Warren Buffett in 1980
Interesting/Unique excerpts from the book The Money Masters
Although always interesting, much of what Warren Buffett says nowadays is a repeat of something he already communicated. His older writings/interviews are often the most interesting as he speaks more originally. Among those older materials, is a book published in 1980 called The Money Masters by John Train. The book profiles nine great investors such as Larry Tisch, Ben Graham, and obviously Warren Buffett.
Below are some of the more interesting excerpts from Warren Buffett’s chapter. Among the topics discussed are commodities, Henry Singleton, and his opinions on certain industries.
On the ideal business:
“The few business 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, international advertising agencies, iron-ore landholding companies, newspapers. Benefitting directly from the large capital investments of the companies they service, they require little working capital to operate and, in fact, pour off cash to their owners. The unfortunate capital intensive producer-Chrysler STLA 0.00%↑ , 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.
“Other valid franchises Buffett likes include the large insurance brokerage agencies and some specialized ad hoc situations such as Sperry and Hutchinson Green Stamps, but there aren’t many that have both a substantial and well-secured niche.”
On the qualities an investor needs to be successful:
“Buffett thinks to succeed as an investor you must have six qualities:
1- “You must be animated by controlled greed, and fascinated by the investment process.”
2- “You must have patience”
3- “You must think independently”
4- “You must have the security and self-confidence that comes from knowledge, without being rash or headstrong”
5- “Accept it when you don’t know something”
6- “Be flexible as to the types of businesses you buy, but never pay more than the business is worth” [He also adds…] “Calculate what the business is worth now and what it will be worth in due course. Then ask yourself, ‘How sure am I?’. Nine times out of ten you can’t be [sure]. Sometimes, though, the bell rings and you can almost hear the cash register.”
On valuation:
“Buffett won’t pay a high multiple of earnings. Specifically he feels the earnings yield should be as high as the prevailing bond yield.”
“Buffett has a theory that the Dow Jones [Index] is worth one times book value if you expect Treasury Bills to yield an average of 11% in the future, 1.3% if your expectation is that they will yield an average of 8.5% and close to twice book if you expect 5%.”
[Note: as the first quote mentioned, he’s effectively aligning the Dow Jones earnings yield to equal the Treasury Bill rate. This also follows with Buffett’s 1977 article he wrote for Fortune entitled "How Inflation Swindles the Equity Investor". In that article he mentions how American business has averaged a 12% return on equity over long periods of time. His math above seems to assume a 11% return on equity - close to the 12%.]
On how he thinks about managers:
“In discussing qualifications for business managers, Buffett grinned and recommended a one-line employment form: “Are you a fanatic?” A manager must care intensely about running a first-class operation; if his golf game is what he things about while shaving the business will show it. A good manager should be a demon on costs. He need not have fancy data processing equipment, or even a budget: he should know his costs, down to how many stamps he uses. Buffett mentioned Peter Kiewit, regarded as the leading businessman in Omaha, whose company may be the most successful construction firm in the world. There are no carpets in the executive offices, no consultants, and the bosses are there on Saturday.”
On Henry Singleton:
“Buffett considers that Henry Singleton of Teledyne has the best operating and capital deployment record in American business. When I asked if he did not consider Tom Murphy of Capital Cities to be equally outstanding, Buffett smiled and said, “Well, Murph plays a simpler game,” but added that part of great business ability is to get into simple games. Singleton’s return on assets, calculated in the way that Buffett likes to do it (inventory plus fixed assets), is unique. All four major industry groups in Teledyne are in fully competitive areas; none has a special protected niche; and yet all four earn 50% on assets. The company earns $250 million after tax, with very conservative accounting.”
“Singleton bought 130 business for ‘Chinese paper',’ as it used to be called, when his stock was riding high. Then when the market, and his stock, fell he reversed field and in the last eight years hadn’t acquired a single company; on the contrary, by buying his stock back he has shrunk his capital from 40 million shares to 12 million.”
“According to Buffett, if one took the top 100 business school graduates and made a composite of their triumphs, their record would not be as good as that of Singleton, who incidentally was trained as a scientist, not an MBA. The failure of business schools to study men like Singleton is a crime, he says. Instead they insist on holding up as models executives from a McKinsey & Company cookie cutter.”
On the Wall Street Journal as a business:
“Buffett considers the Wall Street Journal one of the most perfect business franchises, one you probably could not duplicate for a billion dollars. … The most profitable publication in the country, the [WSJ] offers a product for which many users would gladly pay double the price. Both advertisers and readers get a bargain, while required capital investment to support growth is minimal.
“Bernard Kilgore made the discovery that a newspapers is as good as its own city. The only problem was that all the cities were taken. So he created his own, the community of business readers, block by block. His city is a demographic dream, with no slums, and its readers have a vast buying capability.”
On advertising agencies as a royalty business:
“The perfect business is a royalty on the sales of a major company, as distinct from its net profits. One example is the big international advertising agencies, which net 1% or so after-tax on their client’s advertising expenditures, and often 5% or so on their own revenues. The clients, not the agencies, invest the capital to build those sales.”
“There are few big international agencies, and there will be fewer new ones, since it’s getting harder and harder to break into the club. At this point a J. Walter Thompson controls so much business that it can just buy an agency in a new territory that becomes interesting, such as Brazil or the Middle East. A smaller agency would have trouble making a competitive offer.”
“A local advertising agency is quite another matter. Buffett would not buy a share in a brain surgeon, but in the Mayo Clinic, yes, it’s become institutionalized.”
“Interpublic IPG 0.00%↑ and Ogilvy & Mather, two of the top five or six agencies worldwide are to him the most interesting of them as investments. In 1974 Interpublic sold at less than two times pre-tax earnings per share, and half of the market price of its tangible assets, although this unique enterprise represents a well-earned royalty on the gross income of Exxon XOM 0.00%↑ , Carnation, Buick, and Chevrolet GM 0.00%↑ . Small agencies at that time were being bought at perhaps three times that price. In a way, the situation was actually better than in 1932, since by 1974 it was quite clear that the companies themselves would not fall apart.”
On the television business:
“Broadcasting companies enjoy superb growth and provide cascades of cash. As a result they have maintained strong values in purchases by private buyers. (Buffett thinks it might be an interesting idea to buy a TV station in partnership form, so that one could duck the corporate tax.)”
“Their stock market values are another story. In 1974, Capital Cities was appraised by the stock market for $125 million but was worth at least three times that. Capital Cities’ only problem is the pleasant one of what to do with all its excess cash. Buffett felt it should buy its own stock.”
“Television stations are not entirely without risk as investments. In theory, the government can fail to renew a license, although in practice that almost never happens. Regulation and new technology could change the economics of broadcasting. But at present the arithmetic of television stations is astonishing: they often net 50% on sales, have no need for working capital, have only minor fixed assets, and no inventories except for a supply of movies, which can be bought on credit. Buffett bought a major television station in Dayton, Ohio for Grinnell College, of which he is a trustee. The purchase price in 1976 was $12.9 million; it’s probably worth more than double that now.”
On his failures investing in retailers:
“Buffett’s worst investments have been in retailing (including trading stamps), a field he says he never has really understood. In addition to investment losses on several retailing securities, his negotiated purchase of Hochschild Kohn, a Baltimore department store, has proved a dud. Figures and close observation are not enough: you need a special flair to understand what’s going on in that field. A store can report good figures year after year and then, as Buffett learned the hard way, suddenly go bankrupt.” WMT 0.00%↑ TGT 0.00%↑ COST 0.00%↑
On commodities speculation:
“…[Buffett] says that one sometimes can analyze the long-term price outlook for a nonagricultural commodity, notably a metal. If the price gets way below production costs for an indispensable metal, it must eventually recover. But the prices of agricultural commodities are subject to weather and other vagaries of nature; investing in them becomes a matter of flair. Since he depends on analysis for success, Buffett will never invest in an agricultural commodity.”
“In twenty years he has engaged in two commodities transactions recently in copper and, some years ago, before the price was freed by the government, in silver futures. Every time President Johnson announced that the price of silver would never rise, Buffett went out and bought more. In his copper speculation he bought a large position at 56 cents per pound, since, though the above-ground stock of the metal was enormous, many mines were closing down and eventually the price would have to go up. …”
“He finds ownership of actual metal far safer than ownership of a mining company BHP 0.00%↑ FCX 0.00%↑ . A Kennecott, for example, spends hundreds of millions of dollars to dig a hole and sell copper. Then it reinvests much of its profits in more and more development and facilities. Eventually the consumers have gotten all the copper and Kennecott is left with the hole. In theory this can be profitable; in practice, lots goes wrong.”
Outside of the Buffett chapter, at the end of the book, John Train compares all the “master” investors profiled in the book. He said they all seem to have five traits in common:
“1- Realistic”
“2- Intelligent to the point of genius; or else [is…see #3]”
“3- Utterly dedicated to their craft”
“4- Disciplined and patient”
“5- A loner”