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WB Letter 1960
In 1959 letter, Mr. Buffett had made an investment of 35% of net assets in the company named Sanborn Map Co.
Maps are immensely useful to the fire insurance companies. Business is operated in a monopolistic manner and without the need for strong sales efforts. Earlier, the insurance companies had feared for the profit of Sanborn Map and hence they placed a number of prominent insurance men to Sanborn’s Board Of Directors to act as a watch-dog.
In 1959, the ratio of PAT reduced to $100000 as compared to $500000 as in the year 1930. The company began to make investment portfolios since they did not need any further capital to run the business. Over a period of time, their investment was accumulated to $2.5 million; of which roughly half was in bond and half in stocks. These investment portfolios worked well but the map business lost its shine.
In the year 1938, the stock was traded at $110 but the value reduced to $45 in the year 1958; whereas their investment per share value increased from $20 to $65. Hence, their stock is available for negative $20 against the investment portfolio.
The company had sales volume of $2 million per year and they owned $7 million worth of marketable securities. Their income from investment portfolio was substantial enough to take care of their company’s finance. Regular dividends were paid to all the stockholders but there was a decrease seen in the dividend payout for a constant of 5 times in a period of 8 years. As against this; there was no reduction in the salary of the directors.
Board of directors held a minimal position in the Sanborn shares. Buffett proposed to separate the investment portfolio business from the map business. Hence, after the death of the president of Sanborn; his part of shares (around 15000) were bought by Warren Buffett and another 24000 from the open market. Apart from this; there were 2 large stockholders who held 10000 and 8000 shares respectively. They were unhappy with the current situation of the company and they desired to accept the proposed idea of Buffett of separating the business.
Mr. Buffett wanted to work on re-establishment of earning power of the map business. In the same instance, they got an opportunity of converting their physical goods to electronic goods which will multiply their profit for the map business.
Indian company example – Before 2006, the company was involved in the manufacturing of scooters. But the company discontinued to manufacture in 2006 and became an investment company with the profit that they had made from the sales. At the end of FY2013, the market value of investment portfolio of the company was worth Rs.2034 crore; whereas stock was traded at the market capitalization of Rs.440 crore (stock price of Rs382). Currently, the company is trading at the market capitalization of Rs.3172 crore (stock price of Rs.2775). The company is also paying out healthy dividends.
Mr.Buffett also mentioned that no one should jump to conclusions by reviewing one-year performance. One needs to at least measure five years of performance in both strong and weak markets.
WB Letter 1961
Mr. Buffett had identified few mutual funds and done a comparative performance of mutual funds with the market and with his partnership.
We can see that Mr. Buffett has outperformed in mutual funds with a heavy margin.
Mr. Buffett used 3 methods of operations as below –
1) Generals
The general situation works with the market situation. The investment outperforms in the bull phase and declines sharply in the bear phase. These investments work well in a longer period of time.
2) Work-outs
The work-out situation provides stable and safer earnings and due to that Mr.Buffett use borrowed money to take an advantage of work-out situations. In the bear phase; we get better results and in the bullish phase; we get bad performance.
3) Control
During 1961, Mr. Buffett owned around 70% stake of the Dempster Mill, which was a fall into a control situation category. Initially, Dempster Mill was started as a value investment (General) category but as time passed, this investment came under control situation when an additional stake was purchased by Mr. Buffett.
The detailed discussion of Dempster Mill investment will be done in the later series of Warren Buffett’s letter.
Few people who want to invest conservatively, have bought government bonds and few others bought blue-chip securities regardless of Price to Earning ratio, dividend yield, etc. with a belief of getting benefits by investing in the bonds.
Mr. Buffett has always emphasized on better performance during a bear market and getting the similar return in a bull market.