Warren Buffett Quotes

Warren Buffett MidAmerican Energy Investment. Why Warren Buffett invested in MidAmerican Energy. Buffett acquired 76% of MidAmerican Energy for $2 billion in 1999. MidAmerican Energy is a utility company based in Iowa.

Investments such as MidAmerican Energy are examples of investments in companies that generate stable but not spectacular returns. They have high capital expenditure requirements in order to continue to generate returns, but that creates barriers to entry that deters competition and makes it difficult for others to share in the returns.

Warren Buffett Investment in MidAmerican Energy

Buffett liked this investment for several reasons:

First, it was a strategic investment with good growth potential. Buying MidAmerican Energy gave him a toehold into the utility industry in its early stages of deregulation, and could give him an early-mover’s advantage in establishing market dominance.

Second, it allowed him to deploy large amounts of capital. Buffett speaks of investments in utilities as investments that do not necessarily generate the highest returns on invested capital, but that allow him to put large amounts of capital to use at fair rates of return that beat the zero return from sitting on piles of cash.

Third, it had outstanding management. Buffett very much admired the managers for the company and said, “If I only had two draft picks out of American business, Walter Scott and David Sokol are the ones I would choose for this industry”.

Warren Buffett General Re Investment. Why Warren Buffett invested in General Re and eventually acquired it in 1998. In one of the largest deals in history, Buffett acquired General Re for $22 billion in Berkshire stock in 1998. The purchase price represented a 29% premium to General Re’s closing price. The all-stock nature of the transaction allowed it to be tax-free.

General Re was the largest reinsurance company in America. It also had a large international presence and earned $1 billion a year in the years before Buffett’s purchase. Buffett argued that the investment was advantageous because of the synergies that it could generate. He notes that after the merger, General Re would be able to focus on its world-class underwriting instead of having to worry about tax considerations and earnings volatility.

Unclear if good Investment, at least in the immediate several years

However, it is unclear if this was a wise investment in retrospect. General Re lost more than $7 billion in the four years after Buffett’s acquisition, compounded by the effects of the 9/11 terrorist attacks. General Re management was also dissatisfied with the purchase – General Re’s president James Gustafson resigned after the Berkshire merger; a number of other senior executives also openly expressed discontent. Buffett later hypothesized that if General Re had remained independent, it might not have survived the 9/11 attacks.

Nonetheless, with the merger, Buffett could argue that even if the underwriting operations did not turn a profit, Berkshire would gain free use of float as long as the reinsurer was not loss-making – the dry-powder cash with a zero cost of capital has great value for Berkshire.

Warren Buffett NetJets Investment. Why Warren Buffett invested in NetJets. This Warren Buffett investment is one of Warren’s favorites; flying on jets is one of his few ‘guilty pleasures’.

Buffett acquired NetJets for $725 million in 1998, with 50% in cash and 50% in stock, after having been NetJets’ customer for three years. The company pioneered the notion of ‘time sharing’ of corporate jets, allowing customers to own fractions of business jets. This lowers the cost of the plane by reducing the opportunity cost of idle time. Under this scheme, NetJets profits in two ways: first, it purchases steeply-discounted planes from manufacturers and sells them to customers at retail price; second, its customers pay NetJets fees to manage the time sharing. NetJets’ fleet includes jets of three major cabin sizes: light, midsized and large. Its fleet has about 340 jets.

Warren Buffett Investment in NetJets

NetJets has been an excellent investment for Buffett, who has also been a fervent unpaid salesman for the company. NetJets has a strong international presence and counts among its customers such public figures as Roger Federer, Carrie Underwood, Wayne Gretzky, Arnold Schwarzenegger and Sylvester Stallone.

Prior to purchasing the company, Buffett had been a satisfied customer for three years. He thus could testify to how well-managed and well-run the company was. NetJets had also built a strong brand name with its promise of quality service, safety and security.

As the first-mover in the fractional ownership market, NetJets was able to establish its name early and gain relatively significantly competitive advantages that allow it to generate significant return on invested capital for its shareholders and owners.

Warren Buffett Dexter Shoe Investment. Why Warren Buffett invested in Dexter Shoe, and why he later came to regret this investment.

Buffett acquired Dexter Shoe in 1993 with $420 million worth of Berkshire stock. Dexter made $40 million in pre-tax earnings then from selling popular-priced men’s and women’s shoes.

Warren Buffett Investment in Dexter Shoe

When Buffett first made the investment, Buffett lauded the company as one of the best-managed companies that he has seen in his lifetime. He also asserted that although the domestic shoe industry was generally thought to be unable to compete with imports from low-wage countries, Dexter was one example of a highly competitive business within the industry.

However, Buffett would later come to regret this investment – in particular, paying for it in Berkshire stock even though Berkshire stock was at an all-time high back then. Buffett later realized that attempting to keep shoe production domestic has been very costly, as U.S. companies will not be able to compete with foreign companies that were able to hire workers at a fraction of U.S. wages; this meant that locally produced shoes will be significantly more expensive than low-priced imported shoes.

Worst Deal Buffett ever made

Buffett called Dexter the worst deal he had ever made in his 2007 letter to shareholders. He writes, “What I had assessed as durable competitive advantage vanished within a few years… by using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion. In essence, I gave away 1.6% of a wonderful business – one now valued at $220 billion – to buy a worthless business”.

Warren Buffett Wells Fargo Investment. Why Warren Buffett invested in Wells Fargo. Buffett bought 1.6% of Wells Fargo in 1989 and another 8.4% in 1990, at less than 5x after-tax earnings and less than 3x pre-tax earnings. His average buy-in price was approximately $58 a share – this would later become one of Buffett’s best investments, as the stock of Wells Fargo rose to approximately $270 by 2001.

Wells Fargo & Company has a substantial presence in the United States, with three major operating segments: Retirement, Brokerage, Banking and Wealth. As a bank holding company, Wells Fargo provides banking services both online and offline, for both retail consumers and customers. In addition to its core banking business, it also offers insurance, brokerage, mortgage lending, and other relevant services.

Warren Buffett Investment in WellS Fargo Rationale

At that time, Buffett believed that Wells Fargo would be a great investment for two reasons:

First, Wells Fargo had the best managers in the business. It was conservative and financially stable, and exceptionally well-run compared to its competitors. In a competitive market, the company that runs the leanest ship with superb management will enjoy a lead over its competitors.

Second, Wells Fargo was cheap when Warren Buffett first invested – it was a chaotic market in banking stocks then. The disarray was appropriate because one huge loss after another was unveiled due to losses in the real estate market. Walls Fargo set aside $1.3 billion as contingency for potential future losses. The Street reacted strongly and panic selling caused the stock to lose more than 50% of its market capitalization in a year. Buffett saw this as a great buying opportunity and indeed was proven right eventually. But this was not without a period of time when everyone else thought Buffett had gone crazy and that he was making a terrible call in investing in Wells Fargo. A study of quips from Buffett and Munger will teach you how difficult it is to call the market, and how sensible it is to demand a margin of safety so that the risk-reward is in your favor.

Warren Buffett US Air Investment (NYSE: LCC). Buffett regretted this US Air investment later; it was one of his few forays into the airline industry. In 1989, Buffett purchased $358 million of US Air preferred with 9.25% dividend, mandatory redemption in 10 years, and right to convert into common at $60 a share.

Structuring as a preferred afforded Buffett slightly more protection than if he were to buy straight equity in the event of bankruptcy. However, he would still be behind debtholders and risks a complete writedown to zero if the company runs into significant trouble and is not even able to repay all debtholders. The intrinsic problem with many airlines is that the airline industry as a whole has generated negative returns for shareholders – the industry lacks genuine competitive advantages and is often reduced to brutal price competition. There is no true customer stickiness – customers would willingly pick another airline if its airfare was cheaper. This lack of customer loyalty is accentuated by comparison sites like Expedia, Orbitz, Kayak and Travelocity.

Warren Buffett Investment in US Air – the Aftermath

Although Buffett eventually made money on this investment, he almost lost all of it as US Air neared bankruptcy in the interim.

Buffett regretted this investment and would not have invested in retrospect. Once, when asked if he would do anything different if he could live his life all over again, Buffett noted, “I would really do almost exactly what I have done except I wouldn’t have bought US Air”.

Buffett bought US Air because it was an attractive security. However, the airline industry as a whole was and continues to be far from attractive. Buffett shuns the airline industry in general, as it is a high fixed cost and highly competitive industry that has on the whole made negative returns for its investors.

Buffett once joked to a group of business school students, “I now have an 800 number I call every time I think about buying a stock in an airline. I say, ‘I’m Warren and I am an air-aholic.’”

Warren Buffett Gillette Investment. Why Warren Buffett invested in Gillette (NYSE: G). Described as one of ‘The Inevitables’, this was one of Warren Buffett’s favorite investments.

The Gillette Company merged into Proctor & Gamble in 2005, but until then traded as an independent listed company on the New York Stock Exchange. The Gillette Company was a razor manufacturer, with dominant market share in the shaving market. Under the slogan ‘The Best a Man can Get’, it was a business with high return on invested capital. Products in its product line include Techmatic, Trac II, Atra, Gillette Sensor, Good News!, Custom Plus, Mach, Mach3 disposable, Mach3 Turbo, Venus (a female version of Mach 3), Gillette Fusion, among others.

Warren Buffett bought Gillette Preferred Stock

In 1989, Buffett purchased $600 million of Gillette preferred with 8.75% dividend, mandatory redemption in 10 years, and right to convert into common at $50 a share.

Buffett liked Gillette a lot and labeled it along with Coca-Cola as one of ‘The Inevitables’. This is a kind of business that Buffett likes to be in because it is easy to imagine what the business will look like in ten years. It fulfills a basic need that will always be there: regardless of what happens to the Internet, people will still need to shave.

Gillette is well-positioned to meet this need, as it is the dominant player in the shaving-equipment business with strong brand recognition that gives it a wide moat. This means that Gillette will be able to keep competitors away and continue to profit from supplying shaving equipment to meet this fundamental need that will not change over time. Businesses with a wide moat like Gillette’s are able to sustain supernormal returns that make them very attractive to long-term owners like Warren Buffett who are not concerned about the short term gyrations of the market and care much more about ‘owner earnings’.

Warren Buffett Borsheim’s Investment. Why Warren Buffett bought Borsheim’s, a reputable jeweler based in Omaha. This again showed the large variety of businesses Warren Buffett is interested in. Borsheim’s has now become one of the must-go destinations for visitors to Omaha, especially during the annual Berkshire Weekend in May.

Buffett bought an 80% interest in Borsheim’s Jewelry in 1989. This Omaha-based jewelry retailer belonged to the Friedman family. It sold fine jewelry and had a strong reputation as one of the top jewelers in America. A lean operation run by CEO Susan Jacques, Borsheim’s is a quality jeweler with a sterling reputation in the business.

Borsheim’s Competitive Advantage

There was much that Buffett liked in Borsheim’s:

First, it had rapid inventory turnover, in part due to its large variety of merchandise and in part due to its competitive pricing.

Second, it had extremely low operating expenses. This was because it was a shrewd buyer, able to purchase in large volumes; it was also exceptionally well-run with high operating efficiency. This meant that Borsheim’s gross margins could be maintained at a highly competitive level while delivering prices far below those of its competitors.

Third, it had extremely good customer service. It offered personalized, friendly customer service with family members available at all times. This significantly enhanced the customer experience and allowed Borsheim’s to generate a loyal following of customers.

Fourth, it had top management that paid careful attention to detail. Top managers were always in the store every day and made sure that store operations were run exceedingly well.

Warren Buffett Investment in Fechheimer – why Warren Buffett invested in Fechheimer, a seemingly ‘boring’ company that makes uniforms. Fechheimer specializes in making uniforms for the police, fire, postal service, train and EMS departments. Brands it is known by include Flying Cross and Fechheimer.

Buffett acquired 84% of Fechheimer for $55 million in 1986. The company was sold to a group of venture capitalists in a leveraged buyout in 1981. The leveraged buyout meant that the company assumed significant debt to finance the buyout, causing it to start with high debt-to-equity. However, with the solid operations of the company, Fechheimer was able to pay down its debt substantially in five years.

Fechheimer’s Competitive Advantage

This investment was attractive to Buffett for several reasons:

First, it had a long and successful operating history. Fechheimer began operations in 1842 and has consistently produced strong profits even when burdened with significant debt.

Second, it is owned by family members who want to continue to run the business as owners and managers. In fact, several generations of the family are active in the business – it is a great source of family pride. This is seen as a strong positive by Buffett, as he wants managers who are personally vested in the business’s success.

Third, there was a good match in the motivations of the buyer and seller. The sellers, the managing family, wanted a buyer who would not re-sell the business regardless of price, and who would allow the business to be run in the future as it had been in the past. Buffett saw no reason to tweak an evergreen business’s formula for success, and thus was happy to oblige.

The Warren Buffett Fechheimer investment added another quality company to Berkshire Hathaway’s portfolio.

Why Warren Buffett invested in Scott Fetzer. The Warren Buffett Investment in Scott Fetzer is one that Buffett highlighted in his letters to shareholders – it was another quick deal for Warren Buffett, who liked the high return on invested capital Scott Fetzer earned.

Buffett acquired Scott Fetzer for $320 million in 1985. Scott Fetzer was a diversified manufacturing and marketing firm based in Cleveland, Ohio. It made products such as World Book and Kirby vacuum cleaners.

This seems to be a company selling ordinary products, but Buffett admired Ralph Schey’s ability to handle the basics extremely well.

Scott Fetzer’s Competitive Advantages

Specifically, here are the main positives that Buffett liked:

First, one of Scott Fetzer’s businesses, World Book, sold two times as many encyclopedia sets annually as its nearest competitor, and two times in the US than its four biggest competitors combined.

Second, many of Scott Fetzer’s 17 businesses are dominant players in their fields.

Third, the return on invested capital is extremely high for most of those businesses.

Fourth, Ralph Schey (Scott Fetzer’s CEO) was an excellent manager that Buffett greatly admired.

The main negative that Buffett saw was the declining results for many companies in the direct-selling industry. Indeed, twenty years later, we see that this is exactly what happened as Internet commerce took over and direct-selling declined significantly as a marketing channel.