When I got married in 1993, I was determined to do well with our money, so I asked a stockbroker for advice on how to get started. He said read everything you can about money. So I read furiously about stocks and the financial markets. I opened two IRAs and a brokerage account with Charles Schwab and started investing in stocks. Living in Nebraska, I met several people who had an opportunity to invest with Warren Buffett, but did not and regretted it.
In 1996, Warren Buffett offered Class B Shares of Berkshire Hathaway. I drained all of our bank accounts and came up with $4,400 for four Class B shares with the IPO price of $1,100 apiece. I told my wife don't buy anything for a week, we only have $10 in our checking account.
I quickly read Roger Lowenstein's book Buffett The Making of American Capitalist, published in 1995, and then devoted my investment style to emulating Warren Buffett.
For this article, about my encounters with Warren Buffett and Charles Koch, I have gathered information from Warren Buffett's annual reports and two major biographies, The Lowenstein book, and The Snowball, Warren Buffett and the Business of Life by Alice Schroeder. I read The Science of Success, by Charles Koch for material about Koch's philosophy in business. I also read Kochland, The Secret History of Koch Industries and Corporate Power in America by Christopher Leonard.
What is capitalism?
Capitalism is an economic system in which people are allowed to earn money, and keep it for themselves and invest it for a profit. This system allows investors to take a risk in investing their money into a business and to reap a profit based on their percentage of ownership in that business. The government collects taxes on a portion of their income and on the sale of investments, but allows the means of production and distribution to remain privately owned.
The merchants of Venice and Antwerp in the 1500s and 1600s invested capital into shares of a ship and received a proportionate amount in the spoils. This way they diversify their capital into several ships, in case one goes under, they don't lose all their money.
The first formal financial exchange was created in 1531 in Antwerp, where traders exchanged loans, promissory notes and bonds.
The Dutch East India Company founded in 1602 was the first joint stock company. Shares were traded on the Amsterdam Stock Market, founded in 1602. Ships that brought spices from the East gave investors income through dividends. The Dutch East India Company's regular dividend yielded between 12% to 40% from 1679 to 1772.
In the 1800s, British and American investors made fortunes on investments in American railroads. In the modern era businesses like Google and Amazon that operate on the Internet became the new fortune makers.
Today US Capitalism with support from the Federal Reserve has produced a country with low unemployment, wage growth, and opportunities to create a tremendous amount of wealth. But the downside with capitalism is if you are not an owner of money-appreciating assets, such as real estate, stocks, bonds, ETFs, mutual funds, you get left behind and that is where this huge divide between the rich and the poor is found, in the disparity between the people who own capital and the people who don’t.
In the investment world, a great average annual return is 15% to 20%. That is when you are doubling your money every 4 to 5 years. That’s tough to do, very few people have done it over 10-year periods.
Two investors in the Midwest who have achieved more than 15% annual returns for more than 20 years are:
Charles Koch of Wichita at 18% annual returns for Koch Industries from 1967 through 2007, when I interviewed Koch; and Warren Buffett at 19.8% annual returns at Berkshire Hathaway from 1965 to 2023.
Over the past five years, Berkshire Hathaway stock is up 100% or an average of 15% annually; the S&P500 is up 84% in the past five years or an average of 13%. Through June 6, 2024.
Warren Buffett, age 93, is the 6th wealthiest person in the world, worth about $134 billion. Charles Koch, age 88, is worth $59 billion, ranked as the 25th richest man in the world.
I interviewed Charles Koch in 2007 for an article about his book The Science of Success.
Charles Koch
When I met Koch, when I shook his hand, I noticed his skin was as smooth as a baby's skin. In person Koch is affable, he is like a scholar, when he talks about business and philosophy.
I wrote, "Charles Koch is a capitalist who believes the role of business is to create value in our society. If it doesn't, the business should be shut down or sold."
Over his long career Koch developed his Market Based Management. MBM begins with a vision for determining the greatest long-term value; using virtue and talents to ensure employees with the right values, skills and capabilities are hired, retained and developed; creating, acquiring, sharing and applying relevant knowledge and measuring and tracking profitability; and ensuring the right people are in the right roles with the right authorities to make decisions and holding them accountable. MBM rewards people according to the value they create for an organization.
Charles Koch inherited a $10 million stake in Koch Industries, but after he became president of the company in 1967, he grew it into a much larger conglomerate, with an emphasis on oil, energy, refining, chemicals, lumber, paper, fibers, investments, trading and arbitrage, electric battery production, and cell phone components.
Koch's best acquisition was Georgia Pacific in 2005, which more than doubled the size of Koch, which now has 120,000 employees. His worst acquisition was Purina Mills of St. Louis in 1998 because deep within the company were agreements with farmers to buy baby pigs and then resell them. But the pig market fell apart and nobody wanted the pigs. Koch fired the manager who engineered the deal, for failing to find this obscure contract that obligated them to buy some $240 million worth of pigs that had no market because of overproduction. Purina Mills went into bankruptcy, and Koch lost all of its $100 million investment in the company plus paid another $60 million on top of that. Purina was purchased by Land O Lakes in 2001.
Koch is not afraid to take over a company that is in trouble financially. He applies his market based management philosophy to increase the value of his businesses, While he is more hands-on in applying these principles and capabilities, Buffett lets his managers run their businesses.
In the early 2000s, I wrote an article about Koch's trading and arbitrage floor, where some 50-75 people were making trades on financial markets.
I interviewed a trader at Koch who had a million dollar profit in a long gas futures position, the trader sold out his position for a big profit going into the summer driving season, typically the time for the highest gas prices of the year. He told me the job was highly stressful, he hoped he could do it for 10 years.
Koch will start a small business from scratch and then if it grows, Koch will invest more capital to grow the business. Buffett generally invests only in profitable existing businesses, and does not conduct startups. Charles Koch would never take his company public, but Buffett's company has been publicly traded for decades.
Warren Buffett probably undergoes more scrutiny because he operates a publicly traded company. But this allows people an opportunity to own shares in Berkshire Hathaway.
Koch supports libertarian and Republican politics while Buffett has been a longtime Democrat, who believes the wealthiest incomes should be taxed higher than they are now, while Koch is about less government and less taxes.
Another big difference between Koch and Buffett is ethics. Buffett is more willing to lose money but not reputation. Buffett isn't without problems; he took over Solomon Brothers after a bond trading scandal in 1991 and his real estate firm recently paid $250 million in fines for inflated broker commissions.
In his early days Charles Koch was willing to risk damaging his reputation for the sake of profits. In 1999, Koch Industries was convicted of stealing oil from federal and Indian lands, including the Osage Nation, something the company had done for years. Koch admitted to earning $10 million annually from taking oil without paying for it. Employees were encouraged to be long or over what Koch paid for when they extracted oil from tanks in the fields.
In 1999, Koch Industries pled guilty to violating environmental laws, for dumping ammonia and allowing leaks to pollute land and waters for years at its Pine Bend refinery in Minnesota. The company paid big fines and got a lot of bad press for stealing from the Indians and polluting the Earth.
After these disasters, including the big loss from Purina Mills, Charles Koch fired all of his division managers and gutted his Wichita office, eliminating 500 positions and 300 contractors. The company changed its corporate structure, hired new leaders, who added a new incentive program that included rewards for compliance, not just profitability.
His new slogan was 10,000% compliance meaning that employees obey 100% of all laws 100% of the time.
This ushered into an era of substantial growth, funded in part by the huge cash generated by the Pine Bend operation in Minnesota.
"This change in Koch's corporate structure and strategy ushered in a decade of unprecedented growth," Christopher Leonard wrote in Kochland (page 223). That growth included the acquisition of Georgia Pacific.
Warren Buffett
In 1997, I went to the annual meeting of shareholders of Berkshire Hathaway in Omaha and listened to Warren Buffett and Charlie Munger for over six hours. I asked Warren Buffett a question about tobacco stocks, and he and Charlie talked about tobacco stocks for about 20 minutes. Buffett said that Berkshire had owned tobacco stocks in the past and they looked at buying a chewing tobacco company, but didn’t. Berkshire owns assets that distribute tobacco products and he said he doesn’t have a problem with that. With tobacco companies, He said “we were uncomfortable enough about their prospects overtime that we did not feel like making a big commitment to them.”
In Warren Buffett’s response, you can hear the caution in his analysis of tobacco stocks. So he set their eyes elsewhere on where to deploy capital.
Warren Buffett was born on August 30, 1930, the second child of Howard Buffett and his wife, Leila Stahl.
From a very early age, Warren Buffett excelled at mathematics. He had a knack for business and also loved journalism. He sold cola, magazines and chewing gum door to door. He also delivered newspapers. When his father Howard Buffett was elected to Congress Warren Buffett started carrying the Washington Post. He found out he could make more money by serving the high-rises where he could quickly deliver hundreds of newspapers from apartment to apartment pretty quickly.
Another early venture was investing in pinball machines. He and a friend bought some machines and had them installed in barbershops. When these teenagers came to collect the money from the machines, the barbers thought they were just working for somebody else but actually these kids were pure play Capitalists, they owned the machines. They sold the pinball business for $1200 to a WWII veteran.
The pinball machine is sort of symbolic of the type of business Warren Buffett likes to own: a machine that generates lots of cash and is low maintenance.
While Charles Koch got a nice lift financially from his father Fred, Warren Buffett received mostly mentorship and encouragement from his father, Howard Buffett, who was a stockbroker. As a teen-ager and young adult Buffett worked various jobs, saved his money and invested it.
Warren Buffett early on, wanted to become rich and study business. He was net worth about $10,000 at age 19, $140,000 by age 26 and $1 million by age 30.
Buffett went to Wharton Business school for two years, but finished his bachelor's degree at the University of Nebraska-Lincoln and later went to Columbia University to study under Benjamin Graham.
Benjamin Graham was a deep-value-investor who wrote The Intelligent Investor which showed a Quantitative way to come up with an analysis on a company to see if it’s trading below its intrinsic value. Often times they would find stocks that were trading well below their intrinsic value and look for a way to make profit on them.
"The basic ideas of investing are to look at stocks as business, use the market's fluctuations to your advantage, and seek a margin of safety. That's what Ben Graham taught us. A hundred years from now they will still be the cornerstones of investing," Buffett has said.
Buffett worked for Graham Newman for awhile and was a star analyst and investor there and probably could have become a partner there but turned it down to go his own way.
As early an investor, Buffett was looking at companies that were trading below book value, so there was a margin of safety in the stock. Sometimes a company trading so cheap, at 7 times earnings and less than book value, was because its best days were behind it and now it's on the decline.
One of those companies was the Sanborn Map Company, which started in 1866. It provided maps to fire insurance companies to help them determine risk of fire.
Sanborn maps have detailed descriptions of buildings and addresses, and potential hazardous places but they also showed in great detail what was of in a community at the time.
For example, you can find some old Sanborn maps of the Topeka Room at the Topeka and Shawnee County Library. These maps will show your house lot in say 1905. By 1958 the stock was trading at $45 per share, which was really cheap considering Sanborn's investment portfolio alone was worth $65 per share. To get a hold of that investment portfolio Warren Buffett got on the board with the help of friends and family who bought the stock. Eventually he controlled 1/3 of the stock, he convinced the to repurchase shares at fair value, paying with a portion of its investment portfolio. 77% of the outstanding shares were turned in. Buffett had reaped a 50 percent return on investment in just two years.
By 1959 Warren Buffett met Charlie Munger who was to have a lasting influence on Buffett's investment style. Rather than chasing cigar butts, Munger encouraged Buffett to buy high quality businesses, he said, "Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices."
In 1963, American Express got caught having to support receipts for the sale of soybean oil from Anthony Tino DeAngelis. DeAngelis had a shady past and once sold tainted meat to the government school lunch program, he had become a huge dealer in soybean oil. He found out nobody really cared to check what’s actually inside the tanks of oil, so he began filling them with seawater, and still getting receipts that he used as collateral to borrow from 51 banks. American Express stood as guarantor of the quantity of oil behind those receipts. DeAngelis owed his lenders about $150,000,000 to $175,000,000. Stock in American Express fell about 50%. Warren Buffett put Henry Brandt on the case. Brandt researched American Express extensively. Buffet began to buy the stock furiously trying to buy as many shares as he could without driving up the price.
Buffett encouraged the American Express management to pay the liability to retain the good name and trust of customers in American Express. Buffett had what he would later call a "high probability insight" about American Express that confounded Benjamin Graham's core idea. Unlike companies whose value came from cash, equipment, real estate and other assets that could be calculated and if necessary liquidated, American Express had a little more than its customers' Goodwill. This goodwill had value, and Buffett put a price on it. American Express turned out to be a fantastic investment and is still held by Berkshire Hathaway today.
Warren Buffett would in his early days put as much is 30% of his portfolio in one stock. Which is very risky really. But he calculated his risk pretty carefully he knew mathematically what things were worth.
$10,000 invested in his Buffet partnership in 1957 was worth $260,000 in 1969, according to Forbes. In an article the partnership at that time had $100 million and had grown at an annual compound rate of 31%. Over that 12 year. and during that time it hasn’t lost or it hasn’t had one year in which it lost money.
You’re doubling your money, every 2.3 years.
His net worth was about $26.5 million in 1969.
Berkshire Hathaway
In 1888 Horacio Hathaway and Joseph Knowles organized a group of partners to create textile mills. Aschnet Mill Corporation & Hathaway Manufacturing Company was formed. One of the partners was Hettie Green, the notorious witch of Wall Street, a shipping heiress raised in New Bedford, Massachusetts. She was so tight that when her son broke his leg, she didn’t want to take him to the hospital and his leg got deformed. She supposedly had a hernia but kept a stick on it to keep it in. She inherited $7 million but turned that into a fortune of over $100 million; she made a fortune in Northern Civil War bonds.
In 1955, Berkshire Fine Spinning Associates, founded in 1889, merged with the Hathaway Manufacturing Company.
Eventually, the Stanton family took control of Berkshire Hathaway. Seabury Stanton was the prince leader, who butted heads with Warren Buffett in the early 1960s.
Seabury Stanton had agreed to buy stock from Buffett at a certain price, but reneged on the deal and pissed off Warren Buffett, according to snowball author, Alice Schroeder. Eventually Buffett started buying more shares of Berkshire Hathaway and took control of the company in 1965.
Buffett said Berkshire Hathaway was a terrible investment because the long term prospects of the textile industry was not promising. Over time, the company eventually closed all its mills. Buffett decided to make Berkshire Hathaway as a holding company for other investments.
Since Berkshire purchased National Indemnity Insurance in 1967, property and casualty insurance has been a core business and the propellent for growth. Insurance provided a float -- insurance premium held before being paid out in claims. This float was used for investments in securities, stocks, bonds and other businesses that have given the company a multitude of cash generating machines.
He was buying Berkshire stock at $9 to $11 per share. A single share of Berkshire Hathaway class A is now worth $619,000 per share
Today after a 50 for one split and the significant appreciation of our B shares, our original $4400 investment today is worth a $82,000.
Buffett actually is a fairly conservative investor. Using his valuation techniques, he determines a margin of safety and a target price for acquisition. He uses fluctuations in the market to acquire the stock at discounted prices.
In the 1970s, when the stock market was really cheap, Buffett sold stocks trading at 7 times earnings to buy stocks trading at 3 times earnings.
Northern Natural Gas had been headquartered in Omaha, but Ken Lay of Enron wrestled it away and moved it to Houston in the 1980s.
When Enron went bankrupt, Dynegy acquired Northern Natural Gas, but that company needed cash and quickly sold it to Buffett at 7 times earnings. Northern Natural Gas is now part of the Berkshire's energy unit.
Warren Buffett has always loved trains, he enjoys travel by train and has an extensive model train set in his house.
Yet for many years, he and Charlie Munger avoided railroads because of their high overhead, constant need for capital, with so much for maintenance and upkeep.
Buffett and Munger watched a lot of railroads go bankrupt by 1980 but by year 2000 they had consolidated to the point where the largest railroads had more economies of scale and higher profit margins.
Buffett started buying all the publicly traded railroads in 2009, and then particularly focused on Burlington Northern Santa Fe Railway, news of this spread on CNBC, Wall Street Journal. I followed him, buying shares in all the railroads, particularly BNSF Railway and Union Pacific.
When Buffett bought BNSF Railway in 2010, it was his biggest acquisition to date, about $40 billion including debt, he called it an all in wager on the economic future of the United States, "I love these bets.” He paid $100 per share of BNSF Railway stock, about 18 times earnings.
Another big bet was placing $35 billion into Apple stock. That position grew into a $174 billion position by on Dec. 31, 2023, but is now worth $150 billion after Buffett sold some Apple shares.
Berkshire Hathaway operating earnings were $37 billion in 2023, up 17% over 2022's $30 billion.
Buffett is worth about $134 billion. He plans to pass his assets to charity after his death. He already gave some assets to his children. He is 93 years old.
So prized by collectors, the old annual reports of Berkshire Hathaway sell for a lot of money on eBay. For example the company's 1998 annual report sells for $1099.99 on eBay.
Favorite Warren Buffett Quotes
The first rule of an investment is don't lose money. And the second rule of an investment is don't forget the first rule.
The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.
It's what you do right now, today, that determines how your mind and body will operate ten, twenty, and thirty years from now.”
It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.
“You’ve gotta keep control of your time, and you can’t unless you say no. You can’t let people set your agenda in life.”
“There seems to be some perverse human characteristic that likes to make easy things difficult. ”
Some online dictionaries even call such a person a 'complicator.'
Honesty is a very expensive gift, Don't expect it from cheap people
The most important investment you can make is in yourself.
Buffett's wealth is 99% in Berkshire Hathaway stock. "Charlie and I feel totally comfortable with this eggs-in-one-basket situation because Berkshire itself owns a wide variety of truly extraordinary businesses."
No comments:
Post a Comment