Business Investing

Berkshire Part 1: See’s and PetroChina

You’ve probably read Warren Buffett’s 2007 letter to shareholders that was released a week ago. If not, stop everything you’re doing, and read it now.

Below are a few comments I have on some of the things Buffett mentions in the letter. The second part of this post should be up later today.

On See’s Candy

The best part of the letter is the section entitled “Businesses – The Great, The Good, and the Gruesome.” In it, Buffett talks about the qualities of a great business using See’s Candy as an example.

Six months ago I wrote a two part story on See’s Candy. In Part I of Quality Without Compromise I talk about the history and background of the See’s acquisition. In Part II, I discuss some of the technical and qualitative aspects of the purchase. (Click here for a single PDF version of the articles.)

In the letter, Buffett reveals some interesting new information about See’s and his mindset regarding the business.

Fun with numbers:

  • Pre-tax profits in 2007 were $82 million.
  • Over the years, total profits distributed come to $1.32 billion.
  • Current Return on Capital is 205%.
  • Since the purchase, only $32 million in additional capital was required.
  • Profits at acquisition were about $5 million, so total increase has been $77 million over the 35 year period. This comes out to a return on incremental capital invested of 241% ($77/$32).
  • For every $1.00 Berkshire sent to See’s, they got back $41.19.

Talking about some of the reasons for the high Return on Capital, Buffett made the comment: “First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was sort, which minimized inventories.” Working capital is one of the major reasons businesses must invest more capital to keep up with sales growth. Fixed assets are another requirement where See’s has advantages. There are relatively few production facilities. More recently, the internet has allowed See’s to sell more pounds of candy (to anywhere in the country) with little to no additional capital expenditures.

Low volume is a problem at See’s, but the ability to raise prices made up for it: “Last year See’s sold 31 million pounds [of candy], a growth rate of only 2% annually.” In See’s early years (the 11 years after Buffett’s purchase), prices per pound of chocolate were raised about 10% per year. These increases accounted for 86% of sales gains over the period. Small volume gains accounted for the rest.

See also: Shai Dardashti asks if See’s Candy is a Magic Formula Stock from 1972. I like Shai’s conclusion that “See’s Candy is effectively a (rising) royalty on love men pay, annually, in the state of California.

On PetroChina

Buffett goes into a little more detail on the sale of Berkshire’s stake in PetroChina. In October I wrote up a short case study on the investment in PTR, which you can see here. He confirms in writing that when they sold PTR back in September, he believed it was fairly valued. This echoes the research I did on the gap between price and value over the years (and the effect of oil prices on that value).

“By 2007, two factors had materially increased its value: the price of oil had climbed significantly, and PetroChina’s management had done a great job in building oil and gas reserves. … We paid the IRS tax of $1.2 billion on our PetroChina gain. This sum paid all costs of the U.S. government – defense, social security, you name it – for about four hours.”

On Selling Market Puts

Stay tuned for Part 2…

Business Investing

6 Sources for Company Research

I find it useful to know as much as possible about any potential investment, especially if it may become a large position down the road. Why is Company X where it’s at today? Knowing their history, philosophy, and information about current/past management teams can help you solve that question. In turn, it will help when you estimate where they’ll be 10 years from now.

Sometimes I like to take the activist investor approach: For large long-term holdings, you’re ultimate goal should be to know the company better than the management team running it. Nine months ago, there was a story on activist investor Nelson Peltz in Fortune magazine. Commenting on his research methods, the author wrote: “Peltz prides himself on knowing businesses so intimately, from factory floor to supermarket shelf, that he can systematically break down any management’s rationale for mediocre results.”

Below are 6 useful sources for researching individual companies.


“Real people” invade Amazon

Seth Godin points readers to evidence that there’s real people working at (::yahoo(“AMZN”)::). This is just one of the many reasons that great service is sending more and more customers to companies like Amazon.

By doing something that customers don’t expect—Amazon stands out from the crowd. One person has a good experience. They tell their friends, and their friend’s friends. By using money that would have been spent on marketing on a better experience, Amazon gets very sticky customers for a cheap price. Widening the moat, one day at a time. It’s unfortunate that the stock is a little too expensive for my taste.

Make sure to check out the Amazon reviews of the Bic Ballpoint Pen that Seth linked to. Out of all the pens I’ve tried, this one’s the best. As noted, the ink consistency is just right for a variety of different papers. (Click the “Comments” of Matt Williams’ review – I’m glad some people have a sense of humor).

Business Innovation

TED Talk Videos

The TED Conference (Technology, Entertainment, Design) is held annually in Monteray, California. TED brings together some of the most intelligent thinkers and leaders from across the globe to talk about innovation, technology and other interesting topics. Below I list some of my favorite talks relating to business and technology. Be sure to check out all the other interesting speeches across many categories.

Each clip is about 20 minutes long. Below the links is one of my favorite talks, Malcolm Gladwell on Spaghetti Sauce.

Sergey Brin and Larry Page: Inside the Google machine
Jeff Bezos: After the gold rush, there’s innovation ahead
Seth Godin: Sliced bread and other marketing delights
Barry Schwartz: The paradox of choice
Steven Levitt: Why do crack dealers still live with their moms?
Jimmy Wales: How a ragtag band created Wikipedia
Jeff Skoll: Making movies that make change
Richard Branson: Life at 30,000 feet
Chris Anderson: Technology’s long tail
Malcolm Gladwell: What we can learn from spaghetti sauce

Business General Investing

The Forbes 8 Value Investor Index

Warren BuffettAfter looking over the recently released Forbes 400 list (the richest 400 people in America), I noticed the list has included more and more individuals in the “Finance/Investments” category. The growth in assets managed by Hedge Funds and Private Equity companies has been a major cause of this increase. In the Forbes 400 magazine, it shows a graphic representation of each category since the first list in 1982 (25 years ago). In 2007, Finance and Investments had the largest number of members in the list. Below I list which categories have grown or shrunk over the years:

Higher: Service, Finance/Investments, Technology, Retail

Lower: Food, Oil, Media/Communications, Real Estate, Manufacturing, Other

Business Investing long-form

Quality Without Compromise

See’s Candies, Warren Buffett and the perfect investment.

PDF Version of “Quality Without Compromise”

See's Candies

William Ramsey, an executive at Blue Chip Stamps, stood in the office of Robert Flaherty as they both awaited a call. Moments earlier, Flaherty attempted to persuade Warren Buffett, majority owner of Blue Chip, to con­sider purchasing See’s Candy Shops Inc., a popular West Coast candy maker. Buffett turned them down—up until then, he was used to buying boring businesses on the cheap: banks, textile mills and insurance companies. Ramsey however, thought See’s was a great buy, and desperately tried to get Buffett back on the phone. Their sec­retary finally got hold of Buffett at his home in Omaha. He had reviewed the numbers, and liked what he saw.

After consulting with Charlie Munger, Buffett’s friend and business partner, they were willing to make an offer. This would be Buffett’s biggest investment to date, and he wasn’t one to overpay for anything—the deal al­most fell through during negotiations, but the sellers finally accepted their proposal. The final price was $35 per share. With one million shares out­standing and $10 million in cash on the books, the net purchase price was $25 million. Blue Chip Stamps now owned 67.3 percent of See’s Candy Shops, with the remainder purchased from about 2,200 public holders in the months after. But one thing remained unfinished: who would run the com­pany? Buffett made it clear upfront that they wouldn’t be calling the shots at See’s. Suggested by the previous owner, Buffett, Munger and a friend named Rick Guerin met with Charlie Huggins—executive vice president and twenty-year veteran of See’s. After three hours of discussion, Buffett knew that Huggins was the man for the job.

Business Investing

Warren Buffett & The Washington Post

By Max Olson

PDF Version of “Warren Buffett & The Washington Post”

Warren Buffett and Katherine Graham

There is no question that Warren Buffett is one of the greatest investors of all time. To study his investment methods, there are the Berkshire Hathaway annual letters, biographies, and dozens of other books written on the subject of value investing. But, Buffett’s specific investments are rarely examined within the context of the time he made the purchase—and without the benefit of hindsight. To more fully understand Buffett’s past successes, “reverse engineering” his purchases is essential. One investment in particular interested me, both because I like the business and because it is one of the only investments Buffett made where he disclosed an estimate of intrinsic value. That business is The Washington Post Company.


Buffett began acquiring shares of the Washington Post in early 1973, and by the end of the year held over 10 percent of the non-controlling “B” shares. After multiple meetings with Katherine Graham (the company’s Chairman and CEO), he joined the Post’s board in the fall of 1974.

According to Buffett’s 1984 speech The Superinvestors of Graham-and-Doddsville, in 1973, Mr. Market was offering to sell the Post for $80 million. Buffett also mentioned that you could have “…sold the (Post’s) assets to any one of ten buyers for not less than $400 million, probably appreciably more.” How did Buffett come to this value? What assumptions did he make when looking at the future of the company? Note: All numbers and details in this article are from the 1971 and 1972 annual reports and “Buffett: The Making of an American Capitalist” by Roger Lowenstein.