Warren Buffett 25 Best Quotes

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Buffett declared the best inflation hedge is a company with a wonderful product that requires little capital to grow. As a test, he invited each of us to look at our own earning ability. In inflation, your compensation can go up without any additional investment. As a business example, Buffett noted that when See’s Candy was purchased in 1971, it had the revenues of $25 million and sold 16 million pounds of candy annually with $9 million in tangible assets. Today, See’s sells $300 million of candy with $40 million of tangible assets. Berkshire needed to invest only $31 million to generate a more than 10-fold increase in revenues. In aggregate, Buffett noted that Berkshire has earned $1.5 billion in profits at See’s over the years. See’s inventory turns fast, has no receivables and has little fixed investment – a perfect inflation hedge. Buffett allowed that if you have tons of receivables and inventory, that’s a lousy business in inflation. The railroad and MidAmerican Energy both have these undesirable characteristics, but that is offset by their utility to the economy and subsequent allowable returns. Buffett rued that there simply aren’t enough “See’s Candys” to buy. Buffett added that being an investor has made him a better businessman and that being a businessman has made him a better investor.(125) Munger noted that they didn’t always know this inflation-business element, which shows how continuous learning is so important.

Buffett bought 25 shares of Marshall-Wells in 1950 at $200 per share for a total investment of $5,000. Buffett made the investment through a 50–50 partnership with his father, making his attributable stake $2,500, about a quarter of his net worth. Marshall-Wells had an $11.4 million market capitalization at his purchase price, and with net cash on the books, only a $7.0 million enterprise value.

P&R acquired Union Underwear for $15 million. The deal was a big swing for P&R, with the purchase price equal to 35% of its beginning-of-the-year assets. But beneath the big headline number, there were several factors that reduced risk. The deal was done at a salivating valuation: Union was earning $3 million in pre-tax profits—one-fifth of the purchase price—that would be partially sheltered by P&R’s tax loss. Moreover, P&R structured the compensation of Union’s management in an attractive manner: The company provided Goldfarb with a five-year management contract as well as a bonus of 10% of the subsidiary’s operating profits (subject to both a minimum and a cap), ensuring he stayed on and incentivizing him to grow the business.160 Finally, the deal’s consideration was also interesting, which Buffett later reminisced about in the 2001 Berkshire Hathaway chairman’s letter: The [Union Underwear] company possessed $5 million in cash—$2.5 million of which P&R used for the purchase—and was earning about $3 million pre-tax, earnings that could be sheltered by the tax position of P&R. And, oh yes: Fully $9 million of the remaining $12.5 million due was satisfied by non-interest-bearing notes, payable from 50% of any earnings Union had in excess of $1 million. (Those were the days; I get goosebumps just thinking about such deals.)161 Although the P&R board had approved the Union acquisition, Ben Graham was angered by its conservatism and pushed to add more directors. The other members obliged, ceding five additional seats to Graham allies. Jack Goldfarb and Louis Green of Stryker & Brown—the same Louis Green from the Marshall-Wells chapter—were among those added.

In his 1961 letter to partners, Buffett laid out three broad categories of investments: generals, workouts, and controls. Generals were undervalued securities where Buffett had no say in corporate policies, nor a timetable for when the stock might reflect its intrinsic value. Buffett pointed out that the generals would behave like the Dow in the short term but outperform the index over the long term. Buffett expected to have five or six positions in this category that were 5% to 10% of total assets each, with smaller positions in another ten to fifteen. Later on, in his 1964 letter, Buffett would break generals into two categories: private owner basis and relatively undervalued. Private owner generals were generally cheap stocks with no immediate catalyst, while relatively undervalued securities were cheap compared to those of a similar quality. Relatively undervalued securities were generally larger companies where Buffett did not think a private owner valuation was relevant.173 Workouts were securities whose performance depended on corporate actions, such as mergers, liquidations, reorganizations, and spin-offs. Buffett expected to have ten to fifteen of these in the portfolio and thought this category would be a reasonably stable source of earnings for the fund, outperforming the Dow when the market had a bad year and underperforming in a strong year. He anticipated these investments would earn him 10% to 20%, excluding any leverage. Buffett would take on debt, up to 25% of the partnership’s net worth, to fund this category. While he didn’t disclose his allocation every year, he put around 15% of the partnership in workouts in 1966 but increased that to a quarter of the portfolio in 1967 and 1968, when he was having trouble finding bargains.174 The final category was controls, where the partnership took a significant position to change corporate policy. Buffett said these investments might take several years to play out and would, like workouts, have minimal correlation to the Dow’s gyrations. Buffett pointed out that generals could become controls if the stock price remained depressed.