The Deals of Warren Buffett By Glen Arnold

Book cover for the deals of warren buffett

The Benjamin Graham School of practical investing

The Definition of Investment

  1. Thorough Analysis
  2. Satisfactory return
  3. Safety of Principal

The Great Irony: Great investors act with safety of principal in mind and aim only for a satisfactory rate of return. Yet, over the long run, they outperform those who take the path of higher risk.

The returns depend on:

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  1. Follow sound investment principles
  2. It is only necessary to outperform the market by a few percentage points to end up with vast amounts more wealth.
  3. It’s only investing if you have made a thorough analysis of the company, there is a built-in margin of safety and the objective is set as merely a satisfactory return.
  4. Do not accept Mr Market’s valuation of a share; do your own research.

Investment 1: Cities Services

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Investment 2: GEICO

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Investment 3 & 4: Cleveland worsted mills and a gas station

Check the qualitative factors

Why companies with large surpluses can be bad businesses:

Paths to reverse pattern of losses

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Investment 5: Rockwood & Co.

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Investment 6: Sanborn Maps

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Investment 7: Dempster Mill

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Investment 8: American Express

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Investment 9: Disney

Buffett’s actions A key part of Buffett’s research was to go and sit in the cinema surrounded by a whole bunch of children watching Marry Poppins. he could see how much they loved the Disney product for himself. And he could see that with the valuable feedback catalogue, people would keep paying for Disney films, generation after generation. The wonderful thing about Snow White, for example, is that once it has been made and you have written off the cost, you can bring it out again and again. Furthermore, you can use the love of the characters in many different forms, from licensing on children’s school bags and t-shirts to theme parks. And Mickey Mouse does not have an agent (unlike Tom Cruise, say) who might take much of the value generated by a film franchise for their client.

Buffett and Munger met Walt Disney and admired his devotion to his work and his infectious enthusiasm.

Buffett logic - more like Fisher and Munger than Graham Buffett was putting a great deal of weight on the intangible assets of Disney and paying little attention to the balance sheet assets.

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Investment 10: Berkshire Hathaway

The way Buffett organized this business:

  1. Get rid of the liquidator reputation: After being hurt greatly by the loathing people of Beatrice, he announced that there would be no mill closings.
  2. Allocation of tasks: Buffett was true to his word: anything to do with the mill operations was up to Ken Chace. Buffett’s job was to look after the money.
  3. Incentives: Buffett does not like executive options because they offer rewards without the downside risk, and they encourage mangers to gamble with shareholder’s money.
  4. Focus on return on capital employed: He wasn’t focused on the level of output of the mills, or the volume of sales or market share, or just profit. He thought what really matters is the percentage return on capital employed.
  5. Release Cash: Existing cash was not being used to generate adequate returns in BH.
  6. Send bad news early: Chace was asked to warn Buffett if unpleasant surprises might be around the corner.
  7. Praise key people: People respond to signals that they are appreciated; it’s only fair that they are told they are doing a good job if that is the case.
  8. Buffett would be the only one who could allocate capital

Chace managed to do as he had been asked and released capital tied up in inventories and non-current assets. Dividends were at first meager and then non-existent, thus saving cash.

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Investment 11: National Indemnity Insurance

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Investment 12: Hochschild - Kohn

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Investment 13: Associated Cotton Shops

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Investment 14: Investing in Relationships

The evaluation of securities and businesses for investment purposes has always involved a mixture of qualitative and quantitative factors… Interestingly enough, although I consider myself to be primarily in the quantitative school, the really sensational ideas I have had over the years have been heavily weighted toward the qualitative side where I have had a ‘high-probability insight’. This is what causes the ranger register to really sing. However, it is an infrequent occurrence, as insights usually are, and of course, no insight is required on the quantitative side — the figures should hit you over the head with a baseball bat. So the really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions. -- Buffett.

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Investment 15: Illinois National Bank and Trust

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Investment 16: Omaha Sun Newspapers

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Investment 17: More Insurance

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Investment 18: Buffett’s Investment in sanity

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Investment 19: Blue Chip Stamps

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Investment 20: See’s Candies

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Investment 21: Washington Post

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Investment 22: Wesco Financial

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