Turtle Bay
@turtlebay_io
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Business History l Investment Cases l Financial Data
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My all-time favorite LBO: Conwood
Buffett called it "one of the best businesses I ever saw." Munger called it "the best deal I ever saw." Pritzker bought it and made ~260X.
Here's the story…
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Here's an old Warren Buffett profile:
[TLDR: When there's inflation, look for businesses that are (a) royalty-like and (b) asset-light.]
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How Warren Buffett earns 50% on small sums:
Bayuk Cigars
In 1982, Buffett bought 6% of Bayuk for his private account. His $572,907 investment produced a 50% IRR with "virtually no risk."
Here's the story…
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Bernard Arnault in 1989:
"I'm trying to build the No. 1 luxury-goods group in the world."
[See below for the full interview.]
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Charlie Munger on Belridge Oil:
"An idiot could've told you there was no possibility of losing money."
"You don't get that many great opportunities. When life finally gave me one, I blew it."
"That decision cost me about $5 billion."
Why was Belridge so appealing? See thread:
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Warren Buffett on American Express:
"That was my partnership's best investment"
In 1964, Buffett put $2.8M of his $17.5M fund into AMEX. AMEX grew to a 40% holding, "the largest investment the partnership ever made," and compounded at 50% for four years.
Here's the story…
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You might know about Michael Burry's investments in Avant and CDSs. But did you know his other big "quarter-killer but career-maker" idea was Gemstar?
See Burry's (michael99) VIC comments below for a masterclass on how to analyze a complex investment.
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KKR's first deal: Vapor Corp
In 1972, Jerry Kohlberg, Henry Kravis and George Roberts bought Vapor for Bear Stearns. Despite closing on the eve of a recession, the deal worked so well that they used it as a template for future buyouts.
See below to learn why...
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Charlie Munger the short seller?
That's right. Soon after launching Wheeler-Munger, he took a large short position in Western Union.
Munger even published a 26-page writeup:
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From $JNJ's 1986 annual report:
11.6% revenue CAGR over 100 years.
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A Case Study in Capital Allocation: Philadelphia & Reading
In 1955, Ben Graham took control of P&R. Over the next 12 years, Graham transformed P&R from a failing coal mine into a high-return holding company.
Here's why P&R was Buffett's
- Largest investment
- Berkshire template
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Buffett & Munger passed on several deals that turned the would-be buyers into billionaires.
One of those deals: Detroit International Bridge ("DIB")
DIB's Ambassador Bridge:
- Connects Detroit / Windsor.
- Handles 30K crossings a day.
- Enables 25% of US-CA trade.
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The first LBO: Stern Metals
In 1965, Jerry Kohlberg formed a group to buy Stern Metals. The deal, which earned 4.7x within two months and 8.0x over a two-year hold, became Kohlberg's "blueprint" for buyouts at his future firm.
That firm: KKR
Here's the story…
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Buffett's first private investment was…
A tech startup?
That's right. In 1960 Buffett invested $60K (20% of his net worth) into Data Documents.
Data Documents:
- Started by Buffett's friend in 1959
- Made IBM tabcards
- Grew by +70% a year
- Produced a 1-year payback on capex
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"One of the greatest Wall Street coups":
Gibson Greetings, Inc.
In January 1982, Bill Simon bought 33% of Gibson for $330K. The value of that $330K investment when Gibson went public in May 1983: $66.7 million.
That's a 202X return in 17 months.
Here's how he did it…
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How cheap can stocks get during an inflationary bear market?
In 73/74, good businesses sold for 3 to 6 times earnings.
An example: Ogilvy & Mather
Buffett paid 5x profits for O&M, which:
- Grew by ~15% a year
- Earned ~25% ROEs
[Note: O&M stock bottomed at ~3x earnings]
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"Deal of the Century": RJR Nabisco
In April 1989, KKR bought RJR for $30.8 billion. The deal was 6x larger than any other buyout and exceeded "the $29.5 billion cash value of the seven other biggest LBOs." It remained the largest buyout for eighteen years.
Here's the story...
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Pritzker on ROI:
“The single most important financial number is ROI. How much a company earns on the capital invested in it is the best measure of how it is doing. From both a financial and philosophical point of view, that’s what counts.”
[From Marmon’s management handbook]
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How does Greenblatt invest his PA?
One example: Calls options on “growing service businesses” when they trade for “close to 10 times cash earnings.”
Here’s a writeup and his bio from 2000:
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The first company Buffett ran?
Dempster Mill
When Buffett took over Dempster in 1961, the company was:
- Losing money
- Consuming cash
- About to lose its bank lines
Yet Dempster became one of BPL's best deals.
How'd Buffett salvage his investment? See below.
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Another 1960s Berkshire holding:
Wrigley
Buffett paid $103.69 per share for Wrigley in 1968, which was:
- 13x earnings
- 11x earnings net of cash
One reason he bought it?
Untapped pricing power
Wrigley's hadn't raised prices in 50 years.
Cost per stick
- 1918: 1c
- 1968: 1c
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Danaher's acquisition criteria:
- Understandable
- Predictable
- Cash earnings
- Niche market
- Good management
"Particularly important is that the profits be cash profits. When profits are in some other form, funny things can happen, most of which are not good."
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Buffett's most important deal:
See's Candy Shops
In 1972, Buffett acquired See's for $25 million (net).
"To date (2014), See's has earned $1.9 billion pre-tax, with its growth having required added investment of only $40 million."
Take a look below for more on See's.
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Think your stocks are cheap?
In the early 1980s, consumer staples sold for mid-to-high singledigit multiples. Here’s an old Sequoia letter where Bill Ruane writes about buying Gillette and Pepsi at 7½ times earnings.
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Another deal Buffett passed on that turned the would-be buyer into a billionaire:
Irvine Co.
Insiders described the deal as:
"The best real estate deal since Peter Minuit bought Manhattan Island."
"An absolute slam dunk."
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Nadella memo to Microsoft’s board:
“Our long-term financial ambition is to grow at more than 10% pa through this decade to become a $500 billion revenue business by FY2030 while still growing at 10% or more at that time.”
[From the FTC case]
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Constellation Software's ideal VMS business?
Jack Henry & Associates
They call it "Our Gold Standard for VMS Companies." Bernard Anzarouth, CSI's CIO, wrote a memo about Jack Henry in 1999.
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Think 10Ks and 10Qs should be hundreds of pages long? Belridge Oil issued one-page quarterly reports and ten-page annual reports. That was all Charlie Munger needed to conclude that Belridge was "one of the major opportunities of [his] life."
Here's a Belridge quarterly report:
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Buffett's BPL results:
- 30% a year
- 28X total return
Even more impressive: No down years
How'd he do it? Arbitrage
Arbitrage investments produced:
- Market-neutral results
- +20% unleveraged returns
Here's a thread on an arbitrage deal from Buffett's PA:
Bayuk Cigars
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Munger's first buyout attempt:
The Cincinnati Enquirer ("CE")
In 1971, Munger's Blue Chip Stamps ("BCS") agreed to buy CE for $29M. That purchase price was a big commitment for BCS, amounting to:
- 30% of liquid assets
- 80% of shareholders' equity
Here's the story…
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Rick Guerin was:
- Charlie Munger's lifelong partner
- A great investor (33% for 19 years)
Here's an old writeup of his…
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A Buffett 1950s stock:
National American Fire Insurance
NAFI was a long-forgotten fraud. It didn’t file with the SEC or trade on an exchange, and the guy who ran it “hated stockholders.” Yet Buffett went door-to-door buying 10% of the float. Why? See below to find out.
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Another 1960s Berkshire holding: John Blair & Co.
In 1966, Buffett bought Blair stock for Berkshire. Blair was the country's largest TV and radio station sales agency. They sold station ad space to national brands looking to get their products in front of small-town consumers.
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Warren Buffett's AMEX Investment Case Study
Slide deck version:
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How did Buffett compound at 50% in the 1950s?
Take a look at his largest investment in 1955: Philadelphia & Reading.
Buffett’s P&R Investment:
- Bought at 0.5x book value in early 1955.
- Book value doubles over 5 years.
- Sold at 2x book value in late 1959.
CAGR = ~50%
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The best-managed endowment/foundation? Yale? Wellcome? Bowdoin? MIT?
Grinnell College
Joe Rosenfield, with Buffett's help, turned Grinnell's $11M into $1B over 30 years.
He made just a handful of investments, including:
- A TV station LBO
- Intel
- Berkshire
- Sequoia Fund
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Danaher
Results (in $ per share)
1985 (Rales takeover)
- Earnings: 0.02
- Equity: 0.11
- Stock: 0.19
2015 (pre-spinoff)
- Earnings: 4.74
- Equity: 33.54
- Stock: 95.00
The value of the Rales family's $1 million investment?
$12 billion
Here's the story about how it started…
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You might know Otis Booth as:
- Charlie Munger's first partner.
- An early Berkshire investor.
But did you know he ran a Berkshire-like holding company with Charlie Munger, Rick Guerin and Harry Bottle?
See the attached screenshots for more.
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How Buffett does an FDIC-backed deal:
- Buy a failing mutual savings bank
- Hire a "brilliant manager"
- Obtain a "no-lose guarantee"
- Use "extreme financial leverage"
That's how he made a "50% annual return" from Bowery Bank during the S&L crisis.
See below for more…
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You know about Ted Weschler, Todd Combs and Lou Simpson. But did you know Berkshire hired other investment talent? One of them was Larry Pidgeon. Larry came to Berkshire from Goldman and went on to launch a ZBI-backed fund called CBM Capital.
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What were the first equity investments Buffett made for Berkshire Hathaway?
Here are Berkshire's 1967 and 1968 portfolio holdings:
- AMEX
- S&H
- IDS
- Disney
- Blair
- Wrigley
- Rank
- Mass I&L
- Crompton
- Florida Gas
I'll review these investments over the next few days…
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Another 1960s Berkshire tech investment:
Rank Organization
Rank was a cheap way to buy Xerox. It owned a 50% interest in Rank-Xerox, which controlled the non-US rights to xerography. Berkshire paid just ~15x for Rank. Xerox Corp, on the other hand, traded at a ~60x multiple.
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Constellation Software Memo
"Once the commitment to outsource is made, it becomes increasingly difficult for the customer to change service providers."
Top-performing VMS attributes:
- Outsourcers → Recurring revenues
- Acquisitions → Low-cost CAC
- Cash deals → No dilution
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The birthplace of modern railroading:
Illinois Central
In 1989, Hunter Harrison joined a group that acquired IC. Harrison transformed IC from the "worst- to best-run rail" and earned 20X over nine years. IC became the template for how to run a railroad.
Here's the story…
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How Warren Buffett Earns 50% on Small Sums
Slide deck version:
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You know about Berkshire Hathaway. But did you know Warren Buffett ran several other companies? Here’s a rare look at his Diversified Retailing letters from the 1960s.
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Munger on Conwood:
- "The figures were just unbelievable."
- "There was virtually no [risk]. Nothing but money."
- "It was the best deal we ever saw."
What made Conwood such a great deal? Take a look below.
(Transcript from
@Latticework1
)
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Was Bayuk a one-off?
No. Buffett grew his private account from $0 to $500M in 33 years. And he did it with Bayuk-type holdings: "fringe inefficiencies,""little wrinkles" and "arbitrage but in a different way than customary arbitrage."
That's how Buffett earns 50% on small sums.
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John Malone on TCI:
"The scheme of the company is to go contrary to what they teach in business school, which is to earn money, pay taxes, issue dividends and then have your shareholders pay 70% on those. We think that's stupid."
See below for Malone's first shareholder letter.
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Here's a PDF of Buffett's P&R investment
Would you like to receive:
- Future case study PDFs
- Longer-form writeups
- Historical filings & documents
- Old business articles
If there's enough interest, I'll make this a regular thing. Sign up below.
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Berkshire Hathaway's Financial History (1965 - 2021):
Link:
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Buffett:
"The single-most important decision in evaluating a business is pricing power."
Take a look at pricing power in the credit ratings business:
Corporate Ratings Cost
- 1974: 1.0 bps (issuer-pay began in 74)
- 2021: 7.2 bps
$SPGI
$MCO
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Another good case study: Studebaker
Buffett 2X’d his investment but would’ve lost 50%+ if he held.
Warren Buffett Case Study
Studebaker - 1965
How Buffett doubled his money in 12 months.
By doing the work nobody else would, Buffett realized there was great value inside the Studebaker brand.
He bought the stock at a $56MM valuation. 3 years later Studebaker would spin off a
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Good podcast with Todd Combs:
Combs mentions Buffett and Munger's Western Union short position (see below).
Thanks
@PaulBuser
and
@buhrman_rick
for doing this.
Charlie Munger the short seller?
That's right. Soon after launching Wheeler-Munger, he took a large short position in Western Union.
Munger even published a 26-page writeup:
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From one of my favorite CEOs on how to run a bank:
"[We're] driving a nice car down a superhighway in second gear."
We need more of this.
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ROLLINS, Inc.
IPO to BREAKUP (21 years):
- Sales: $4.4M → $526M (26% CAGR)
- Earnings: $0.4M → $46M (26% CAGR)
- EPS: $0.02 → $1.70 (24% CAGR)
No Y/Y declines.
[See below for letter and financials]
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Notes from a 1984 meeting with Buffett:
[You can find the complete memo at the screenshot below. Like/Retweet.]
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Berkshire Hathaway AGM Notes (1993)
Includes Buffett & Munger's comments on:
- Marlboro Friday
- Brands vs. generics
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CINTAS
1983 (IPO)
- Sales: $62.8 million
- EBIT: $9.6 million
- ROE: ~30%
2022
- Sales: $7,854.5 million
- EBIT: $1,587.4 million
- ROE: ~30%
CAGRs: ~13%
Richard T. Farmer's first shareholder letter:
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Great thread on Danaher:
Billionaire investor Dan Loeb believes studying this one company is worth more than a 2-year MBA.
Surprisingly, it isn’t Amazon, Apple, or Berkshire Hathaway.
As one of the all-time best-performing stocks, it’s delivered 4,500%+ returns over the last 25 years.
Let’s dive in!
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Bank of Granite: "The Best Little Bank in America?"
Buffett: "What [Bank of Granite] has done is extraordinary."
Results
- ROA: ~2.70%
- NCOs: ~20 bps
- NPLs: ~30 bps
- Expense ratio: ~35%
- Equity to assets: ~15%
- 45 years of dividend increases
- 60 quarters of y/y EPS growth
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The best-performing stock over the 30 years ending YE 2015?
Balchem Corp
In 1985, Balchem:
- Traded OTC
- Had a $2 million market cap
- Earned $400,000 on $2 million in equity
Would you have bought it? See the financials below for more.
@jasonzweigwsj
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Good articles on share buybacks during the 1973/74 bear market:
- Short-term verdict: These companies “haven’t been very sharp about their [buyback] timing.”
- Long-term verdict: Those “buybacks have made a mint for shareholders who stuck with the companies carrying them out.”
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Lawrence Goldstein
"My wife told me either she or those annual reports had to go. Today I must tell you I am a single man."
What a career! Can't think of anyone else who's owned so many great underfollowed stocks—Belridge, Balchem, Hayward, Compass, TPL, etc.
@Overlook_Ignore
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@rhunterh
Businesses or funds?
Some of my favorites:
- Penn Square
- Penn Central
- Continental Illinois
- Thrift industry in 1980s
- Texas banks in early 1990s
- 20th Century
- Lloyd's
- O&Y
- Levitz
- Schwinn
- Franklin National
- ZZZZ Best
- Baldwin
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Sol Price
"Merchandising is not a science, it's an art."
Price Club model:
- Bargain prices
- High turns
- Low expenses
- Cheap real estate
- Trustworthy customers
See below for (a) Sol Price's 1981 shareholder letter and (b) his 1982 Forbes profile.
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@BillBrewsterTBB
I’ve done work on buybacks. Companies that sustain ~10% annual repurchases produce outlier-type returns (one produced a 63% CAGR). It’s hard to get similar returns from HSD revenue growth (the exception: 100% growth from pricing).
Buyback math at high rates / low multiples:
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@atelicinvest
- Commodity traders (Marc Rich & Co)
- 3PLs (Expeditors)
- Outsourced labor (ServiceMaster)
- C-stores (Casey’s)
- C-store distribution (McLane)
- Pharma distribution (McKesson)
- Electronics distribution (Tech Data)
- HVAC distribution (Watsco)
- Auto insurance (20th / GEICO)
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A good podcast from
@rainmakerspod
:
Donald Bren’s Irvine deal is one of the most successful real estate investments ever. It’s also a great case study of urban planning and MPC development.
Another deal Buffett passed on that turned the would-be buyer into a billionaire:
Irvine Co.
Insiders described the deal as:
"The best real estate deal since Peter Minuit bought Manhattan Island."
"An absolute slam dunk."
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How'd the deal turn out?
Conwood continued to…
Raise prices at a HSD rate
…For twenty years.
Then Pritzker sold Conwood for $3.6 billion.
RESULTS
- Purchase (1985): $20 million
- Sale (2005): $3.6 billion
- Dividends (est): $1.5 billion
RETURNS
- TPVI: 260X
- IRR: 49%
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Why Berkshire? Because Buffett and Munger:
- Owned RJ Reynolds stock
- "Knew tobacco and liked it"
Buffett on tobacco economics:
- "It costs a penny to make."
- "It sells for a dollar."
- "It's addictive."
- "And there's fantastic brand loyalty."
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@NeckarValue
Jim Sinegal probably modeled himself after his mentor and old boss: Sol Price
Sol's goals (from his first investor letter):
- Keep company growing
- Help solve country’s problems
- Create fulfilling workspace
- "Honestly & efficiently" serve customers
Sounds very Costco-like.
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This is one of the most important business stories in history. Nick makes some insightful and nuanced points. You should give it a read.
The year is 1987 $MSFT’s MS-DOS lifecycle is coming to an end & the future of the PC OS is uncertain. This is a pivotal time for MSFT.
Studying how Bill Gates navigated this situation teaches investors how Bill Gates managed risk to become the richest person in the world.
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Buffett's 'Desert Island Challenge': "If you were stranded on a desert island for ten years, what stock would you buy."
WEB's pick when he closed BPL? Dow Jones & Co
Good thing he didn't buy DJ. Their market power eroded for the next 30 years. The stock didn't do well either.
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Want to learn more about Buffett's Data Documents investment? Check out this excellent Alice Schroeder lecture:
[Note: The Data Documents discussion begins at 18:00]
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What a great podcast—
Markel: Playing The Long Game
Why aren’t there tons of Berkshires? Because insurance is crazy hard and investing successfully for decades is near impossible
Markel has tried to do both well and by certain measures has succeeded. An interesting company to explore:
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RIP Harold Byron Smith, Jr.
He and his family built two great American businesses:
- Illinois Tool Works
- Northern Trust
[One of my heroes]
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Munger's Daily Journal AGM Info:
Date: Today (2/15)
Time: 1 PM (ET)
Here's some Daily Journal history…
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Gillette's postwar financial results:
- Return on equity: ~20%
- Growth rate: ~10%
- Payout ratio: ~50%
Valuation? Between 5 and 10 times earnings.
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@MohnishPabrai
Thread on Munger’s Belridge investment:
Charlie Munger on Belridge Oil:
"An idiot could've told you there was no possibility of losing money."
"You don't get that many great opportunities. When life finally gave me one, I blew it."
"That decision cost me about $5 billion."
Why was Belridge so appealing? See thread:
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Was Irvine really a "slam dunk"? No.
Irvine had a history of:
- Zoning issues
- Environmental activism
- Renter/community conflicts
These problems were serious enough that some of the smartest investors in the world bailed on Irvine just six years after the deal closed.
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Buffett on why he liked DIB:
"Because you have laid out the capital costs. You build the bridge in old dollars, and when there is inflation, you don't have to keep replacing it—a bridge you build only once."
Munger:
"I can't imagine a more secure investment than that bridge."
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Buffett started buying in March at $13.50.
Why invest $13.50 for $15.00? Bayuk was going to pay $8.00 within weeks and $4.00 within months. Given these large upfront payments, Buffett's purchase price was cheap relative to the present value of Bayuk's expected cash flows.
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Lou Simpson:
"If there's one thing I've learned it's that the people at the top are awfully important. The combination of a good business and people running it in the shareholders' interest can be explosive."
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What'd Buffett & Munger think of Conwood?
- WB: "One of the best businesses I've seen.
- CM: "The figures were unbelievable."
Conwood's figures (1972-1984 CAGRs):
- Unit growth: 6%
- Price increases: 9%
- Tobacco revenues: 15%
- Net profit: 17%
Cash conversions: ~100%
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So what happened? Buffett/Munger sold their shares to Matty Moroun, a Detroit businessman. Moroun took DIB private and raised tolls by 5% a year for the next 30 yrs.
The result: Moroun's $30 million investment produced $500 million in cash flow and is worth more than $1 billion.
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@lhamtil
The World for Sale
The King of Oil
Philipp Brothers
Metal Men
[non-Glencore but good: Merchants of Grain]
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Why was the deal so good?
Irvine owned:
- "100 sqmi of land sitting in the path of LA's southward sprawl."
- "15% of the land of fast-growing Orange County."
- 73K acres valued at "less than $1 an acre."
You were also buying from an uninformed forced seller (Irvine Foundation).
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Buffett held his investment and remained chairman of the board for over 14 years. Over that time, Data Documents:
- Grew sales by ~30% a year
- Increased profits from $4K to $3M
- Earned +20% ROEs
The result: Buffett's Data Documents investment returned 170x (33% a year)
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From Sam Zell's Great American letter:
"Great American's objective could be defined as 'asset arbitrage': prudent investments in numerous, diversified opportunities bought and sold, wherein the risk is carefully assessed and the potential reward is reflected in that assessment."
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Ben Graham on his +200x in GEICO:
"Our experience was contrary to everything we preached."
"Situations like this are almost impossible to identify. The ones that seemed easiest to pinpoint in the Fifties, the airlines, the computer companies, turned out to be full of pitfalls."
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