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…



"Things had never looked rosier at AMEX than they did in mid-November 1963." Traveler's checks. Charge cards. Deposits. Earnings. The stock. Everything was "growing by leaps and bounds." AMEX was a "true growth stock of prime investment quality.

But that was about to change.

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



P&R was "a leading producer of anthracite coal." Anthracite was a dying market that had been "artificially inflated" by a postwar boom. And the boom allowed P&R to do "pretty well from 1946 on" despite management that ran the company "like a fine old nonprofit."

Enter Ben Graham

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.



NAFI began in 1919 as a stock promotion. The promoters sold shares to “Nebraska and Iowa farmers and small-town merchants who had little idea what it was worth.” These retail investors soon learned their shares were “worthless” and “lost hope ever seeing their money again.”

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 ADP:

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. Jack Henry Financials:

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…



Illinois Central owned 2,900 miles of track between Chicago and New Orleans. The company, which began in 1851 as the first land grant railroad, used its north-south network to transport (a) Midwest coal and grains south and (b) Gulfcoast chemicals north.

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…



—April 3, 1984—

Conwood, the US's second-largest smokeless tobacco maker, was 'in play'. Management had scrapped a planned merger. Now Conwood needed a friendly buyer. And they had to find one before a raider made a hostile bid for the company.

The solution: Call Jerry Seslowe.

"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... It starts with RJR's CEO—Ross Johnson. By October 1988, Johnson had a solid three-year operating record:

+20% sales
+50% earnings
+66% EPS

The problem: RJR's stock price

"The company was going like gangbusters but the [stock] got beaten down."

Johnson's solution: An LBO

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… The Bowery fell on hard times back in the seventies when rising interest rates began eroding the bank's balance sheet. There was no looting of Bowery's assets. Just managers who dozed as the cost of deposits kept outstripping the yield on mortgages and government bonds.

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… HJ Stern, the owner of Stern Metals, had a problem. He needed to monetize his Stern equity w/o:

- Selling to his ill-equipped kids
- Losing control in an IPO

He consulted with his neighbor Jerry Kohlberg. Kohlberg, then head of IB at Bear Stearns, proposed a solution:

An LBO

"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… Bill Simon, a trader-turned-statesman, left his job as Treasury Secretary in 1977.

His financial position:
- Salary: $66 thousand
- Net Worth: $2.5 million

He spent the next five years:
- Consulting
- Value investing
- Commodity trading

Then he found his niche: LBOs

Warren Buffett's Salomon letters: Buffett’s YE 1991 Letter:

Munger's Daily Journal AGM Info:

Date: Today (2/15)
Time: 1 PM (ET)

Here's some Daily Journal history…

In 1976, the California Newspaper Service Bureau, a mutually-owned public notice ad sales agency, settled a restraint-of-trade lawsuit. The settlement terms required that they (a) pay the plaintiff $1.5M and (b) sell their 100% interest in the Daily Journal Corp ("DJCO").

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… CE was Cincinnati's largest newspaper. Scripps, a newspaper chain, bought the paper in 1956. But there was a problem: Cincinnati was one of the last "two-newspaper towns," and Scripps controlled both papers. This led to an antitrust suit and DOJ-imposed sale of CE to Munger.

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 Buffett invested in Bayuk in March 1982. At the time, the company had two assets:
- $3M EBIT cigar business*
- $15M net cash & investments

They also announced a plan to:
- Sell the cigar business
- Liquidate & dissolve the company

———
*Bayuk's brands:
- Garcia + Vega
- Phillies

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... Bear bought Vapor from Singer Corp (sewing). The company had three divisions:

- Mass transit equipment
- Oil & gas valves and pumps
- Industrial process control parts

Think these were low-return cyclical businesses? They weren't.

Vapor:
- Earned +20% ROIC
- Grew every year

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. Rank invested $1.7 million into Rank-Xerox. Yet by the time of Berkshire's investment in late 1966, Rank-Xerox:

- Grew revenues to $125 million
- Produced 40% operating margins
- Earned a 30% return on equity

Rank-Xerox accounted for 60% of Rank's 1966 consolidated net profits.

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 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)

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 Wrigley's long-term financials:

drive.google.com/file/d/1KOeBxN…

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… In 1979, Steven and Mitchell Rales formed Equity Group Holdings ("EGH").

The brothers' plan? Use borrowed money to buy companies that are:
- Simple
- Defensible
- Profitable
- Well-managed

EGH did two large deals:
- Master Shield
- Mohawk Rubber

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. Step #1: Increase prices

Buffett realized Dempster could sell replacement parts "at higher prices with little, if any, resistance." So he raised parts prices as follows:

- Fully-Proprietary: up to 500%
- Semi-Proprietary: 200% to 300%
- Non-Proprietary: up to 100%