The Digest #32

Published on July 29, 2020

Berkshire Hathaway’s Great Transformation

Jacob McDonough’s new book, Capital Allocation: The Financials of a New England Textile Mill  does an excellent job of analyzing Berkshire Hathaway from 1955 to 1985 using the financial information that would have been available to investors during that era. Warren Buffett started buying shares of Berkshire in 1962 and took control of the company in 1965. The book allows us to see what Buffett himself saw when looking at the financials in the early 1960s.

Capital Allocation is most relevant to investors who seek to study and emulate Buffett’s approach as well as to shareholders of Berkshire Hathaway who are interested in the company’s early history. McDonough obtained and studied annual reports and financial data that are not widely available online and pre-date the SEC’s EDGAR system.

In addition to studying Berkshire’s reports, McDonough examined the financials of Diversified Retailing and Blue Chip Stamps, both of which were investment vehicles controlled by Warren Buffett and Charlie Munger and were eventually merged into Berkshire. Important Berkshire subsidiaries such as See’s Candies and the Buffalo News were originally acquired by Blue Chip Stamps, not by Berkshire directly.  Untangling the complex inter-relationship between Blue Chip Stamps, Diversified Retailing, and Berkshire Hathaway is essential for any comprehensive understanding of Berkshire’s early years.

I reviewed the book earlier this week and found that it presented information that I have not seen elsewhere regarding Warren Buffett’s early years.

Read the full review of Capital Allocation on The Rational Walk

An Unsung Hero

Peter Kaufman is CEO of Glenair, a member of the board of directors of Daily Journal Corporation, and the editor of Poor Charlie’s Almanack which remains the best resource for those interested in Charlie Munger’s life, worldview, and practical wisdom. Mr. Kaufman recently spoke at the Redlands Forum about the fascinating life of an “unsung hero” — a man of amazing accomplishments and impact who is unknown to most people. 

In 1888, a thirty-four year old Baptist preacher who had demonstrated a rare work ethic in his community was presented with an opportunity to have a major impact in philanthropy. His ingenious approach to the task he was given attracted the attention of others and this preacher soon embarked upon a career in philanthropy that had a profound impact on all Americans.

I will say no more about the “unsung hero”, whose identity is not revealed until the end of the presentation, other than to say that the story of his life is fascinating. A link to the video appears below and is highly recommended.

Interesting Links

How Costco Convinces Brands to Cannibalize Themselves by Adam Keesling, July 15, 2020. In 1992, Costco introduced Kirkland, its private label brand that has become increasingly popular over the years. Keesling analyzes how Costco convinces manufacturers of branded products to make Kirkland products that appear next to their brands on Costco’s shelves. (Napkin Math)

Buffett’s Bought More Bank of America Stock by Ed Lin, July 28, 2020. Buffett purchased $1.2 billion of Bank of America stock in recent days. The purchases were reported in SEC Filings on July 22 and July 27. (Barron’s)

Too Interconnected to Fail by Jonathan Welburn and Aaron Strong, July 23, 2020. With the growing importance of distributed work environments, a trend that has greatly accelerated due to the COVID-19 pandemic, the next systemic crisis may start not in a bank or other financial institution but in the cloud. (WSJ)

Surviving Once a Decade Disasters: The Cost of Companies Not Keeping Enough Cash on Hand by Geoff Gannon, July 26, 2020. How much cash should companies keep on hand to ensure survival during hard times? Gannon discusses how to think about this problem as a matter of corporate policy as well as how investors should weigh the risks. (Focused Compounding)

Rory Sutherland: Human Behavior, Innovation, and Alchemy, July 23, 2020. Jim O’Shaughnessy interviews Rory Sutherland, Vice Chairman of Ogilvy Group and author of Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and Life which I reviewed on The Rational Walk in February. Most of the discussion is related to behavioral economics and the relationship between marketing and human psychology. (Infinite Loops Podcast)

Ian Cassel on Micro Cap Investing, July 25, 2020Anthony Pompliano interviews Ian Cassel, the founder of Micro Cap Club and CIO of Intelligent Fanatics Capital Management. Cassel has spent the last 20 years learning about and investing in micro-cap public equities. (Pomp Podcast via YouTube)

Nassim Nicholas Taleb on the Pandemic, July 27, 2020. Russ Roberts interviews Nassim Taleb in a wide-ranging discussion covering how to handle the rest of this pandemic and the next one, the power of the mask, geronticide, and soul in the game. I also came across a short article this week that explains Taleb’s work for those who may not be familiar with it. (EconTalk Podcast)

Ted Weschler and McDonald’s – Crisis and Turnaround of 2002-2003, July 19, 2020. Prior to being hired to run part of Berkshire Hathaway’s investment portfolio, Ted Weschler ran his own fund. One of his major investments in the 2002-03 timeframe was McDonalds which was facing many problems at the time. This article appears in a new blog written by Canuck Investment Analyst.

Music in Human Evolution by Kevin Simler, January 30, 2013. Essay regarding the origins of music and its role in evolution. A fascinating fact to pique your interest: Humans are the only ground dwelling species that sings. Of the 4,000 species known to sing, all but humans will sing only from water or trees. Birds stop singing when they land on the ground. I found this link via David Perell’s excellent Friday Finds Newsletter. (Melting Asphalt)

Photo of the Week

Painted Lady reflected in Upper Rae Lake, Kings Canyon National Park
Photo taken on August 20, 2019

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The Digest #32