Berkshire Beyond Buffett(2)
While Berkshire Hathaway’s textile operation continued to deteriorate after 1965, Buffett was simultaneously building what turned into a force in the insurance industry, a fortress in the investment field, and the most unusual conglomerate in history. In 1967, Berkshire acquired two Omaha-based insurance companies, National Indemnity Company (NICO) and National Fire & Marine Insurance Company, for a combined $8.5 million.
These insurance operations provided a source of capital, as customers pay premiums that the insurer holds until needed to cover claims. As an investor, Buffett relished this source of capital, referred to as float. Berkshire deployed float in three ways in the ensuing five decades: to reinvest in and grow the insurance operations, to buy minority stakes in larger companies, and to acquire wholly owned subsidiaries.
During the 1970s, Berkshire used much of the considerable float that NICO and its other insurers generated to expand insurance operations, including acquiring a minority position in Government Employees Insurance Company (GEICO). To strengthen capital resources and broaden policy reach, Berkshire formed or acquired numerous other insurance companies—all of which remain viable today.1
But insurance was not Buffett’s only interest. Among Berkshire’s first noninsurance acquisitions was Sun Newspapers of Omaha, Inc., a group of area weeklies acquired in 1969. Fellow Omaha denizen and Buffett family friend Stanford Lipsey ran the company. Although the company was never financially significant, it put a feather in Berkshire’s cap.2 In 1973, Sun won a Pulitzer Prize for a series of stories about Boys Town, the orphanage on the outskirts of Omaha immortalized by the 1938 movie of the same name starring Spencer Tracy as its visionary founder, Father Edward J. Flanagan. The orphanage occupied a sizable boarding school campus, thanks to endless fundraising campaigns that pled both the school’s noble mission and its persistent poverty. In 1972, therefore, many knew about its excellent program, but few had any inkling that the school’s endowment exceeded $200 million.3 The public discovered this truth—and the related mismanagement—as a result of the investigative reporting of Sun Newspapers.
The newspaper industry was also among the earliest Berkshire common stock investments. In 1973, Berkshire acquired a minority stake in the Washington Post Company, a holding company controlled by the Graham family and named after the metropolitan newspaper it owned. The family matriarch, Katherine (“Kay”) Graham, had taken the company public in 1971 by selling Class B shares, held in large numbers by its employees.
Acquiring blocks of the shares on the open market, Buffett assured Graham that he respected the family’s traditions and management and did not wish to interfere with either.4 Over the ensuing decades, the two developed a relationship that could be seen as a model between an astute shareholder and an owner-oriented manager. Graham sought Buffett’s counsel, and he backed her decisions.5
In stages during the early 1970s, Berkshire made another large and defining investment as it acquired a majority of the stock of Blue Chip Stamps. The company had something in common with both Berkshire’s textile business and its insurance companies. Like the insurance companies, it generated float; like the textile business, it was dying.
Trading stamps were a marketing device popular in the 1950s and 1960s. Companies like Sperry & Hutchinson (S&H) Green Stamps and Blue Chip sold stamps to retailers, such as gas stations and grocery stores, who distributed them to customers in proportion to a sale. Customers redeemed accumulated stamps for a selection of consumer goods like coffee makers and toasters. The stamp companies got cash from retailers up front but did not incur prize costs until redemption, thus creating investable float.
A group of California retailers formed Blue Chip as an alternative to S&H and then monopolized the state’s market. Rivals, including S&H, sued for damages, and the government required the company to sell much of its ownership to unrelated parties. That made Blue Chip an investment opportunity for many, including not only Buffett but the manager of a California investment partnership, Charles T. (“Charlie”) Munger, a polymath who in 1962 also co-founded a Los Angeles–based law firm, today’s prominent Munger, Tolles & Olsen.6 Buffett, through Berkshire and other vehicles, became the largest shareholder of Blue Chip, Munger’s partnership being Blue Chip’s next largest shareholder.7
By virtue of their respective Blue Chip investments, Buffett and Munger became functional business partners and began a lifelong friendship. Munger, an Omaha native then living in Pasadena, California, contributed to Berkshire culture from the start. He encouraged Buffett to adopt a long-term view of business opportunities, rather than the approach of bargain hunting Buffett had practiced in his early career. Munger advised that it’s better to buy a good business at a fair price than a fair business at a good price. In addition, Munger embraced a more qualitative approach to investment than Buffett had, factoring in not only statistical analysis of balance sheet quantities and earnings, but soft factors like entrepreneurship, integrity, and reputation.