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Warren Buffet 10+ Baggers


BG2008
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I was reading Berkshire's 1970s annual shareholder reports to see how BH fared during periods of high inflation.  I found it interesting that BH's insurance operations were able to generate float during a favorable underwriting period and utilized those float to invest in some high interest rate debt instruments.  As inflation hit at a later time, most underwriters did not raise their rates accordingly.  Yet inflation was running 1% a month causing the payouts to be quite expensive.  The premiums charged were not adequate to cover the cost of repairs, medical bills, etc. 

 

I'm going off a tangent, but I felt it was interesting to point out.  What I really want to discuss is Buffet's 10+ bagger stock purchases.  I think part of why Buffet is so success is his ability to buy stocks that turn out to be 10+ baggers.  I want to steer the discussion towards why Buffet bought these.  How important was management?  Why did he winded up with all the franchise businesses and the Gorillas in their respective space.  Were Gillette already an leader in its space back then?  Or was Gillette the scrappy 4th largest that beat out all the others?  Was Buffet's 10+ baggers results of buying during extremely depressed times? At a discount to book value.  Washington Post is a heck of a story.  It winded up being an 80 bagger.   

 

1977 Portfolio Holding

Name        Cost(mm)    Market (mm)

Cap City    10.9            13

GEICO        19                33

Interpublic  4.1              10.5

Kaiser Alum 11.2            9.9

Kasier Indu  .78            6.0

Knight-Ridder Newspaper 7.5  8.7

Ogilvy & Mather 2.8        6.9

Washing Post  10.6        33.4

 

1982

Affiliated Public  3.5  16.9

Crum & Forster  47    48.9

General Food      66.3  83

Geico                  47.1  309.6

Handy & Harman 27.3  46.7

Interpublic Group  4.5  34

Media General      4.5  12.3

Ogilvy & mather    3.7 17.3

R.J. Reynolds        142 158

Time Inc                45  79

Wash Post              10.6  103

 

1985

Affiliated Public      3.5  55.7

ABC                      54  108

Beatrice Company  106  108

Geico                    45    595

Handy and Harman 27  43

Time                      20.4 52.7

Wash Post              9.7  205

 

1990

ABC/Cap City        517  1377

Coke                      1023  2171

Freddie                    71    117

Geico                      45    1110

Wash Post              9.7  342

Wells Fargo            289  289

 

1993

ABC/Cap City          345    1239

Coke                      1023  4167

Freddie                  307    681

Geico Corp              45.7  1759

General Dynamics  94.9  401

Gillette                    600    1431

Guinness                333    270

Wash Post              9.7    440

Wells Fargo              423  878

 

1995

Amex                    1392  2046

Cap Cities/ABC        345    2467

Coke                      1298  7425

Freddie Mac            260    1044

Geico Corp              45.7    2393

Gillette                    600    2502

Wells Fargo            423      1466

 

1997

Amex          1392  4414

Coke            1298 13337

Disney        381    2134

Freddie Mac  329  2683

Gilette          600  4821

Travelers      604    1278

Wash Post    10.6    840.6

 

1999

Amex    1470  8402

Coke    1299  11650

Freddie Mac  294 2803

Gillette Comp 600 3954

Wash Post    11 960

Wells Fargo    349  2391

 

2001

Amex  1470 5410

Coke    1299  9430

Gillette  600 3206

H&R Block 255 715

Moody's Corp  499 957

Wash Post  11 916

Wells Fargo  306 2315

 

 

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I think we were more or less thinking about the same thing - see my other post about inflation.

 

My theory is these 10x stocks are ones that are fairly inflation resistant...  They don't go 10x over a short time like NFLX, but they do because they can consistently increase top and bottom lines over a period of time under any economic environment --

 

I was particularly interested to read about his discussion about goodwill - it may have been in the 1980's letter where he gave the example about see's candy.  Basically, goodwill measures the brand value and a business with its asset mostly in goodwill is better because it is valuable because of the brand value, not because of the asset , which has to be replaced periodically.  This is hard to grasp (for me at least)...  as I'd tend to think I want to own tangible things. 

 

I am still thinking about this....  but at the moment I'm starting to see the rationale behind buying IBM at 6x book value? 

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I think that these are the dominating factors:

 

1- Is the economics of the industry good?  Some industries tend to have extreme competition for whatever reason.  And this can vary from country to country.  In some countries, Coke bottling is extremely competitive (and has low returns) while other countries have profitable bottling industries.

 

And maybe the cereal makers by and large have learned to be less crazy about fighting for market share—because if you get even one person who's hell-bent on gaining market share.... For example, if I were Kellogg and I decided that I had to have 60% of the market, I think I could take most of the profit out of cereals. I'd ruin Kellogg in the process. But I think I could do it.

 

In some businesses, the participants behave like a demented Kellogg. In other businesses, they don't. Unfortunately, I do not have a perfect model for predicting how that's going to happen.

 

For example, if you look around at bottler markets, you'll find many markets where bottlers of Pepsi and Coke both make a lot of money and many others where they destroy most of the profitability of the two franchises. That must get down to the peculiarities of individual adjustment to market capitalism. I think you'd have to know the people involved to fully understand what was happening.

 

2- Some businesses have unique advantages:

 

a- scale

b- brand

c- government-granted monopoly

d- natural monopoly/oligopoly  (e.g. there is only so much bandwidth given out for TV broadcast)

 

3- Some businesses have superstar managers

 

4- The businesses tend to have ethical managers who don't steal.  Buffett has had very little fraud in his portfolio, which helps his returns.

 

5- He waits for a good valuation, though this does not explain all the ten-baggers.  Buffett focuses on companies which are able to grow earnings for a very long time.  Not all of these companies actually do this... e.g. Fannie and Freddie collapsed (which Buffett wisely sold beforehand), World Book was hurt by the Internet, etc. etc.

 

---

 

Not all of Buffett's companies have strong moats or are in good industries.  Buffett has made a lot of money from insurance companies, even though the insurance industry hasn't generated much shareholder return. 

 

In insurance (and retail), it's mostly about management.

 

In food, a number of things matter.  The strength of the brand and the quality of management matters the most.

 

With dominant newspapers, they usually end up in a natural monopoly and make a lot of money regardless of management.  Management still matters, but is not as important as other industries.  I think newspapers are the reason why Buffett sometimes prefers a strong moat over good management, because he has seen good companies go to shambles due to bad management (e.g. GEICO).

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