Instead of seeking great bargains, Buffett learned to find great businesses.
Warren Buffett’s success in business is well chronicled and nearly unparalleled. But you may not know he attributes a healthy dose of his success to a candy shop in California you may never have heard of.
In 1972 See’s Candies was purchased for $25 million by Buffett and longtime Berkshire Hathaway lieutenant Charlie Munger through Blue Chip Stamps, a business controlled by Buffett and Munger.
Although Blue Chip Stamps has faded into obscurity as Americans stopped buying stamps, Buffett has gone on to say that See’s Candies is actually his “dream business.”
So what has made See’s so successful? First, although it hasn’t been a world-beater in growing its sales, it has been incredibly profitable and a cash-generating machine. From 1972-2011 it contributed a staggering $1.65 billion to the bottom line of Berkshire.
Knowing it brings in roughly $85 million annually in pre-tax profits, there will soon come a day when the total contribution of See’s to Berkshire will top $2 billion. And what has Berkshire done with all that cash?
In 2007 Buffett answered that very question by revealing, “After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses.”
Undoubtedly Buffett is thankful for the financial contribution See’s has made to Berkshire.
But it turns out through See’s Candies, he learned something even greater.
Buffett was very much an avid devotee of the value-investment philosophy predicated in the teaching of his former professor, boss, and mentor, Benjamin Graham. Graham spoke to the inefficiencies rooted in financial markets, and how there were always bargains to be had that Wall Street overlooked.
But thanks to his friendship with Munger, Buffett’s mind-set on investing began to shift. Instead of seeking great bargains, Munger continued to tell Buffett about to the need to find great businesses. A 1988 article in Fortune Magazine notes:
So in conversations with Buffett over the years [Munger] preached the virtues of good businesses, and in time Buffett totally accepted the logic of the case. By 1972, Blue Chip Stamps, a Berkshire affiliate that has since been merged into the parent, was paying three times book value to buy See’s Candies, and the good-business era was launched. ”I have been shaped tremendously by Charlie,” says Buffett. ”Boy, if I had listened only to Ben, would I ever be a lot poorer.”
Graham’s teaching doesn’t run contrary to this — he said, “Investment is most intelligent when it is most businesslike” — but it also wasn’t the principle focus. And through Munger and the resulting acquisition of See’s Candies, this insight was all the more affirmed.
When asked about See’s Candies at the Berkshire Hathaway Annual Meeting this year, both Warren and Munger chimed in on how grateful they were for buying it more than 40 years ago:
Buffett: “See’s has provided us with lots of cash for acquisitions and opened my eyes to the power of brands. We made a lot in Coca-Cola partly because of See’s. There’s something about owning one [brand] to educate yourself about things you might do in the future. I wouldn’t be at all surprised that if we hadn’t owned See’s, we wouldn’t have bought Coca-Cola.”
Munger: “There’s no question about the fact that See’s main contribution to Berkshire was ignorance removal. One of the benefits of removing our ignorance is that we grew into what we are today. At the beginning, we knew nothing. We were stupid. If there’s any secret to Berkshire, it’s that we’re pretty good at ignorance removal.”
The 400 million shares of Coca-Cola Berkshire now owns cost $1.3 billion to acquire between 1988-1994, but at the end of September they were worth a remarkable $17.1 billion. And that is to say nothing of the billions worth of dividends Berkshire received over the last two and a half decades.
Buffett openly admits none of that would’ve likely been available to Berkshire (and its shareholders) were it not for See’s Candies. As a result, it is clear the benefit of See’s extends well beyond the $2 billion contribution it has made to the bottom line.
What this reveals
Examples like this show us how we must always seek to learn from things both great and small, and give great credence to the Proverb “Let the wise hear and increase in learning.”
Few would guess a small candy shop would’ve taught Buffett so much.
Above all, this story reminds us to always be thankful of those things great and small, because we never know where they shall lead us.