 million to buy 28.8 million shares at an average price of approximately $17. It has recently traded at $49 a share. In 1999, at the top of the real estate boom, Buffett exited stage left and started selling his shares. Here we have Buffett buying in during a recession and selling out during a boom. Banks go through this boom-and-bust real estate cycle every 10 to 15 years. The shortsighted stock market panics when things go bust and sends bank socks into the ground. When things boom again, the short-sighted stock market sends bank stocks skyward. Anyway you look at it, it's a nice ride. You can do what Buffett does and buy the strongest of the litter.


Price bought: average price $17 (during a banking recession that drove the bank's stock down to $15.75)
Price sold: during the top of the real estate boom in 1999


Wyeth: This drug company is a leading manufacturer of patented prescription drugs, but it also owns some wonderful over-the-counter brand names such as Advil, Anacin, Robitussin, and Chap Stick. The ROE for the last 10 years has always been over 30%. Per share earnings growth has been at 7.9%. At the right price, it's a great buy, and worth holding on to for the long term. People have a habit of getting sick, and that's not going to change anytime soon. Your big buying opportunities will be bear markets and panic sell-offs during bull markets.


ROE: 30% (over the last 10 years)
Per share earnings annual growth rate: 7.9%
Price bought: At the right price; best buy during bear markets and panic sell-off during bull markets.
Price sold: Worth holding on to for the long term.


Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)

Warren Buffett's Historical Investments (Part 8)

Warren Buffett's Historical Investments (Part 8)

Pepsico inc.: Before Warren started drinking three or four Cherry Cokes a day, he was a Pepsi man. PepsiCo is a fantastic company with an annual ROE for the last 10 years of over 20% and per share earnings growing annually at 8%. This is a Buffett Foundation holdings. Look to buy it in a recession, or during a panic sell-off.

ROE: 20% (the last 10 years)
Per share earnings annual growth rate: 8%


Times Mirror: In 1980, the Fed pushed interest rates up to the 14% level, which killed stock prices. Buffett put on his selective contrarian hat and went shopping. One of his purchases was Times Mirrow, owner of the Los Angeles Times, for an amazing $14 a share against per share earnings of $2.04, which equates to a P/E of 6.8 and an initial return of 15%. By 1985 it was trading at $53 a share, giving Buffett a 30% compounding annual rate of return. During the 1999 bubble it traded at 21 x earnings. You can't trade this one anymore - in March 2000 Tribune Company saw the great opportunity here and bought the company.

Price bought: $14 a share (in 1980, PE 6.8x)
Earnings: $2.04 a share
Initial return: 15%
Price in 1985: $53 a share giving a CAGR of 30%
PE in 1999 (bubble): 21x


Torchmark Corp: This is an insurance and financial services company. It consistently earns a ROE in excess of 19%. Its per share earnings have been growing at an annual rate of 10.9% for the last 10 years. Buffett has been buying this one for years, most recently in February 2000 right after the 1999 bubble. You could have bought it then at $20 a share with earnings of $2.82 a share, which equates to an initial return of 14%. As of May 2001, it traded at $37.50 per share.

ROE: 19% (the last 10 years)
Per share earnings annual growth rate: 10.9% (the last 10 years)
Price bought: $20 a share (in February 2000, after the 1999 bubble)
Earnings: $2.82 a share
Initial returns: 14%
Price in May 2001: $37.50



Wal-Mart Stores: With over 2,400 stores, Wal-Mart has the power to outbuy the competition. This means it can give its customers a better buy on just about anything. Thus every price-conscious consumer shops there. More shoppers mean more volume, which means more money. How much? Wal-Mart's annual ROE for the last 10 years has always been over 20%. Its per share earnings have been growing at an annual rate of 24%. It is, after all, the world's largest retailer. It got that way by going into small towns and driving the competition out of business, thus establishing a monopoly. Its distribution network is so sophisticated that it has created a barrier to entry that protects the company from competition. Berkshire reported that it owned 4.39 million shares of Wal-Mart as of 1997.

ROE: > 20% over the last 10 years.
Per share earnings annual growth rate: 24%


Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)

Warren Buffett's Historical Investments (Part 7)

Warren Buffett's Historical Investments (Part 7)

Media General Inc.: Media General is a major newspaper publisher and owner of TV and cable systems. Warren was buying it in 1978 and 1979 for $16 a share, with per share earnings of $3.42 a share, which equates to an initial return of 21%. Again, the Fed's raising interest rates helped make this low price possible. No hard information on when he sold it, but we believe it was 1985, for around $70 a share.

Price bought: $16 a share (in 1978 and 1979)
Earnings: $3.42 a share
Initial return: 21%
Price sold: $70 a share (in 1985)


Mercury General Corp: Mercury is the largest agency writer of passenger auto insurance in California, and California has a lot of cars. It gets great ROE. Buy this one when it is trading close to or below book value, which you could have done in 1988, 1990, 1991, 1992, and 2000. This is a Buffett Foundation holding.


New York Times: The company owns the New York Times, Boston Globe, fifteen smaller dailies, and half the International Herald Tribune. It also owns eight TV and two radio stations. This is a Buffett Foundation holding. In the early nineties the numbers were lousy, but they are starting to look better.


Ogilvy & Mather Int'l. Inc.: This stock is no longer publicly traded. Buffett bought 31% of Ogilvy, the fifth-largest ad agency in America, after the 1973 - 74 stock market crash for approximately $4 a share against earnings of $0.76 a share. No record of when he sold it. By 1978 it was trading at $14 a share, which would have given him an annual compounding rate of return of 30%. By 1985 it was trading at $46 a share, which equates to an annual compounding rate of return of 24%.

Price bought: $4 a share (after 1973-74 stock market crash)
Earnings: $0.76 a share
Price at 1978: $14 a share, giving a CAGR of 30%
Price at 1985: $46 a share, giving a CAGR of 24%


Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)

Warren Buffett's Historical Investments (Part 6)

Warren Buffett's Historical Investments (Part 6)

Hershey Foods: Buffett is rumored to have purchased Hershey Foods on several occasions, but we have no confirmed purchase to sink our teeth into. He has used it as an example in discussing the concept of a durable competitive advantage. Its been making chocolate forever and is the largest producer in America. The majority of the voting stock fo the company is held in trust for the benefit of the Milton Hershey School for Orphans. The company's founder, Milton Hershey, left the majority of his wealth to benefit the children who had made him rich. What this means to you the investor is that there is one large shareholder - the trust for the orphanage - which can wield an incredible amount of weight. The company gets high ROE and ROTC. Its per share earnings have been growing at an annual rate of 9.9% for the last 10 years. It traded at a PE of 33 during the bubble, which is too steep for this business. Try to get it at a PE below 15, which you could ahve done up until 1996. Even if you have a sweet tooth, wait for a recession or panic sell-off to take a bite.

ROE: high
ROTC: high
Per share earnings annual growth rate: 9.9% (the last 10 years)
Price bought: Wait for a recession or panic sell-off to buy



Interpublic Group of Companies: In 1974, Interpublic was the largest company in the international advertising business. Now it is number three. Advertising agencies, according to Buffett, earn a royalty on the growth of other businesses. When manufacturers want to take their products to market, they have to advertise, so they use an agency.
Agencies produce and place ads in the media and are paid a percentage of what the advertiser spends for these services. Agencies are almost inflation-proof. Inflation causes advertisers to spend more for the same amount of work, and the more advertisers spend, the more the agencies make. Agencies are service businesses so they spend only modesly on capital equipment, which means that profits don't go toward replacing worn-out plant and equipment. Plus, only 4% of U.S. advertisers change agencies every year! In other words, those big accounts stay in place. Many of the large agencies that dominated the marketplace years ago still dominate it today. Seven of the top ten are in their fifth or sixth generration of management. The key here is that there is no limit on how big they can grow. As long as businesses grow and the media continue to be where manufacturers take their products to market, advertising agencies will continue to grow as well.
The numbers on Interpublic are great. For the last 10 years it has earned an annual ROE of 16% or better, with the last 3 years at over 20%. Per share earnings for the last 10 years have been growing at an annual rate of 13.8%. Buffett used the 1973-74 recession to buy 17% of Interpublic, which traded as low as $3 a share, against earnings of $0.81. He paid a total $4,531,000 for 592,650 shares, for an averge price of $7.65 per share. We don't know when he sold his interest in this company. We do know that if he had held his position, he would have 74.6 million shares, adjusted for stock splits, worth approximately $2.8 billion. This equates to a compounding annual rate of return of approximately 27% for the 27-year period. If you're patient, you can get a great price on this one. During the 1999 bubble, it traded at a PE of 33 - too high for even this wonderful business. In the midnineties, you could have bought it for 14 x earnings.

Price bought: average price $7.65 (bought in 1973-74 recession, was traded as low as $3 a share)
Earnings: $0.81 a share
ROE: > 16% (over the last 10 years, with last 3 years, ROE greater than 20%)
Per share earnings annual growth rate: 13.8% (over last 10 years)


Kaiser Aluminium & Chemical Corp: This is one of the few investment mistakes that Buffett made in his early days. He bought based on earnings in good "businesslike" fashion, but the earnings soon vanished as they often do in a price-competitive business. He lost money on this one.



McDonald's Corp: McDonald's made the hamburger into a brand-name product with some 28 thousand restaurants - no easy feat. Over the last 10 years the company has had a yearly ROE between 16% and 20%, which is delicious. And its per share earnings have been growing at an annual rate of 12%. It's a great company, and at the right price it is a great investment. Buffett acquired 60 million shares in 1994 and 1995 for $1.2 billion, which equates to $20 a share. He was then rumoured to be selling them in 1997 to 1999 for between $30 and $45 a share as he sold into the bubble. This turned out to be a wise decision. At the right price, Buffett will once agains be buying McDonald's shares, and so would you.

Price bought: average $20 a share (in 1994 and 1995)
ROE: 16%-20% (over the last 10 years)
Per share earnings annual growth rate: 12% (the last 10 years)
Price sold: $30 - $45 a share ( in 1997 to 1999, sold into the bubble)


Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)

Warren Buffett's Historical Investments (Part 5)

Warren Buffett's Historical Investments (Part 5)


Geico: This was acquired by Berkshire. Buffett's initial big investment was made as the company was on the verge of insolvency. Buffett decided to ride to the rescue, believing that the company's durable competitive advantage was still intact. He was right and watched his $45 million investment grow over the next 15 years to more than $2.3 billion. That equates to a compounding annual rate of return of 29.9% - the stuff investment legends are made of.

Price bought: $45 million
Price 15 years later: $2.3 billion
CAGR: 29.9%



General Electric: Originally GE had a lockdownon the electrification of the planet. For most people electricity is a fact of life, but a mere one hundred years ago it wasn't. One company provided the knowledge and equipment to wire the planet, and that company was GE. And it made a fortune. Today GE is one of the largest and most diversified industrial giants on earth. With this position, it has the financial power to play in any game it wants.

Buffett has long admired this company - it is a Buffett Foundation holding - but has never been able to buy a big piece at a price he thinks is attractive. The ROE for the last 10 years has fluctuated between 18% and 23% (which is great) and ROTC between 16% and 25%. The per share earnings have been growing at an annual compounding rate of 11.8%, which is also electrifying. GE carries only $400 million in long-term debt against $10 billion in earnings. You need a real good recession to buy this one at a fair price. During the 1999 bubble it traded at a PE of 36, which is no bargain. Take a strong look anytime the PE drops below 15, where it traded in the 80s and early 90s.

ROE: 18% - 23%
ROTC: 16% - 25%
Per share earnings annual growth rate: 11.8%
Long-term Debt: $400 million
Earnings: $10 billion
PE: 36 (during the bubble in 1999) Buy at PE below 15


General Foods Corp: In 1979, Buffett began buying up the stock of a food company called General Foods, paying an average price of $37 a share for approximately 4 million shares. Buffett saw strong earnings, $5.12 a share, which had been growing at an average annual rate of 8.7%.
This gave him an initial return of 13.8%, which he could argue was going to grow at 8.7% a year. Then, in 1985, the Philip Morris Company saw the value of General Foods' many brand-name products, which created a strong and expanding earnings base, and bought all of Buffet's General Foods stock for $120 a share in a tender offer for the entire company. This gave Buffett a pretax annual compounding return on his investment of approximately 21%. That's right, a pretax annual compounding return of 21%. A nice number in anybody's book.

Price bought: $37 a share (1979)
Earnings: $5.12 a share
Per share earnings annual growth rate: 8.7%
Initial return: 13.8%
Price sold: $120 (1985, tender offer by Philip Morris Company)
CAGR: 21% (pretax return)


Gillette: Razor blades and batteries wear out quickly, and people have to buy more of them if they want to be clean shaven or to keep their portable electrical devices humming. Gillette knows how to make money. This is a Berkshire holding. For the last 10 years the ROE has been above 30% and the ROTC above 20%. Per share earnings over the last 10 years have grown at an annual rate of 14%. During the 1999 bubble it traded at a PE of 40, which is way too high for this company. If you can get it at a PE below 15, you can make some money.

ROE: > 30 % (the last 10 years)
ROTC: > 20% (the last 10 years)
Per share earnings annual growth rate: 14% (the last 10 years)
PE: 40 (during the 1999 bubble). Fair price PE < 15



Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)

Warren Buffett's Historical Investments (Part 4)

Warren Buffett's Historical Investments (Part 4)


Freddie Mac: This is a wonderful company that buys residential mortgages from banks and mortgage brokers and securitizes them before selling them to investors. At one time, Buffett owned a ton of this stock, but he had sold it because the nature of the company changed. It got more risky and Buffett hates risk.

F.W. Woolworth Company: This was once one of the largest retail chains in America. Buffett bought it in 1979 for $20 a share against earnings of $6.02 a share, which equates to an initial return of 30%. It had a book value of $41 a share. By 1985 it was at $50 a share, which equates to an annual rate of return of 20%. (Woolworth is no longer a business concern at present.)

Price bought: $20 a share (in 1979)
Earnings: $6.02 a share
Initial return: 30%
Book value: $41 a share
Price in 1985: $50 a share


Gallaher Group Plc: This company owns Gallaher Tobacco Limited, the market leader in the United Kingdom. It makes Benson & Hedges cigarettes. Gallaher Tobacco sold its American tobacco operations in 1994 and said good-bye to all that bad press and possible expense associated with cancer lawsuits. Cigarette products have great profit margins, which mean big bucks. Gallaher owns other things as well, but it is tobacco that reaps the bountiful harvest. The tobacco operations are a classic durable-competitive-advantage business. English tobacco companies don't face the kind of lawsuits American ones do, so the downside risk is smaller. This stock shows up as a Buffett Foundation holding, though when it was purchased and for how much we can't say.

Gannett Company: Warren Buffett's 1994 purchase of shares in Gannett, the largest newspaper publisher in the United States with 99 other newspapers, was made during an advertising recession for $24 a share, or 15x earnings. During the 1999 bubble it traded at 24 x earnings. He could have sold it in 2002 for $76 a share, which would have given him an annual rate of return of 15.2%. Not too shabby.

Price bought: $24 a share (15 x earnings, in 1994 during an advertising recession)
Price in 2002: $76 a share


Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)

Warren Buffett's Historical Investments (Part 3)

Warren Buffett's Historical Investments (Part 3)

Coca-Cola Co.: Coca-Cola has the mother lode of durable competitive advantages. Coke is the world's top soft-drink company. It sells more than 230 brands of beverages, including coffees, juices, and teas. It commands 50% of the global soft-drink market and 2% of the world's daily fluid consumption. This is one of the biggest bets that Buffett ever made, and it's also one of his most profitable. Buy this one during a recession and panic sell-off. Under no circumstances should you ever pay more than 30 times earnings for it. Expect Buffett to be buying more anytime it drops to a PE below 25.

Price bought: During a recession and panic sell-off



Cox Communications: Provides cable TV service to 6 million customers and digital TV to 350,000 subscribers. Media conglomerate Cox Enterprises contorls 68% of Cox Communications' stock. It also offers Internet access and local and long-distance phone service. It is the monopoly cable TV provider in most of the markets it services. Think of it as 6.3 million people who are addicted to channel surfing sending it checks each month. Cox's net profit margin was 23% in 2000. Compare that to Ford Motors's net profit margin of 1% and you can see why Buffett loves the cable TV business and abhors the automobile business. This is a Buffett Foundation holding.



The Walt Disney Company: Buffett first bought into Walt Disney Company in 1966, when it was selling for $53 a share, which meant that the market was valuing the entire business for $80 million, less than Snow White and the other cartoons were worth. Included in the deal you also got Disneyland. Buffett bought $5 million worth and sold it a year later for $6 million.


Price bought: Bought $5 million at $53 a share (1966, when Disney was undervalued)
Price sold: Sold for $6 million (1967)
(If this 5% stake were kept, it is now worth $1 billion)



He says that if he had kept that 5% stake it would now be worth more than $1 billion (which equates to a 19% compounding annual rate of return for the 30-year period). Lessons like this taught Buffett that holding companies with a durable competitive advantage for the long term was the easiest way to become superrich. He later acquired 21.5 million shares of Disney when it acquired Capital Cities in 1995. At the top of the bullmarket between 1998 and 2000, he was rumored to be selling Disney directly in the market, and also, he sold it indirectly in the General Reinsurance deal.


Price bought: Acquired in 1995 when Disney acquired Capital Cities.
Price sold: Rumored to be selling at the top of bullmarket (1998 - 2000)



Disney is the second-largest media conglomerate in the world. It owns the ABC television network, TV stations, radio stations, theme park, movie studios, and of course, the monarch of the Magic Kingdom - Mickey Mouse. Wait for a recession to buy this one and then hold on for the ride of your life.



Exxon Corporation: In the early eighties the Fed jacked up interest rates to kill inflation. It also killed the economy and the stock market. Lots of stocks were selling cheap ut Buffett placed his bet on Exxon, the largest and best run of the oil companies, on the theory that no matter what happened to the economy, individuals and businesses would keep guzzling oil. The high interest rates kept Exxon's stock down to $44 a share, against earnings of $6.77, which equates to an initial return of 15.2%. It has been growing its per share earnings at an annual rate of 6.7% and had been buying back its own shares. Buffett paid approximately 6.5 times earnings. By 1987 it was trading at $87 a share, which would have given him an annual compounding rate of return of approximately 25%.


Price bought: $44 a share (at 6.5x earnings, in early 80s)
Earnings: $6.77 a share
Initial return: 15.2%
Per share earnings annual growth rate: 6.7%
Price at 1987: $87 a share



Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)

Warren Buffett's Historical Investments (Part 2)

Warren Buffett's Historical Investments (Part 2)

Bristol-Myers Squibb: This company sold about $22 billion in proprietary medical products, ethical pharmaceuticals and health and beauty products in 2000. It has been in business since 1887, and unless people are going to stop getting sick, it is going to be in business for a long time to come. We believe Buffett was buying it in 1993, on the threat of government regulation, for around $13 a share, with earnings of $1.10 a share and historical returns on equity and capital of over 30%. So far Buffett has earned a 23% average annual return on this investment.


Price bought: $13 a share (in 1993, on threat of government regulation)
Earnings: $1.10 a share
Historical ROE and ROTC: >30%



Campbell Soup: Campbell's has 70% of the condensed-soup market. It also owns Franco-American, V8, Swanson, Pepperidge Farm, Vlasic, Mrs. Paul's, Prego, and dozens of other brand names that you might find in your grocery basket. The durability of this company's competitive advantage is amazing. Winter comes along and people start buying soups. Look for recessions, panic sell-offs, a warm winter, which can hurt soup sales, or just a business screwup to make the stock attractively priced. This company shows up in the Buffett Foundation holdings. Soup is good food and so is the stock at the right price.


Price bought: Stock became attractively priced during recessions, panic sell-offs, a warm winter (all these hurt soup sales) or business screwup.



Capital Cities Communications: This acquired ABC, when was then acquired by Disney: Buffett loves owning television stations because they make a lot of money and are cheap to run - you buy a transmitter, put up an antenna, plug it into the wall, and you're in business. Network affiliated TV stations make money because they are key advertising bridges that businesses have to use to reach potential consumers. Capital Cities owned a bunch of television stations and cable TV networks and was incredibly well run. Buffett owned the company in the late seventies and then sold it in the early eighties, which he admitted was a mistake.


Price bought: in late 70s
Price sold: in early 80s (Buffett admitted selling this was a mistake)


When it acquired ABC, back in 1986, it needed an equity infusion, so the CEO asked Buffett whether he wanted in. Buffett made an offer and the company said yes. He bought $515 million worth, paying $17.25 a share and then sold out (in a cash-and-stock deal) when Disney acquired Capital Cities in 1995 for $127 a share. That equates to a 24% compounded annual return on his 1986 investment. Another lesson in the long-term-hold department.


Price bought: $17.25 a share (1986, Capital Cities required equity infusion)
Price sold: $127 a share (1995, acquired by Disney)




Cleveland-Cliffs Iron Company: This is the largest supplier of iron ore products to North American steel companies. It owns and operates 5 iron ore mines with several large steelmakers. The company has been around since 1840. What makes it interesting is that during a recession in the steel business it simply closes down the mines until demand returns. Buffett first bought shares in this company during the 1984 steel industry recession and sold it after the industry recovered.

Price bought: Acquired in 1984 during the steel industry recession
Price sold: When steel industry recovered after the 1984 steel industry recession.

The most recent buying opportunity with this company occurred in 2001 when an overabundance of iron ore met a recession in the steel industry, which killed iron ore prices and sent the stock tumbling from a high of $50 to a low of $14. The company's durable competitive advantage is that it is tied in with the steel companies and can stop production and cut expenses without damaging its competitive advantage. You buy this one in a recession and sell when it's over.


Price bought: $14 Buy during a recession. ( Down from $50 due to recession in the steel industry)
Price sold: Sell when when steel recession is over.


Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)

Warren Buffett's Historical Investments (Part 1)

Warren Buffett's Historical Investments (Part 1)

These are companies Warren Buffett invested either personally, through his foundation, or through Berkshire Hathaway. Be aware that simply because Warren Buffett has made investments in these companies or they met his selective criteria doesn't mean he would buy them today. He bought when the price was right. Remember: You want to identify the company with a durable competitive advantage and then let the price of its shares determine when you pull the trigger. The right price may come tomorrow or it may come five years from now.

Also keep in mind that at times Mr. Market is wildly enthusiastic about some of these businesses and prices them high. On other days he will be very pessimistic about their prospects and price them low. You are interested in the days that Mr. Market is pessismistic, not the others.



Amerada Hess: This is an oil company. Buffett made this investment based on asset evaluation. He multiplied the price of oil by the number of barrels it had in the ground and found that it was selling at a significant discount. He paid $26 a share and we believe he sold it a year later at approximately $50 a share. Not too shabby.

Price paid: $26 a share (Price selling at a significant discount based on asset evaluation.)
Price sold: $50 a share (Sold a year later)



American Broadcasting Companies: ABC is a television network that in the early seventies had one of the most durable competitive advantages around. We believe Buffett started buying it during an advertising recession in 1978 for approximately $24 a share and sold it in 1980 for approximately $40 a share. After it merged with Capital Cities in 1984, it merged with Disney.

Price paid: $24 a share in 1978 (during an advertising recession)
Price sold: $40 a share in 1980



American Express: This is a major financial services company that just about does it all. But its strength is travel-industry-related services for businesses, and at this, it's king. Its credit card business is a kind of toll bridge that makes money every time someone uses an American Express card. Buffett first invested in the company in the sixties during the salad-oil scandal that destroyed its equity base but not its core business. Buffett sold out after the company recovered.

Price bought: In 1960s during the salad-oil scandal when its equity base destroyed.
Price sold: After the company recovered.


In the early nineties AmEx started to have problems. From September 1991 to September 1994 the company lost approximately 2.2 million individual card users and saw its share of the total credit card market drop from 22.5% in 1990 to 16.3% in 1995. This was caused in part by AmEx's push to become a one-stop shop for all your financial needs. In diversifying into different financial products, it lost focus on its credit card operations - the bread and butter of its business. Keep in mind that businesses with a durable competitive advantage are sometimes managed by teams that ignore the wonderful underlying parts of the business that made the company great in the first place. In AmEx's case, Harvey Golub rode to the rescue as the company's new CEO. Buffett jumped on Golub's wagon and began buying the stock. Remember, you invest not only in the company, but also in the people who run it. Buffett made his 1994 purchase right before the spin-off of Lehman Brothers (an investment bank). AmEx gave its shareholders one-fifth of a share in Lehman for every share of AmEx they owned. The one-fifth Lehman was worth approximately $4. Buffett paid $26 a share for the AmEx and then got $4 a share in Lehman stock via the spin-off. Today his AmEx stock is worth approximately $166 a share, which equates to a 30% compounded annual rate of return. When it comes to the American Express card, Warren is happy that people don't leave home without it.

Price bought: $26 a share (In 1994, when AmEx was having problems.)
Price subsequently: $166 a share (30% compounded annual rate of return)



Anheuser-Busch: This is the world's largest brewing company. It has what Buffett calls a durable competitive advantage: You order your beer by brand name, and brand names it has aplenty: Budweiser, Bud Light, Busch, Michelob, Red Wolf lager, ZiegenBock Amber, and O'Doul's. It gets great returns on equity and total capital and has strong earnings growth. You need a recession or panic sell-off to get a buying opportunity on this one. Anheuser-Busch is a Buffett Foundation holding.

Price bought: You need a recession or panic sell-off to get a buying opportunity on this one.
Great ROE, ROTC and strong earnings growth.



Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)