Here are a few relevant examples:

Buffett made 75% in 1951, mostly because of a large position in GEICO, that proceeded
to double in the first 18 months he owned it. He sold it too soon (it would rise 100x over
the coming decades), but he replaced it with another insurer in 1953 that was a profitable
business trading at around 1 time earnings and a fraction of book value. Most are
familiar with a column Warren Buffett wrote called The Security I Like Best, which was
an excellent writeup on GEICO. Fewer people know about the next insurance stock he
invested in called Western Insurance. Buffett referenced Western Insurance at a talk
at Columbia in 1993, using it as an example of stocks he found by flipping through
Moodys manuals: I found Western Insurance in Fort Scott, Kansas. The price range in
Moodys financial manual was $12 to $20. Earnings were $16 per share.[1]

he found National American Fire Insurance (This book really got hot towards the
end!) NAFI was controlled by an Omaha guy, one of the richest men in the country, who
owned many of the best run insurance companies in the country. He stashed the crown
jewels of his insurance holdings in NAFI. In 1950, it earned $29.02. The share price was
$27. Book value was $135.[2]

Marshall Wells
Biggest hardware wholesaler in America
$200 stock price
$62 earnings per share[4]

Union Street Railway

This was a bus company. They had some substantial hidden assets. But the most
important asset they had was cash net of all liabilities of more than $60 a share versus a
stock price of $30 to $35 a share.[4]

He also invested in Commonwealth Bank in 1958

At $50 per share, Commonwealth was trading at a measly five times earnings and had
had an intrinsic value $125 per share computed on a conservative basis.

Over time, approximately ten years, Buffett computed that the banks intrinsic value
could rise to $250 per share. So, this was both a deep value and growth play.

Over a period of 12 months, Buffett acquired around 12% of the bank at a price of $51 per
share, which made Buffett and his partners the banks second largest shareholder. The
bank only had around 300 shareholders in total, the shares traded only around two
times per month.[9]
He ended up selling it for a 60% profit in less than a year, and using the proceeds to buy
another stock that he felt was even more undervalued.

He invested in Genessee Valley Gas. He writes:

I found a little company called Genesee Valley Gas near Rochester . It had 22,000 shares
out. It was a public utility that was earning about $5 per share, and the nice thing about
it was you could buy it at $5 per share.[11]

He also invested in Dempster Mill. He writes the following about how to value it and
what he paid.
Presently we own 70% of the stock of Dempster with another 10% held by a few
associates. With only 150 or so other stockholders, a market on the stock is virtually non-
existent, and in any case, would have no meaning for a controlling block. Our own
actions in such a market could drastically affect the quoted price.
Dempster is a manufacturer of farm implements and water systems with sales in 1961 of
about $9 million. Operations have produced only nominal profits in relation to invested
capital during recent years. This reflected a poor management situation, along with a
fairly tough industry situation. Presently, consolidated net worth (book value) is about
$4.5 million, or $75 per share, consolidated working capital about $50 per share, and at
year-end we valued our interest at $35 per share. While I claim no oracular vision in a
matter such as this, I feel this is a fair valuation to both new and old partners. Certainly,
if even moderate earning power can be restored, a higher valuation will be justified, and
even if it cannot, Dempster should work out at a higher figure. Our controlling interest
was acquired at an average price of about $28, and this holding currently represents 21%
of partnership net assets based on the $35 value.[10]
As Buffett was able to convert working capital to cash, his valuation for Dempster rose to
$50 in the next year.[10]

Here's one other example:

Sanborn, had 65$ per share in liquid assets and a business selling maps and
yet sold for $45 per share. He had 21% of his fund's assets in Sanborn at one
point.[5]
Another example from the 1960s was Associated Cotton Shops that Buffett bought for $6
million and earned "a couple million dollars a year."

Not all of his investments were successes. He was attracted to businesses that were
cheaply priced, but not high quality and considers those investments to be mistakes.
Here is one example.

Shortly after purchasing Berkshire, I acquired a Baltimore department store, Hochschild

Kohn, buying through a company called Diversified Retailing that later merged with
Berkshire. I bought at a substantial discount from book value, the people were first-class,
and the deal included some extras unrecorded real estate values and a significant LIFO
inventory cushion. How could I miss? So-o-o three years later I was lucky to sell the
business for about what I had paid. ... Good jockeys will do well on good horses, but not
on broken-down nags. Both Berkshires textile business and Hochschild, Kohn had able
and honest people running them. The same managers employed in a business with good
economic characteristics would have achieved fine records. But they were never going to
make any progress while running in quicksand.[7]

Here's one reason why some of the stocks he found were so underpriced:

Why would a company with a 20% return on equity ever trade for one-fifth of book
value? ... it was a super illiquid stock that had once been worth a lot more. The shares
ended up spread thinly across a lot of different individual investors. They remembered
when the stock was worth $100 a share. Thats where a lot of them bought. And many of
them didnt want to sell until the stock got back to $100 and made them whole. But,
because the stock had burned them so bad, they also had no interest in buying more
shares. They just clung to what they had.[4]

Buffett's success in the 1960s was noteworthy. He delivered gross returns of 31.6% per
year from 1957 to 1968; after fees his partners' annualized return was 25.3% per year.[6]
Buffet thinks values still exist today if you look hard enough.

He then took out a copy of the 2005 Korean Stock Market guide. It was more of an
almanac than a brokerage report. It was sent to him for free by a broker. If it had been
$10, I wouldnt have paid for it. Based on the recommendation of a friend who thought
South Korean stocks were cheap, Buffett spent 5-6 hours leafing through the pages and
put together a $100m portfolio of 20 or so companies. Daehan Flour sold 25% of the
flour in South Korea, which had a large and stable economy. Its earnings over the last
few years: 12,870 won, 18,000 won, 22,830 won. It had over 100,000 won in securities.
The stock price was 38,000 won. You have to make money buying stocks like this at 2x
earnings. Brokers arent going to tell you about Daehan Flour.[2]

No one will tell you about these businesses. You have to find them.[3]

Buffett believes you can find extreme values today among small cap stocks. This is an
excerpt from what he said about this in 2005:

Question: According to a business week report published in 1999, you were quoted as
saying it's a huge structural advantage not to have a lot of money. I think I could make
you 50% a year on $1 million. No, I know I could. I guarantee that. First, would you say
the same thing today? Second, since that statement infers that you would invest in
smaller companies, other than investing in small-caps, what else would you do
differently?

Yes, I would still say the same thing today. In fact, we are still earning those types of
returns on some of our smaller investments. The best decade was the 1950s; I was
earning 50% plus returns with small amounts of capital. I could do the same thing today
with smaller amounts. It would perhaps even be easier to make that much money in
today's environment because information is easier to access.

You have to turn over a lot of rocks to find those little anomalies. You have to find the
companies that are off the map - way off the map.
...
The market is the greatest game in the world. There is nothing else that can, at times, get
this far out of line with reality. For example, land usually only fluctuates within a 15%
band. Negotiated transactions are less volatile. Some get this; others don't. Just keep
your wits about you and you can make a lot of money in the market. [12]

Buffett has highlighted stocks trading below working capital.

Yeah, if I were working with small sums, I certainly would be much more inclined to look
among what you might call classic Graham stocks, very low PEs and maybe below
working capital and all that. Although -- and incidentally I would do far better
percentage wise if I were working with small sums -- there are just way more
opportunities. If you're working with a small sum you have thousands and thousands of
potential opportunities and when we work with large sums, we just -- we have relatively
few possibilities in the investment world which can make a real difference in our net
worth. So, you have a huge advantage over me if you're working with very little
money.[13]

[1] Buffett's Early Investments

[2] Warren Buffett -- 50% Returns
[3] Page on netnethunter.com
[4] How Warren Buffett Made His First $100,000
[5] What You Should and Shouldnt Learn from Warren Buffett
[6] Page on rbcpa.com
[7] Buffett's Story of Diversified Retail
[8] The Snowball
[9] Warren Buffett The Early Years Part Four: Unlocking Value
[10] Warren Buffett on Dempster Mill Manufacturing Company [Case Study]
[11] Page on fatpitchfinancials.com
[12] Buffett/Jayhawk Q&A / Berkshire Hathaway
[13] How A Young Warren Buffett Started His Fortune Net Net Hunter

Berkshire and Blue Chip Stamps

A summary of Mohnish Pabrai's June 2017 presentation at UC Irvine
July 19, 2017 | About: BRK.A +0% BRK.B +0%

Fellow GuruFocus contributor Snowballbuilder recently pointed me to a June 2017

speech by Mohnish Pabrai(Trades, Portfolio) at UC Irvine. I greatly enjoyed the talk and
conclulded it would probably be worthwhile to share my notes.

The presentation reviewed some of the key investments Warren Buffett (Trades, Portfolio)
and Charlie Munger (Trades, Portfolio) made in the 1960s and 1970s, starting with Blue Chip
Stamps, as well as the substantial returns realized out of these investments over the ensuing five
decades.

BRK.A 30-Year Financial Data

The intrinsic value of BRK.A

 Peter Lynch Chart of BRK.A

Our story begins with S&H Green Stamps, which Pabrai describes as a kickback mechanism to
get loyalty into particular merchants. Customers received stamps for shopping and could
redeem them for a variety of items (like appliances). S&H operated under the model where only a
single merchant in a given category (like a drugstore) in a geographic region would be able to
issue their stamps.

The stores that did not make it into this exclusive club decided to strike out on their own. In
California, nine grocers banded together to start a new competitor: Blue Chip Stamps. Unlike
S&H, any merchant could offer Blue Chip Stamps. Naturally, the merchants that issued Blue
Chip Stamps wanted in on the profit stream. After a legal tussle, the founders of Blue Chip were
forced to offer these merchants an ownership stake in the company (based on their stamp
volume in the past year). This led to Blue Chip shares becoming publicly traded.

Rick Guerin, an early partner of Buffett and Munger's, realized Blue Chip shares were quite
attractive (at this time, the market cap was approximately $40 million). It is worth noting Blue
Chip Stamps was already in decline by the late 1960s. From 1970 to 1980, revenues would
decline by more than 85%.

But the company also had roughly $90 million in float in 1970 or what Pabrai calls OPM (other
peoples money). The three men realized a certain percentage of the stamps given to customers
would never be redeemed: many were lost, stuffed in the back of a kitchen drawer and forgotten
about or thrown away. The permanent float from these unredeemed obligations was akin to free
money. Despite the significant drop-off in revenues mentioned above, float only declined by
around 30% (cumulatively) from 1970 to 1980. Pabrai estimates the permanent float at Blue
Chip was somewhere around $60 million.

But the float was of limited value in the wrong hands. Buffett, Guerin and Munger thought it was
being mismanaged. One way to effect change was to effectively take control of the company:
between 1967 and 1970, they invested $24 million in Blue Chip good for 60% ownership (at
Mungers firm, Wheeler, Munger & Co., this amounted to 61% of its assets). Eventually, the three
investors joined the board of directors; they took control of the investment committee as well.

Now they had roughly $60 million to work with. In 1972, they took $25 million and bought 99% of
Sees Candies. In 1973, they took another $25 million and bought 80% of Wesco Financial.
Finally, in 1977, they took another $35.5 million and bought the Buffalo Evening News (with
roughly 70% of the purchase price funded with the retained earnings from Sees Candies).

These investments worked out quite well. Sees generated nearly $30 million in after-tax profits
from 1975 to 1980. At the Buffalo News, there were problems in the early years. But after their
direct competitor went out of business, the Buffalo News earned $19 million (pre-tax) in 1982.
As Pabrai notes, they effectively bought these businesses with their $24 million investment. In
1983, the businesses were merged into Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B).
After 50 years, the initial investment in Blue Chip was worth $60 billion in Berkshire shares - all
from a starting investment in a business where revenues declined by nearly 85% over 10 years.

It was not always a smooth ride: from 1972 to 1974, Blue Chips market fell by two-thirds. For
Wheeler, Munger & Co., this caused the fund to fall by roughly 50%. When Munger talks about
reacting to significant price declines with equanimity, he is talking from personal experience.

In closing, here is what Pabrai views as the key takeaway from these investments:

From the late 60s to the late 80s, for the most part with these different investments, they made
five decisions. There were five meaningful decisions. So approximately a decision every four or
five years Few bets, big bets and very infrequent bets.