Buffett Profile from 1979: "The investor's investor"
"I cannot promise results, but I do promise this: a. Our investments will be chosen on the basis of value, not popularity. b. We will attempt to reduce permanent capital loss to a minimum."
I’m grateful to Turtle Bay for digging up this old Financial World article. This was an excerpt from John Train’s original Money Masters book. So if you’ve read that one, you’ll be familiar with the themes.
I loved seeing Buffett in his office munching on “a box of fudge on a table, made by a company he owns” surrounded by his precious reading materials.
It’s interesting that Train already considered Buffett one of the country’s most prominent investors:
Though he has written no textbooks, among investment professionals there is no more respected voice.
Perhaps not surprising given his singular performance.
If you had put $10,000 in Buffett's original investing partnership at inception in 1956, you would have collected about $300,000 by the time he dissolved it at the end of 1969. He has never had a down year, even in the severe bear markets of 1957, 1962, 1966 and 1969. That achievement stands alone in modern portfolio management.
Only the speed of delivery has changed:
He speaks with a wry earnestness and gives an impression of complete intellectual honesty. His delivery is so casual, rapid, allusive and clever that unless you pay attention a lot could slip by.
The article hones in on Buffett’s departure from Graham’s deep value approach. Interestingly, Buffett seems to have been a little guarded about his time at Graham-Newman, perhaps not wanting to disparage his mentor?
Buffett went to New York and was hired to work for Graham-Newman Corp., where he spent two instructive years. Today he finds it hard to describe what he did there, but it must have included analyzing hundreds of companies to see if they met Graham's investment criteria.
Buffett’s edge: a deep interest and understanding of businesses.
Buffett understands the companies he owns stock in as businesses: living organisms, with hearts, lungs, bones, muscles, arteries and nervous systems. It is madness, he would say, for an investor buying stock to have anything else in mind other than the operating realities of the underlying business.
Buffett believes that those on Wall Street who talk of the stock trend or institutional sponsorship are ridiculous, combining laziness with ignorance, and compares them with astronomers, setting aside their telescopes to consult the astrology page.
Buffett ran his money in an unconventional way:
The portfolio of Buffett's partnership was often too concentrated in a few issues-some not readily marketable- for an investment counselor or fund manager, but not out of line with what might be done by a conservative professional with his own money.
Few businesses are going to compound long-term:
The essence of Warren Buffett's thinking is that the business world is divided into a tiny number of wonderful businesses well worth investing in at a price and a huge number of bad or mediocre businesses that are not attractive as long-term investments.
He thinks of a stock only as a fractional interest in a business and always begins by asking himself, "How much would I pay for all of this company? And on that basis, what will I pay for 1% of it?" There are very few companies he considers interesting enough to buy at all, and even those he will look at only when they are very unpopular.
Buffett’s focus in an inflationary world: capital-light “toll bridge” type businesses:
The few businesses that Buffett thinks are worth owning often fall into the category he calls "gross profits royalty" companies, perhaps better called "gross revenues royalty" companies: TV stations, institutional advertising agencies, iron-ore landholding companies, newspapers. Benefiting directly from the large capital investments of the companies they serve, they require little working capital to operate and, in fact, pour off cash to their owners.
The unfortunate capital-intensive producer-Chrysler, Monsanto or International Harvester-can't bring its wares to its customers' notice without paying tribute to the "royalty" holder: The Wall Street Journal, J. Walter Thompson, the local TV station, or all three.
Three years after the partnership was liquidated the market went into the 1973-74 collapse. Buffett (directly or indirectly through Berkshire Hathaway) was able to buy big pieces of some of his favorite "gross profits royalty" companies at giveaway prices: 8% of Ogilvy & Mather at 8, 16% of Interpublic, 11% of the Washington Post at 3, the Boston Globe, Capital Cities (an independent chain of television stations that also owns newspapers), Knight-Ridder Newspapers, Affiliated Publications, Media General and Pinkertons.
Qualities of successful investors:
A successful investor, he says, must have several qualities: He must be motivated by controlled greed, have patience, think independently, be flexible as to types of investments and accept it when he doesn't know something.
Buy a franchise when it’s on sale:
The best investments, he says, are those that have strong business franchises-such as American Express.
He brought off perhaps his most spectacular transaction in 1964 when American Express collapsed in the market during the Tino de Angelis salad oil scandal. Studying the company carefully, he determined that the danger from those losses would be limited, while its basic strengths, the credit card operation and the traveler's checks, would be unaffected. He bought heavily, and saw the stock quintuple in the next five years.
Great investments require independent thinking:
After skimping to buy some shares, he discussed GEICO with two brokers who specialized in insurance issues; both pooh-poohed it, since the company didn't look cheap in their tables of insurance stock values. What the tables didn't show was that the company was making 20% on its underwriting activities as against a normal margin of 5%. At that time the entire company was selling for less than $7 million in the market; later it went to a billion and became a Wall Street favorite. Some 25 years after Buffett made his initial investment in the company, mismanagement brought GEICO to the edge of bankruptcy. During that crisis, Buffett bought 15% of the company and thinks that it again has a bright future.
Patience is crucial yet difficult to achieve for the professional investor. Notice the silver futures.
The enormous advantage the independent investor has, Buffett says, is that he can stand at the plate and wait forever for the perfect pitch.
He points out that if, for instance, he had reported to his partners that 40% of their money was in American Express, or that he was heavily long silver futures, his partners would have been concerned, asked questions, mailed him things to read. At best, he would have wasted a lot of time; at worst, he would have been influenced by their reactions. He says it would have been like a surgeon carrying on a running conversation with the patient during a major operation.
Buffett avoided industrial blue chips, here called the ‘smokestacks’, whose reinvestment needs left them without free cash flow for shareholders.
For me, Buffett's most important single message is his cry of alarm and recurring admonition to steer clear of the standard big American heavy industries requiring continuous massive investment. Most of these companies are in trouble.
The cause is competition, over-regulation, rising labor costs and the like. The symptom is that just to stay in business many of these big industries need more money than they can retain out of reported earnings after paying reasonable dividends. To stay in the same place they require endless infusions of net new cash…
Buffett regards investing in the "smokestack" companies, the heavy industries whose obsolescence is often more rapid than their allowable depreciation, as, in essence, participating in a series of constant mandatory rights offerings, where you have to put up more money to maintain your percentage interest. Instead of distributing their earnings to the shareholders in dividends, these companies have to retain them to build more capacity, either to replace rapidly-aging facilities or to meet competition. This increases output, which further lowers profit margins, so that the companies are even less able to make real money in their basic businesses.
Look for shareholder-focused management:
Buffett once met a leading executive of a capital-intensive business giant at a time when the company was selling in the market for one-quarter of its replacement value. Buffett asked the executive, "Why don't you buy back your own stock? If you like to buy new facilities at 100¢ on the dollar, why not buy the ones you know best and were responsible for creating at 25¢ on the dollar?"
Executive: "We should."
Executive: "That's not what we're here to do."
Subscribers can read the full article below.
Warren Buffett: The investor's investor
His message today: Stay clear of heavy industries.