Full feed on

Archive for April, 2007

Berkshire Annual Letter 1995 (Part 5)

Back when Warren Buffett attended Columbia University under the tutorlege of Benjamin Graham, he found out that Ben was the Chairman of Government Employees Insurance Company (GEICO), an unknown company to him.

One weekend, Warren Buffett took a train to the headquarters of GEICO, where he was met by Lorimer Davison, Assistant to the President (and who was later to become CEO).

Even though Warren’s only credentials at that time was a student of Graham, “Davy” spent four hours teaching him about the ins and outs of the insurance business.

Up to this day, Warren Buffett is thankful to Davy’s generousity with his time, as Berkshire would not have gotten to where it is today without that afternoon meeting.

As Warren found out, GEICO’s strength was in using direct marketing as its method of selling, giving it an enormous cost advantage over competitors who sold through agents.

So in 1951, Warren started to buy shares in GEICO on four occassions using money that he earned as a delivery boy for The Washington Post.

This stake of $10,282 was more than 50% of his networth and was sold in 1952 for $15,259. (The stake if kept to 1995, would have growth to $1.3 million.)

From 1976 to 1980, Berkshire spent $45.7 million to accummulate a 33.3% stake in the company. Because of the aggressive share buybacks by the company, this stake actually grew to 50% of the company.

In 1995, Berkshire paid another $2.3 billion for the other half of the company that it didn’t own, gaining full control of the company and taking it private.

Warren Buffett likes businesses with economic castles protected by unbreachable “moats”. GEICO is one such example.

Technorati Tags: , , ,

R.C. Willey Home Furnishings

R.c. Willey Home Furnishings was a business discovered by Irv Blumkin of Nebraska Furniture Mart while he was walking around.

Bill Child, CEO of R.C. Willey took over the company from his father-in-law in 1954 and grew the sales from $250,000 to $257 million in 1995.

The fact of it is that retailing is a tough business. During Warren Buffett’s investment career, he has seen a large number of retailers enjoy terrific growth and high ROE for a while, only to suddenly nosedive into bankruptcy.

This happens more often in retailing than in manufacturing or in the service industry. The reason is because a retailer is easily copied so he has to constantly come up with new ways to attract customers.

And shoppers are always faced with new merchants.

On the other hand, there are kinds of businesses whereby the owner only has to be smart once. By being early in the game, he can coast and still turn out pretty well.

A sidenote.

Just how many managers can Warren Buffett handle reporting to him? His answer:

If I have one person reporting to me and he is a lemon, that’s one too many, and if I have managers like those we now have, the number can be almost unlimited.

Technorati Tags: , , , ,

« Prev