Buffett in the '70s Was the King of Cool
In March 1971, Warren Buffett signed his name for the first time to the annual “letter to the stockholders” of Berkshire Hathaway. He’d been writing the letters since he bought the foundering New England textile manufacturer in 1965, but had been putting the name of the guy who ran the mills at the bottom of them.
By 1971 it was clear that Berkshire Hathaway wasn’t really going to be a textile company. After briefly describing how crummy the fabric business was, the letter devoted far more ink to the insurance operations Buffett had begun to assemble in 1967. It also cited lots of executives by name for good work, and inaugurated the practice of referring to them on second reference by their first names -- a hint of the rampant Uncle Warren folksiness that was to come.
It was just a hint, though, and for the rest of the 1970s the letters were pretty straightforward. They just described Berkshire’s evolving business -- what was working, and what wasn’t -- and offered a bit of explanation or speculation as to why. They aren’t as much fun as the “tone-deaf Randian” Buffett Partnership shareholder letters of the 1960s, which my Bloomberg View colleague Matt Levine says are his favorite, and they’re certainly not as laden with wisdom as what was to come after 1980.
Still, I’m going to take a stand and declare that 1970s Warren Buffett is totally the coolest Warren Buffett. You know, after he stopped smashing guitars on stage, but before he sold out -- or at least, before he started hanging out with Jimmy Buffett.
I’ve been reading the 1970s letters because Buffett’s Berkshire shareholder letter No. 50 is coming out Saturday morning and I figured I should brush up. All the letters since 1977 are online at Berkshire’s website; the earlier ones can be found in a book assembled by money manager Max Olson. I’ve read a lot of the more recent letters before, and I knew the basic story of Buffett’s 1970s investments, but the 1970s letters were nonetheless a revelation.
Back then in the Me Decade, Buffett wasn't the legendary Oracle of Omaha he was to become. For one thing, hardly anybody was reading the letters. Berkshire didn’t have all that many shareholders, and before it was listed on Nasdaq in 1979 its annual and quarterly reports got no media attention. But the letters do show Buffett evolving from the brash young money manager he had been into an odd, and spectacularly successful, hybrid of investor and manager.
In the 1950s and 1960s he had run the Buffett Partnership, a vehicle for investing in the stock market that today would be called a hedge fund (albeit with an unconventional fee structure). He acquired Berkshire Hathaway in 1965 basically out of spite -- as Alice Schroeder describes it in her Buffett biography, “The Snowball,” he’d bought a bunch of shares because they were cheap, made a deal to sell them back to Berkshire and then was so infuriated when Berkshire set its tender offer price lower than agreed that he ended up buying the whole company. He soon realized that he had made a terrible decision. The company and its industry seemed to be in terminal decline, and shutting it down and selling off the assets would be a publicity disaster. So he held on, and after shutting down the Buffett Partnership in 1969 because he thought the stock market had gone mad he turned Berkshire -- which he had spun out to his partnership’s investors -- into his main investment vehicle.
The approach at first was to buy strong, smallish businesses that weren’t publicly traded and leave the previous owners in charge. Then, after stock prices collapsed in the early 1970s, Buffett began wading into public markets again. His first real discussion of this came in the March 1976 letter:
Our equity investments are heavily concentrated in a few companies which are selected based on favorable economic characteristics, competent and honest management, and a purchase price attractive when measured against the yardstick of value to a private owner.
In the very next sentence Buffett for the first time disclosed one of these minority holdings: 467,150 shares in Washington Post “B” stock, “which we expect to hold permanently.” OK, maybe not permanently -- Berkshire divested most of its stake in the Post’s successor company, Graham Holdings, last year -- but four decades is still a pretty long holding period.
In subsequent years Buffett elaborated on this theme that his stock market investments should be judged by their earning power, not their market value -- and that declines in the market value of Berkshire’s stock portfolio were actually a good thing because they meant he could buy even more earning power on the cheap. This view is a Buffett trademark now, but it was much different from the tune he was singing in the 1960s when he trumpeted huge gains in the market value of his portfolio even as he warned that they probably wouldn’t be repeated.
With the operating businesses, Buffett generally followed the approach he outlined in March 1980 (I figure that still counts as a 1970s letter because it was about the year 1979):
We feel that you, as owners, are entitled to the same sort of reporting by your manager as we feel is owed to us at Berkshire Hathaway by managers of our business units.…We don’t expect a public relations document when our operating managers tell us what is going on, and we don’t feel you should receive such a document.
His discussions of the textile business definitely met this standard. From March 1979:
We hope we don’t get into too many more businesses with such tough economic characteristics. But, as we have stated before: (1) our textile businesses are very important employers in their communities, (2) management has been straightforward in reporting on problems and energetic in attacking them, (3) labor has been cooperative and understanding in facing our common problems, and (4) the business should average modest cash returns relative to investment.
The unsentimental capital allocator (the phrase “capital allocation” didn’t actually show up in a Berkshire letter until 1981, but it’s clearly what Buffett saw as his chief job well before then) had a soft spot, it seemed. Of course, Buffett did finally give up on textiles, in 1985. But hey, 1970s Buffett didn’t.
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