In this video, you will learn about the top 25 most important investment decisions that Warren Buffett, the greatest investor of all time, has ever made. The deals that made him a legend and a billionaire. For anyone interested in understanding Buffett’s investment strategies, it is essential to know about these deals. And I think you might be surprised even if you’ve seen a few videos about Buffett or read a couple of books about him before. For example, his investment in Apple for about $36 billion doesn’t even appear on this list. This is The Swedish Investor, Bringing you
the best tips and tools for reaching financial freedom, through stock market investing. Before revealing the number 25 spot on this list, which is Disney, let’s sort out what these rankings are based on. To avoid hindsight bias, I will present investments with both good and bad outcomes. What matters is how convinced Warren Buffett was at the time of purchase, or, in other words, how much he was willing to commit to a certain investment. So, a deal of $10m at a time when Buffett was worth “just” $100m will be ranked higher than a deal of $20m at
a time when he was worth $500m. With that out of the way … The 25th most important deal ever made by Warren Buffett is Disney. In 1966 Buffett bought the Walt Disney Company through his then existing investment partnership, Buffett Partnership Limited, or BPL. The partnership spent $4m for about 5% of the company at a time when the market cap of Disney was $90m and it had $11m in earnings. As Buffett had pretty much all his net worth in the partnership back then, and the partnership spent about 9% of its capital on Disney stock, this represented
9% of his then net worth. He sold the shares a year later for 48 cents each, a nice 55% return. Buffett has jokingly been saying that this decision may seem brilliant, but only if you exclude the fact that the stock is selling for $131 today. Buffett hadn’t yet learned that his favourite holding period of great companies is forever. The oracle of Omaha has revealed partly why he was interested in buying Disney at the time: - Buffett understood the recycle value of Disney’s assets. Remakes and sequels could be released frequently, and the movies would appeal to
a new crop of kids every 7 years or so. It’s like having an oil well where all the oil seeps back in. - Moreover, costs for actors could be kept down compared to other companies in the film industry. Mickey Mouse would never argue for a raise. - Most importantly, the company was selling at a fair price. Says Buffett: “At Disneyland, the $17m Pirates of the Caribbean ride would soon open. Imagine my excitement - a company selling at only five times rides!” One lesson to be learned here is that you shouldn’t sell a wonderful company too
early, even if the price might have gone up temporarily. “Time is the friend of the wonderful company, the enemy of the mediocre.” Number 24: The Washington Post From film & amusement parks to newspapers. In 1973 Warren Buffett’s Berkshire Hathaway bought a 9% stake in The Washington Post for $10.6m. Coincidentally, Buffett’s stake in the company through Berkshire also represented about 9% of his then net worth. The Post was earnings $9.7m in 1972 and had a market cap of about $110m, so the price-to-earnings ratio or P/E of the company was at 11 when Buffett purchased. At their
peak in 2005, Berkshire’s shares in The Washington Post were worth $1.7b, but most newspapers have been killed during the last two decades because of the internet. Therefore, in 2014, Buffett sold the company, and the price at that point was $740m. Why was Buffett interested in a newspaper business to begin with? - Back in the 70s, newspapers were basically like monopolies if they were dominant in their cities. Buffett liked this type of business because its pricing power was outstanding. First, everyone in Washington who wanted to be updated on what was going on in the world had
to pay for the paper. And then, as pretty much everyone in the city did this, advertisers had to pay whatever rates the Post decided on If they wanted to reach the people of Washington. - Also, the company was cheap. It had fallen from a valuation of about 180m to 110m in a very short period of time. Buffett knew that Mr. Market was acting irrationally. One takeaway from this investment is that the beta and volatility of a stock is not a good measurement of its risk. Said Buffett: “And because it happened very fast, the beta of
the stock had actually increased and a professor would have told you that the stock - company - was more risky if you bought it for 80 million than if you bought it for 170 million. Which is something that I’ve thought about ever since they told me that 25 years ago, and I still haven’t figured it out.” Moving on to number 23: Scott Fetzer Scott Fetzer was (is) a conglomerate of businesses and at the time when Warren Buffett purchased it, the two largest operations were the World Book, an encyclopaedia, and Kirby, primarily a manufacturer of vacuum
cleaners. These two companies represented more than 50% of Scott Fetzer’s earnings, and this investment shows that boredom-arbitrage really is a thing within the field of investing. The company was bought by Berkshire Hathaway on January 1st 1986 for a price of $315m, and Buffett spent 10% of his personal net worth here. This is the first deal, but definitely not the last, Where Buffett bought the entire business and not just a bunch of shares in the market. With $40.6m in net earnings in 1984, the purchase was made at a P/E ratio of about 8. It is uncertain
how great the profits of this deal have been, but we know that Scott Fetzer distributed $1b in dividends to Berkshire during the first 15 years it was owned. Why was Buffett interested in vacuum cleaners, you ask? Well, in his 1985 annual letter to shareholders of Berkshire Hathaway, Warren Buffett says that Scott Fetzer is a prototype of the sort of businesses that he wishes to purchase. It’s understandable, large, well-managed and a good earner. An interesting story related to this investment, Which also acts as an important takeaway, follows. The owners of Scott Fetzer attempted, but failed, to
sell the business in 1985 just before Buffett purchased. An investment bank had been hired for this task and was going to receive a few million dollars from the deal even though Buffett hadn’t used them at all to make the purchase. A fellow from the investment bank said to Buffett’s right-hand man Charlie Munger: “Well, we prepared this book in connection with Scott Fetzer, and since you’re paying us a couple million dollars and have gotten nothing so far, maybe you would like to have this book?” Charlie, with his usual tact said: “I’ll pay you $2 million if
you don’t show me the book.” In other words – make your own investment decisions and don’t listen to other people. Especially not investment bankers who have been paid to sell the company. It’s like asking the barber whether you should get a haircut! Speaking of Charlie Munger the 22nd most important deal of Warren Buffett is Associated Cotton Shops In 1966, Buffett, together with Charlie Munger and another guy named David Gottesman formed a company called Diversified Retailing. This was the first time that Buffett and Munger cooperated financially and their friendship proved to be a very fruitful one.
Charlie Munger has been the vice-chairman of Berkshire Hathaway since 1984 And he has had a great influence over Buffett and therefore over many of the investments on this list. Associated Cotton Shops (later renamed Associated Retail Stores) was a company of popular priced women’s apparel stores. In 1967, Diversified Retailing bought the whole company at a price of $4m, which represented 11% of Buffett’s net worth when you take his stake in Diversified into account. Based on the company’s net income in 1968, this deal was made at a P/E of 4. Yes, 4! The results of the deal
are not separately identifiable, but in 1979 Buffett mentioned that: “Ben Rosner, at Associated Retail Stores, continues to pull rabbits out of the hat - big rabbits from a small hat. Year after year, he produces very large earnings relative to capital employed” My guess is that Buffett bought this company due to its price, and because he liked the management a lot. But moreover, this investment highlights Buffett’s preference for businesses with a high return on assets. Buffett has said that the earnings on capital employed in Associated Cotton Shops were around 20%. Number 21: Exxon This is an
interesting one, as it qualifies as the shortest holding period for any investment on this list. Buffett, through Berkshire Hathaway, bought the oil producer Exxon in 1984, before the company had become the giant that is today, Exxon Mobil. It was already large at this time though, with a market cap of around $20b. Buffett bought just short of a single percentage of the company and paid $173m for this. Buffett’s wealth in mid-1984 was in the region of $680m, and as he now owned 46% of Berkshire’s shares outstanding, so the deal represented 12% of his then net worth.
Once again, the stock was fairly cheap, at a PE of 7-ish. The shares in Exxon were sold again in 1985. Based on its stock price in 1985 I estimate that the return on this particular investment was in the region of 30%. So, why did Buffett invest in an oil company in 1984? Well, there’s no information about this that I could find, But part of the reason could be that Buffett was making a bet on oil prices. Crude oil had dropped from about $38 in December 1979 to $28 in 1984. If that was the case, Buffett
really dodged a bullet here, as the prices dropped all the way down to $10 in 1986. Puh! A takeaway here is that even the legendary long-term investor Warren Buffett himself makes short term moves sometimes, instead of just sitting on a bunch of cash. Interestingly, Buffett made a similar move in 2013, when he bought 0.9% of the then merged Exxon Mobil. At this point, the price for the company had increased 20-fold. Buuuut, Buffett’s net worth had increased almost 100-fold, So the trade in 1984 was more important than the one in 2013. Number 20: Kaiser Aluminum &
Chemical A typical industrial company with operations within, well, you can probably tell by the name of it, appeared on Buffett’s radar in 1977. Or possibly much earlier, but this was when Buffett made his first purchases through Berkshire Hathaway. By 1979 he had acquired approximately 3% of the shares in the company for an aggregated price of $20.6m and this represented some 12% of his net worth. Buffett sold in 1981, and, assuming that he got the market price which was last listed in the Berkshire Annual reports, The result of this investment was a 35% return. Not too
bad, but for a holding period of 3-4 years, it wasn’t quite Buffett-standard. This company was priced just as silly as Associated Cotton Shops, at a PE of 4, which I think is part of the reason why Buffett invested. After all, there was still a lot of Benjamin Graham left in him, who emphasized that tangible assets and current earnings are the most reliable measurements which investment decisions could be based on. Number 19: SAFECO Here comes a major jump in percentages of net worth invested, but it is nothing compared to what you will see later in this
video. Primarily in 1978, Buffett purchased 6% of the shares of SAFECO, A property and casualty insurance company. Shares were purchased through Berkshire Hathaway and another company that Buffett controlled called Blue Ship Stamps, which we’ll talk about later. The investment represented 17% of his net worth in total. The company had a really low P/E ratio, but it is important to know that earnings of insurance companies fluctuate. They fluctuate A LOT. One year there are few claims to be paid and investment profits are high, the next year just the opposite might be the case. Anyways, the company
was sold in 1981 & 1982 and the return on this particular investment was 50%. Buffett describes one of the reasons for being in SAFECO in his 1978 letter to Berkshire shareholders: “SAFECO probably is the best run large property and casualty insurance company in the United States.” Sometimes it doesn’t have to be more complicated than that! The number 18 most important investment Warren Buffett has ever made is in Capital Cities-ABC First, some history about this giant of a media company: “On March 19, 1985, Capital Cities announced that it would purchase ABC for $3.5 billion, which shocked
the media industry, as ABC was some four times bigger than Capital Cities The deal was, at the time, the largest non-oil merger in world business history” Buffett helped finance this deal through Berkshire, and, in exchange for $516m, Berkshire received about 18% of the shares of the merged companies. Based on the 1986 earnings, this meant that Buffett purchased at a P/E ratio of 16, and he was betting 17% of his net worth on this single transaction. This may seem quite pricy if you compare it to the previous deals that you’ve seen in this video so far
(but not if you compare it to the current price of stocks, hahaha) Luckily, it turned out great anyways. 1/3 of the holding was sold in 1993 for $600m meaning that Buffett had already made a small profit + 2/3 of his holding still intact. Keeping that remaining part proved to be a smart move as in 1996, Disney acquired Cap Cities-ABC in a huge deal that meant that Berkshire would receive $1.2b in cash and $1.3b in Disney stock. The total profit of this deal was thus $2.6b, or a return of 500%. Here are two reasons why I
think that Buffett was interested in Capital Cities: - It owned valuable properties, such as TV and radio stations. The company was in no way a net-net stock, but these properties could still be sold for a considerable part of what the whole company was selling for. - The company was managed by Tom Murphy, arguably one of the greatest managers of all time. Tom Murphy and Dan Burke are not only great managers, they are precisely the sort of fellows that you would want your daughter to marry” A takeaway from this is that patience truly is key when
it comes to investing. Buffett had known about Capital Cities for a long time, he even owned the stock for a while in the late 70s. He knew it was a great company with great management, But he was simply waiting for the right price. He waited for approximately 10 years, which kind of makes me instantly regret about complaining that the market has been expensive for a while. Number 17: Burlington Northern Santa Fe, BNSF Here’s a more recent investment. Between 2006-2010, primarily in 2010, Berkshire bought all of the outstanding shares in one of two of North America’s
largest freight railway companies, BNSF. BNSF is a HUGE company, almost large enough just in itself to qualify on the Fortune 500 list. Berkshire paid a total of $33b for the company, which represented 18% of Buffett’s net worth at the time, Adjusting for his ownership in Berkshire. In acquiring the final 77.5% of the company in 2010 Buffett did something that he truly hates doing: "Our blockbuster deal with BNSF required us to issue about 95,000 Berkshire shares that amounted to 6.1% of those previously outstanding. Charlie and I enjoy issuing Berkshire stock about as much as we relish
prepping for a colonoscopy.” The reason is quite simple. Buffett does not like to pay 6.1% of the outstanding businesses which he already owns in Berkshire such as Coca Cola, GEICO, General Re, American Express etc. By issuing 6.1% of Berkshire stock, he loses 6.1% of his interest in these businesses. But him and Charlie thought that BNSF was worth it. With a net income of $2.1b in 2008 and $1.7b in 2009, the P/E of the final purchase ranged between 16-20. However, the earnings of the company has increased a lot lately, and based on the earnings of $5.5b
in 2019, the P/E would be brought down to 6. In BNSF I think Buffett saw an asset which: - Is tough to compete with - Is difficult to substitute; and - Will require more cash to be invested in the future at fair returns, in a world where interest rates could be very low. Buffett’s unwillingness to issue Berkshire stock in making new deals (with BNSF being an exception though) Teaches us a valuable investing lesson: Oftentimes the best bet you can make is to just double down on what you already own. Before continuing with the next deal,
we shall have a quick look at which investment vehicles that Buffett controlled in the 60s, 70s and 80s as this is important to understand his coming investment decisions. In 1962 Buffett pooled multiple separate investment partnerships into a single larger one, BPL. He operated this partnership until 1970, when he thought he had run out of good investment opportunities for a while, and therefore, chose to disband it. In 1966 he formed Diversified Retailing together with previously mentioned Charlie Munger and David Gottesman. Buffett later acquired personal stakes in this entity outside of BPL. In 1962 he found Berkshire
Hathaway which he, BPL and Diversified all invested in together. You see now that this is getting kind of complex, but then you don’t know about the final piece of the puzzle yet, which is Blue Chip Stamps. And yes, you guessed it. Both Buffett, BPL, Diversified AND Berkshire Hathaway owned shares in this company at some point. And then all of these investment vehicles purchased other companies separately. It is no wonder that the SEC took an interest in this back then. No legal actions were taken though, and in 1983 Buffett had untangled this financial knot by merging
everything into Berkshire. Except for BPL which he terminated in 1970. I think that this is the reason why no one (that I know of at least) has tried to make a top list like this one about Buffett’s investments before. Calculating Buffett’s interest in a deal when Blue Chip Stamps was the acquirer and Buffett simultaneously increased his said interest in Blue Chip, is an exercise which can get quite bothersome. And the next investment on our list is just such a holding. Number 16: Pinkerton Pinkerton was (and still is) a service firm which offers uniformed guard services.
Back when Buffett bought this, Wall Street used to refer to this as the rent-a-cop business. Pinkerton was the largest player in the US at that time. Buffett purchased this company for Blue Chip Stamps during the period 1976-1978. Simultaneously, he increased his interest in Blue Chip from 34-41%. The purchase price for a final 37% of Pinkerton was $24m and Buffett’s stake in this, including indirect purchases in Blue Chip, was 19% of his then net worth. In 1983 Pinkerton was purchased by American Brands for$162m and Buffett’s return on this deal amounted to 150%, plus some dividends. There’s
an important takeaway from Buffett’s structuring of his investment vehicles here, which is that by owning multiple businesses you can leverage control. Buffett didn’t want control over the operations of these companies, but he sure wanted control over their capital. Here’s an example: Say that you have $510,000 to invest, but you want more. Then you find company A, B and C. For simplicity, these companies are just holders of $1m in cash, and as such, you can purchase 100% of any of these companies for $1m. But you only need to own 51%, or sometimes much less, of a
company to control it. So you purchase control of company A with your $510,000. Then you use company A’s cash to purchase a controlling stake in company B, and finally, you use company B’s cash to purchase company C. You’ve now turned your initial $510,000 into almost $2m which you control. Now this will only turn out to be profitable if A) you can deploy the $2m as profitable as you could deploy your initial $510,000; and b) if you can purchase more shares of A, B and C at later stages at valuations below their intrinsic value. I think
there’s no doubt that at least a) turned out to be true, as in a 1974 Forbes interview, at the bottom of the then bear market, Buffett was asked: “How do you feel?” He answered: “Like an oversexed guy in a brothel. Now is the time to invest and get rich.” A really important side-note by the way, is that Pinkerton was acquired by the Swedish security company Securitas in 1999. Number 15: Coca-Cola Warren Buffett, through Berkshire Hathaway, Purchased huge chunks of the world’s leading beverage company back in 1988, 1989 and 1994 that summed up to $1.3b and
19% of Buffett’s net worth. This is one of the more expensive purchases Buffett has ever made in terms of valuations. Based on the net income of Coke in 1987, Berkshire bought at a P/E of 19 in 1988. In 1994 they owned 7.8% of the company. Since these purchases, Buffett has not acquired any additional shares in the company, but Berkshire’s ownership has nonetheless increased to 9.2%, thanks to share repurchases made by Coca-Cola. This investment is now worth $22b meaning almost a $21b profit. Not too shabby. Nonetheless, Warren Buffett sees Coke as one of his biggest mistakes
of omission. This Coca-Cola investment provides yet another example of the incredible speed with which your Chairman responds to investment opportunities, no matter how obscure or well-disguised they may be. I believe I had my first Coca-Cola in either 1935 or 1936. Of a certainty, it was in 1936 that I started buying Cokes at the rate of six for 25 cents from Buffett & Son, the family grocery store, to sell around the neighbourhood for 5 cents each. In this excursion into high-margin retailing, I duly observed the extraordinary consumer attractiveness and commercial possibilities of the product. I continued
to note these qualities for the next 52 years as Coke blanketed the world. During this period, however, I carefully avoided buying even a single share, instead allocating major portions of my net worth to street railway companies, windmill manufacturers, anthracite producers, textile businesses, trading-stamp issuers, and the like. Only in the summer of 1988 did my brain finally establish contact with my eyes. Of course, we should have started buying Coke much earlier, soon after Roberto and Don began running things. In fact, if I had been thinking straight I would have persuaded my grandfather to sell the grocery
store back in 1936 and put all of the proceeds into Coca-Cola stock. I’ve learned my lesson: My response time to the next glaringly attractive idea will be slashed to well under 50 years. The list of why Buffett probably was interested in Coca-Cola shares goes on and on and on: - It had exceptional brand strength - It had major possibilities for expansion. Consumption in the rest of the world wasn’t even close of what it was in the US when Buffett purchased. - It had great conditions for cost control, etc. Number 14. Salomon Brothers Salomon Brothers was
an investment bank and this is a fairly unusual investment of Buffett’s. In his 1987 annual letter to Berkshire shareholders, he testifies to this himself: “We, of course, have no special insights regarding the direction or future profitability of investment banking. By their nature, the economics of this industry are far less predictable than those of most other industries in which we have major commitments.” Anyhow, in 1987 Berkshire purchased $700m of Salomon 9% preferred stock. The preferred shares also had a possibility of being converted into Salomon common stocks. Later, in 1994 I think, he spent an additional $300m
in purchasing the common stock outright. Together, these two deals represented about 22% of his net worth, again, after taking into account his ownership of Berkshire. The 20% ownership of Salomon was later sold in different stages up until 1997 when Travelers Group acquired the company. When including the preferred dividends that Berkshire received, the return of this investment was around 150%. I think the primary reason for why Buffett acquired Salomon to begin with was because he liked the terms of the instrument. 9% yearly dividends with an option to change into common shares at reasonable prices Can turn
out to be a very valuable investment, especially in a stock market which was hitting all-time-highs (Remember – Buffett prefers bear markets) In fact, many managers at Salomon were upset about this at the time. They thought that the deal Buffett got was too valuable. But it didn’t always look like it would be. In 1991 Warren Buffett had to step up as the interim chairman of the company in an act to try to restore its reputation. A Salomon managing director named Paul Mozer had been bidding for governmental securities using customer accounts, in order to receive larger portions
of these securities than were legally possible in the biddings. At one point, Salomon was close to bankruptcy, But Buffett managed to save the sinking ship. A couple of years later, he sarcastically noted: “Mozer is paying $30,000 and is sentenced to prison for four months. Salomon’s shareholders – including me – paid $290m, and I got sentenced to ten months as CEO.” What’s the lesson here? Stay within your circle of competence. Number 13. General Re General Re is a reinsurance business, which means that it is writing insurance for other insurance businesses. This typically covers risks that otherwise
could cause the individual insurance companies to go bankrupt, such as natural catastrophes. Berkshire bought this business in 1998 and acquired the whole company for $22b. This deal was financed using Berkshire stock and diluted shareholders by issuing 22% additional shares. Thus, Buffett used 22% of his net worth in this deal. When looking at the P/E ratio of the deal, which was 23 based on 1997 earnings, one might question why Buffett did it. It didn’t seem very Buffett-like. But then one would miss an important part of why Buffett made this purchase: It came with approximately $15b in
float. It is time to quickly explain what float is and why it has been so important in Buffett’s accumulation of wealth. Simply put, float is money an insurance company holds that isn’t theirs, but which is theirs to invest. Every year insurance holders pay a premium to stay insured. But this money isn’t necessarily paid back immediately. Think about it, when was the last time that you yourself filed an insurance claim? Sometimes it takes years before claims are paid out. It is of course similar with reinsurance. It is actually common that claims plus operational costs are higher
than premiums over the lifetime of an insurance policy, which may seem odd. Are insurance companies in a loss-making business? Noooo they aren’t, and here’s where Buffett and his exceptional investment skills enter. Insurance premiums can be used as capital and earn investment returns before claims are paid, so the success of an insurance company depends on two: - The cost at which float can be generated; and - The investment returns that the float produces Berkshire and Buffett have been exceptional at both of these, but the results from this investment has nonetheless been mediocre. In his 2016 annual
letter to Berkshire shareholders, he explained why: “… It was, nevertheless, a terrible mistake on my part to issue 272,200 shares of Berkshire in buying General Re, an act that increased our outstanding shares by a whopping 21.8%. My error caused Berkshire shareholders to give far more than they received (a practice that - despite the Biblical endorsement - is far from blessed when you are buying businesses).” Number 12: The Buffalo Evening News The Buffalo Evening News, or just “The News” was bought in 1977, through Blue Chip Stamps. Blue Chip paid 35.5m for this company, and after including
later indirect purchases in the company though Buffett’s increased ownership in Blue Chip, this investment represented 22% of his net worth. Based on its 1976 earnings, the company was purchased at a P/E of a whopping 50, and I think this requires some further explanation. Buffett has said that a market-dominant newspaper (back in the days at least) was the equivalent of owning an unregulated toll bridge. The pricing power both towards readers and advertisers was outstanding. The News, however, wasn’t yet dominant in the town of Buffalo, they competed with another newspaper called The Courier-Express. The News was strong
in Buffalo, but not yet strong enough. There’s no doubt in my mind that when Buffett entered this deal, he was betting on that The Courier-Express would fold sooner or later. And in 1982, after a bloody fight, it did. The News went straight from losing $1.2m pre-tax in 1982 to profiting $19.4m in 1983. And remember, this was on an investment of only $35.5m. Shortly after Blue Chip had purchased The News, it ran into all sorts of trouble. It was sued by the other paper in town, The Courier-Express, And unions were striking simultaneously. Buffett can be quite
tough sometimes, and he proved that during this incident in 1981. On a Monday they struck, and Buffett told the union leaders: “If you come back in a day, I know we’re competitive. If you come back in a year, I know we will not be competitive. And if you are smart enough to figure out where exactly the point is that you can push us to and still come back and we have a business and you have jobs, you are smarter than I am. So go home and figure it out.” They came back on Thursday. Number 11:
General Foods General Foods was a huge player in the American supermarkets back in the 80s. It owned brands such as: JELL-O, Maxwell House coffee, Post Grape-Nuts, Birds Eye frozen peas, Kool-Aid, Oscar Mayer hot dogs, Log Cabin syrup, Ronzoni spaghetti, Cool Whip dessert topping, etc, and most of these were the number 1s within their individual categories in the country. Buffett acquired shares of General Foods for Berkshire during the period 1979-1983 and managed to get a hold of 9% of the total company for about $150m, which represented 25% of his total net worth at that time. Philip
Morris acquired the company in 1985 in a gigantic merger worth $5.6b. Remember that the merger between Cap Cities and ABC was the largest non-oil merger of all time when it was made? Well, that only lasted 8 months. Although Tom Murphy might have been robbed of his title, I don’t think Buffett was one to complain. His Berkshire made $338m in this deal, and including a buyback in 1984, the return of the General Foods investment was 240%. Buffett revealed a few reasons for this purchase in his 1985 letter to Berkshire shareholders: We thus benefited from four factors:
a bargain purchase price, A business with fine underlying economics, an able management concentrating on the interests of shareholders, and a buyer willing to pay full business value. While that last factor is the only one that produces reported earnings, we consider identification of the first three to be the key to building value for Berkshire shareholders. In selecting common stocks, we devote our attention to attractive purchases, not to the possibility of attractive sales. A takeaway is that, owning the number 1 brands, even within smaller niches of businesses such as frozen vegetables or packaged desserts, can be very
profitable. Okay so we’ve made it into the top 10! As you’ve come this far, I’d like to ask you for a favor. For the YouTube algorithm, please pause the video now and write which company you think will be in the number 1 spot. Do that now please. Awesome. Alright! Number 10: Wesco Financial Wesco Financial’s primary income came from a savings and loan subsidiary called Mutual Savings & Loan. Its principal sources of income were interest received on loans and investments over the interests paid on savings deposits, plus some associated service charges. Most of the business revolved
around mortgages when Buffett first purchased it. It also operated partly as an insurance agent. Larger purchases were made by Buffett’s Blue Chip Stamps in 1972, 1973, 1974 and 1976 for a total of 80% of the company for about $31m, and then finally in 2011 the last 20% were purchased for $550m by Berkshire. As you may already suspect based on that, this investment turned out to be a whopper. Based on the valuation of the company in 2011, those $31m that were spent to purchase 80% of the company up until 1977 had a return of 7,000%. In
total, direct and indirect purchases of the company though Blue Chip Stamps represented 26% of Warren Buffett’s net worth. Once again, Buffett had found a company with float. Or well, kind of at least. The insurance business was not important at Wesco back in the early 70s, but the savings and loan business had depositors which meant capital to employ. But perhaps more importantly in this case, Buffett had once again found a manager that he admired. Louis Vincenti joined Wesco in 1955 and had quickly climbed the corporate ladder to become its CEO. In Buffett’s 1979 letter to Berkshire
shareholders he referred to Louis Vincenti, then 74, as one of his “up-and-comers”, who kept achieving more each year. Number 9 on this list wasn’t just important by the time of the purchase, it is one of the top 3 most important holdings of Buffett’s ever in terms of the outcome too. It’s National Indemnity Insurance. This investment deserves a little story. In the words of Buffett himself: Next month marks the fortieth anniversary of our entrance into the insurance business. It was on March 9, 1967, that Berkshire purchased National Indemnity And its companion company, National Fire & Marine,
from Jack Ringwalt for $8.6 million. Jack was a long-time friend of mine and an excellent, but somewhat eccentric, businessman. For about ten minutes every year he would get the urge to sell his company. But those moods - perhaps brought on by a tiff with regulators or an unfavorable jury verdict - quickly vanished. In the mid-1960s, I asked investment banker Charlie Heider, a mutual friend of mine and Jack’s, to alert me the next time Jack was “in heat.” When Charlie’s call came, I sped to meet Jack. We made a deal in a few minutes, with me
waiving an audit, “due diligence” or anything else that would give Jack an opportunity to reconsider. We just shook hands, and that was that. So the company was bought in 1967 through Berkshire Hathaway, and it represented the first major diversification, away from its core textile manufacturing business. The initial purchase was for $8.6m, with Buffett’s share being at 9% of his net worth, but as Buffett later increased his holding in Berkshire Hathaway, his indirect purchases in the company bumped that up to a total of 27%. In 1966 the company had an underwriting profit, which is quite unusual
in the insurance business, and the income after investments etc. amounted to $1.6m. That means a P/E of 5.4 when Buffett purchased, But remember that this will fluctuate a lot with insurance companies. Anyways, this deal was the real start of Buffett’s insurance journey, and because of this, it had a huge impact on his future wealth. Both directly and indirectly, this investment has earned many billions for Berkshire and its shareholders. National Indemnity had: - Underwriting profits - Jack Ringwalt; and - Float. In 1967 it was about $17m on an $8.6m investment. Not bad. Remember that General Re
had $15b in float But the price-tag was a whopping $22b. There are so many important takeaways from this one investment, but an obvious one is that an investor must be able to trust his own skill and intuition when an opportunity arrives. It may never come back again. Or … well … In the case of National Indemnity, Buffett would probably have had another 10-minute window of opportunity the following year. Number 8: Hochschild, Kohn & Company This was the deal that formed Diversified Retailing together with Charlie Munger and David Gottesman back in 1966. Hochschild, Kohn & Co
was a department store at Howard and Lexington Street in Baltimore. Buffett, Munger & Gottesman put up about $6m of their own capital and then borrowed an additional $6 million from two fellows at the prestigious Wall Street firms Goldman Sachs and Kidder Peabody. Buffett didn’t really have the same clout in the investment world back then as he have now, and these two fellows only agreed to borrow Diversified the money if they could do it under assumed names. So the total price of the deal was about $12m, or 28% of Buffett’s net worth, and the department store
earned something in the area of $1.4m, which would give a P/E of 8.5. The result? Well, this is actually Buffett’s worst investment that appears this high on the list. The business was sold for about $11m in 1969. Humility looks good on a billionaire, and Buffett is not afraid of admitting his mistakes: “It must be noted that your Chairman, always a quick study, required only 20 years to recognize how important it was to buy good businesses. In the interim, I searched for "bargains" - and had the misfortune to find some. My punishment was an education in
the economics of short-line farm implement manufacturers, third-place department stores, and New England textile manufacturers.” A takeaway is that sometimes you must recognize that your initial assumptions were wrong, or at least that they tuned out to be. Although I don’t like preaching trading mantras too much, cut your losses short applies in long-term investing at times too. Or as Charlie Munger puts it: “Scramble out of your mistakes!” Number 7: Illinois National Bank & Trust This was an exceptionally run bank which Buffett purchased as Berkshire’s second large investment. In 1969 he paid $18.9m for about 100% of the
shares when earnings before security losses in 1969 were $2m meaning a P/E of 9.5. We are now approaching the really big deals that Buffett made as this bank cost him a total of about 31% of his net worth after accounting for indirect purchases through his later increased ownership in Berkshire. And it proved to be a quite profitable investment too. Illinois National Bank & Trust had to be divested from Berkshire in 1980 due to the Bank Holding Company Act of 1969. Buffett decided to sell the bank to Berkshire shareholders by giving them the shares of the
bank and then repurchasing a certain amount of Berkshire stock as their payment. Altogether, previous dividends and the sale price amounted to a return of 130%, but the return for Berkshire shareholders was probably higher than that, as they received shares in Illinois National Bank & Trust in 1980 at a very low price. Buffett was sad that he had to sell this bank. Quote: “However, you should be aware that we do not expect to be able to fully, or even in very large part, replace the earning power represented by the bank from the proceeds of the sale
of the bank. You simply can’t buy high quality businesses at the sort of price/earnings multiple likely to prevail on our bank sale.” Here’s a quote that summarizes a good deal of the reasons why Buffett purchased the bank in 1969: “Eugene Abegg ran a bank in Rockford that, when banks - the best banks were earning one percent on assets, he earned two percent on assets. And he did it with way less leverage than anyone else and lower loan losses and a big investment portfolio. And there wasn’t any magic about it. He just didn’t do anything that
didn’t make sense” A takeaway from this is that you should buy businesses with proven track records. Both managers and the operations should have proven themselves over many years. This investment advice actually works as good marriage advice too. Don’t get a fixer-upper, get someone with a proven track record! Number 6: GEICO GEICO was the United States’ fourth largest auto insurer with a market share of about 4% in 1976 when Buffett first purchased shares in the company for Berkshire. During the period 1976-1980, he accumulated 33% of the outstanding shares and the price tag was $47m. The ownership
increased to 50% through share repurchases done by GEICO up until 1996, when Berkshire bought the second half of the business for $2.3b. Yes, that’s right. The first half cost him $47m and the second half $2.3b. And GEICO haven’t stopped performing since 1996 either! Today, it’s the second largest auto insurance company in the U.S. with a market share of approximately 14%. In 2019 Buffett explains that the underwriting profits from GEICO since its purchase has totaled $15.5b pre-tax and that the float is currently $22.1b. I think it’s fair to say that the company has been almost a
1,000-bagger for Buffett on his 1976-1980 purchases, which may make it his best investment of all time. And that was a good thing, because Buffett spent a total of 33% of his net worth on the company. In 1976, this remarkable future development wasn’t so obvious though. (well, maybe it was to Warren Buffett) GEICO had been under reserving for losses for many years which resulted in them pricing their policies too low. In 1976, claims piled up and GEICO was on the brink of failure. Buffett’s mentor Benjamin Graham had been a director of the company for many years
but had recently retired. In an interview he said: “It makes me shudder to think of the amounts they were able to lose in one year. Incredible! … You have to be a genius to lose that much money!” The stock had fallen 97% from its peak as a result. But Buffett thought that the situation was only a temporary financial problem, and not something that was linked to either the power of the brand or the underlying business. What did Buffett see in GEICO? - Well first and foremost it was extremely cheap - Secondly, it possessed an important
business advantage compared to other auto insurers that was difficult to duplicate. It sold its insurance through direct marketing instead of through agents, essentially cutting out the middleman. This allowed its margins to be better then other insurers, as long as it was pricing its policies correctly. - Thirdly, it had just recently installed new management. Jack Byrne, who had proven himself before at Travelers Insurance, was determined to turn the ship around Side-note: Buffett has admitted that he had a whopping 65% of his net worth in GEICO-shares in 1951. As Buffett hadn’t yet became the guru that he
is today at that point though, I won’t include that investment on this list. In fact, I won’t include any investment before Buffett had become a millionaire, which he did in 1962. Otherwise, the Cities Service Preferred that he purchased for $114 back in 1941 when he was only 11, would probably top this list, because in that instance, he was pretty much all in. Number 5: R. J. Reynolds Industries I find it exceptional that so little has been said about this colossal investment of Buffett’s in the early 1980s. Reynolds was the United States’ largest tobacco company back
in 1980 when Buffett first purchased it. It was quite diversified at the time though, and in 1979, 45% of revenues and 20% of profits came from other businesses than tobacco. Among other things, the company owned the fast food chain KFC. R. J. Reynolds was purchased through both Berkshire and Blue Chip Stamps, and Berkshire’s share in the purchases (including its ownership in Blue Chip’s) amounted to $270m. This represented some 34% of Buffett’s net worth at that time. Reynolds was purchased at an insanely low multiple around PE 4. Although it hasn’t been specified when exactly that Buffett
sold the shares in 1984, I think it is fair to assume that it happened in conjunction with Reynolds offering to repurchase 10m of its shares at a price of $73.5 each. If this is the case, that would bring the returns of the deal to 50%, which is a bit meh - for being Buffett. As I mentioned, Buffett hasn’t exactly been open about this investment, so therefore I can only speculate in why he was interested in acquiring the business: - It was a dominant player in its industry and held approximately 1/3 of the US market -
It had the highest return on capital of any tobacco company at the time - And the valuation was crazy-low By the way, I seriously don’t know what was up with 1985 and mergers. Remember what I said about Capital Cities & ABC holding the title as the largest non-oil merger for only 8 months? Well, turns out I was wrong, they only held it for 3 months, as in June 1985, R. J. Reynolds announced that it would purchase a large food company Called Nabisco Brands for $4.9b. Number 4: American Express You may know what American Express is
today, but do you know what it was more than 50 years ago when Buffett first purchased it? It was primarily a seller of traveler’s checks, which kind of fulfilled the same purpose as a credit card and/or an ATM does today, when you are on vacation. You pre-paid American Express in exchange for a check and could then use it to get cash in a local currency or for paying merchants. It had also quite recently released its credit card, and actually did this in a defensive move To protect its business from the potential threat of Diners Club.
Buffett purchased 5% of the company for his partnership BPL during the period 1964-1966. The cost was $13m, and that amounts to a staggering 43% of his then net worth. The investment had even reached the threshold for how much money Buffett would allow the partnership to have in a single security – which was 40%. The holding was sold primarily in 1967 and although there’s no official record of exactly how well this turned out, it turned out pretty well. I estimate that the return was somewhere in the region of 140%. For a bet of this size, and
for such a short holding period, this is massive. The main reason why Buffett was interested in buying this stock at the time Was because it was a strong business franchise which had taken a temporary hit to its price. Buffett describes the strength in the business: “Anytime you can charge more for a product and maintain or increase market share against well-entrenched, well-known competitors, you have something very special in people’s minds. Same thing came about when the credit card came around.” Also, it had recently taken a hit to its stock price, falling from $65 in November 1963
to $37 in January 1964. This was due to the infamous “Salad oil crises” at the company. But Buffett realized that the potential cost for this crisis was nowhere near enough to take the company down. Also, by doing some scuttlebutt research, Which Philip Fisher had taught him, he realized that the primary customers of the company kept using its products like nothing had happened. Buffett purchased American Express again in the period 1991-1995, and it represents one of Berkshire’s largest holdings to this day still. Number 3: See’s Candies See’s Cadies was and is a candy business selling premium
chocolate. Buffett bought 99% of the company through Blue Chip Stamps in 1972-1973. The total price was not $25m like many other sources have reported, but $34.7m, as reported in Blue Chip Stamps 1973 10k report. But the first 67% of the business did cost Buffett $25 millions and there’s an interesting little story behind that: “The family controlling See’s wanted $30 million for the business, and Charlie rightly said it was worth that much. But I didn’t want to pay more than $25 million and wasn’t all that enthusiastic even at that figure. (A price that was three times
net tangible assets made me gulp) My misguided caution could have scuttled a terrific purchase. But, luckily, the sellers decided to take our $25 million bid.” Calculating the % of Buffett’s net worth which was invested in this business involves a lot of assumptions, as there are so many indirect purchases through an increased ownership of Blue Chip Stamps over the years. Buffett owned only a 19% interest in Blue Chip by the time of the first purchase in 1972, But this later increased to 46%. Simultaneously, See’s was clearly rising in value because of its soaring revenues and profits.
But I estimate that the first purchases represented some 18% of his net worth and the subsequent indirect purchases added up to 26%, which means 44% in total. See’s was purchased at a PE of 17.5, which was unusually high for Buffett. It was a good thing that he listened to Charlie Munger though, as this business has delivered about $2.3b in pre-tax profits to Berkshire over the years. The importance of this investment has been massive: Buffett has said that: “Just like Adam and Eve kick-started an activity that led to six billion humans, See’s has given birth to
multiple new streams of cash for us.” Probably even more importantly, See’s opened Buffett’s eyes to quality businesses when he had for a long time before only been focusing on bargains. “It is better to own a wonderful company at a fair price than a fair company at a wonderful price.” Finally it’s time to cover an investment which has been hinted at throughout this whole video. Number 2: Blue Chip Stamps As you already know by now, Buffett, together with Charlie Munger, used Blue Chip as an investment vehicle to acquire other businesses. Can you guess which characteristic it
possessed that made it particularly useful for that? That’s right! Float. The trading stamps business was a marketing giveaway. When customers purchased something in a retail store they were handed stamps to collect in little booklets. With enough stamps, they could redeem stuff from Blue Chip. Retailers paid Blue Chip for the stamps and then marked up their merchandise accordingly. Usually it took some time before the stamps were redeemed though, and some customers totally forgot about their stamps or lost them. This meant that Blue Chip had large quantities of money that could be invested in the meantime, while
it waited for customers to redeem. In this way, the business reminded a lot about insurance. In Buffett’s own words: In 1970, indeed, about 60 billion of our stamps were licked by savers, pasted into books, And taken to Blue Chip redemption stores. Our catalogue of rewards was 116 pages thick and chock full of tantalizing items. When I was told that even certain brothels and mortuaries gave stamps to their patrons, I felt I had finally found a sure thing. There’s a second part to that quote which you’ll hear in a minute. Buffett bought shares of Blue Chip
for himself, for BPL, for Diversified Retailing and for Berkshire Hathaway, so calculating a total purchasing price is a bit problematic. Moreover, Blue Chip started buying other valuable businesses that we’ve already talked about on this list like See’s Candies, Wesco Financial, The Buffalo Evening News etc. But I estimate that the purchases attributable to Blue Chip’s core business – stamps and float – had a price tag of approximately $26m during the period 1968-1974. After that, the sum of Blue Chip’s holdings had a higher value than the market cap of the whole business according to my estimations, so
I’ll exclude those purchases here. Nonetheless, Buffett put 44% of his net worth into this holding. And the result? Well, now for the second part of that quote: Not quite. From the day Charlie and I stepped into the Blue Chip picture, The business went straight downhill. By 1980, sales had fallen to $19.4 million. And, by 1990, sales were bumping along at $1.5 million. No quitter, I redoubled my managerial efforts. Sales then fell another 98%. Last year, in Berkshire’s $98 billion of revenues, all of $25,920 (no zeros omitted) came from Blue Chip. Ever hopeful, Charlie and I
soldier on. It would be totally unfair to say that this purchase wasn’t lucrative though. Through Blue Chip, Buffett managed to multiply the capital he could allocate to other businesses such as the beforementioned three – See’s, The News and Wesco. Without these neither Berkshire nor Buffett would have been where they are today. And now for the final one. The most important investment that Buffett has ever made is, give me a drumroll please. Berkshire Hathaway. In the early 60s, Berkshire Hathaway was a textile producer operating within a tough industry, but it had valuable assets. Buffett started to
purchase the company in 1962 through BPL and originally planned to sell his holding back to those who were running the company. In his 2014 annual letter to Berkshire shareholders, Buffett explained the situation like this: “On May 6, 1964, Berkshire Hathaway, then run by a man named Seabury Stanton, sent a letter to its shareholders offering to buy 225,000 shares of its stock for $11.375 per share. I had expected the letter; I was surprised by the price.” Buffett had expected an offer of $11.5 per share as this was the deal that him and Seabury had agreed upon
beforehand. Instead of accepting the new bid and selling his interest in the business at a 1% lower price than initially agreed. Buffett got angry. Now, he was going to take control of the business instead, so he kept buying shares. He later described this as a mistake: By April 1965, BPL owned 392,633 shares (out of 1,017,547 then outstanding) And at an early-May board meeting we formally took control of the company. Through Seabury’s and my childish behavior After all, what was an eighth of a point to either of us? – he lost his job, and I found
myself with more than 25% of BPL’s capital invested in a terrible business about which I knew very little. Eventually, 70% of the company was owned by BPL. In true Buffett and Munger “scrambling out of mistakes” fashion, Buffett came up with a plan though. Berkshire could create high returns on capital as long as the company redirected its cashflows into new great businesses and out of the failing textile one. This led to a series of purchases starting with National Indemnity in 1967. Buffett bought shares in Berkshire for himself, for BPL and for Diversified Retailing during the period
1962-1973. Actually, the purchasing took place up until 1977, but similarly to Blue Chip Stamps, the individual holdings of Berkshire became more valuable than the total price of the business at one point. The price of the shares attributable to the core business was $18m. After some additional estimates this represented 52% of Buffett’s net worth at that time in total. The earnings of Berkshire back in the early 60s were VERY unpredictable, ranging from -$2.1m to $4.6m, so a P/E is not applicable here. However, the company was almost selling below its net current assets When Buffett took control
in 1965, something which Buffett’s mentor Benjamin Graham was very fond of. Also similarly to Blue Chip Stamps, Berkshire’s core business eventually failed. In 1985, Buffett decided to shut down the last textile operations. But let’s do some calculations. Back in 1965, a single Berkshire share was trading at $15. Today, it costs more than $300,000. Even though you would have been diluted a couple of times if you would have owned the stock since 1965, this is approximately a 10,000-bagger. I'm not sure if there are any other stocks out there which could compare. Please let me know in
the comments if you know of any. Well, that’s it. The top 25 most important investments that the legendary Warren Buffett ever made. A few quick disclaimers Now, if you just can’t get enough of The Oracle of Omaha (or the Swedish Investor for that matter) here’s a recommendation of what you can watch next. Cheers guys and see you soon!
