Introduction
Warren Buffett gave a talk to MBA students at The University of Florida in 1998. This article is the second of a 5 part series on the videos. Included in this article are take aways from his talk.
Featured in this article are a short thesis on The Walt Disney Company, The Coca-Cola Company, DreamWorks Animation SKG Inc and several of Berkshire Hathaway Inc other holdings that Warren was so kind as to discuss them.
Part 1 can be found here
Video 4
Q-04: How do you determine what a fair price for a business is?
A:He doesn’t have huge returns in mind but he has the idea of not loosing money in mind.
Using See’s Candy as an example. See’s Candy sold 16 million pounds of candy at $1.95 a pound in 1972. The basic premise was if there was any untapped pricing power there. Charlie Munger and Buffett agreed that there was. See’s Candy could just as easily sell for $2.25 per pound? If so, that’s a 30 cent increase in sales for each pound sold. Keep in mind that Berkshire Hathaway Inc paid $25 million for it. That 30 cent increase in pricing over 16 million pounds translates to about $5 million. That $5 million increase in sales at this already profitable company essentially translates into another $5 million in earnings. When you look at the price paid and the earnings potential it is a no brainer. And See’s Candy has share of mind in the people of California. People view it to be a high end product. From what Warren implies, it is as well liked as Coke. Also, See’s Candy also doesn’t require a lot of capital expenditures. It is the kind of business where you raise prices every year. He is very confident in the fact that See’s Candy will make more money in 10 years. A near guarantee of increased sales is another example of moat. All this for $25 million.
Also, don’t forget that in the case of See’s candy that it is a traditional gift to give your girlfriend/fiancé/wife.
Warren goes on to say that he has never hired a consultant in his life. His idea of consulting is to buy a box of candy.
Warren also talks about Disney. Think of Disney. All over the world people have an idea about Disney. Every mother has the same vision in their mind when you say Disney. You can not say that about Universal Pictures or 20th Century Fox. This is true all over the world. If you have kids you want to put away for a while and let them watch a video, will you watch 20 videos to choose an appropriate one for your child or will you buy the Disney video knowing that it is appropriate for your child. You’ll just buy the Disney movie and have piece of mind and you’ll know that your child will watch it 20 times. So, we got an explanation of Disney’s moat. It’s their brand. Warren also gives the example that if you have one video for $16.95 and a Disney video for $17.95 that you’ll pay the extra dollar. You’ll get a little more money per sale as Disney and sell more videos. How do you compete with this? You can’t. Ironically, back in 1998 Warren mentions that Dreamworks is trying to become a new Disney. Today, Disney has a distribution deal with Dreamworks.
Part of Coca-Cola’s moat is that it is associated with happiness around the world. It is advertised at the Olympics, The World Cup and sold at Disney World. Everywhere people are happy, Coke is sold. There is no way RC Cola can do this. RC Cola can’t do anything to change this.
Part 5:
Q-05: Have you ever bought a company where the numbers told you not to? And how much is qualitative and how much is quantitative?
A: The best buys are almost when the numbers tell you not to because you feel so strongly about the company. This refers to buying a wonderful company and 20, 30 years out it will be worth more and still be wonderful. You’re not just getting a cigar butt on the cheap. For example, windmill companies are cigar butts. Warren Buffet bought a windmill company once at a 3rd of working capital and did make money on it. With windmills though, you sell a product once and that’s it. There is only a one time sale. It is not the thing to be investing in. He also had a phase where he bought a street car company. The point is that the best buys are often those companies that are so good that you think you are overpaying.
With Net Jets, he was a customer for 3 years before he bought. Just like See’s candy, he did not need a consultant. He knows the service is good from using it.
Warren usually understands the qualitative in 10 minutes. Almost every business has taken him 5 or 10 minutes in terms of qualitative analysis. General Re is an example of this. If you don’t know the business instantly, you won’t understand it in 2 months. This is what he refers to as “Circle of Competence”. You need to have a background of understanding. You also need to be honest to yourself about what you do and do not understand. What is important is staying within your circle. If you know 30 companies well, the key is knowing what those 30 companies are. The size of the circle doesn’t matter, staying inside of it does.
In Warren Buffett’s early days, he would use what Philip Fisher called the scuttlebutt approach. He did a lot of this in his early years just to become familiar with businesses. He’d talk to customers, ex-employees, suppliers, etc.
For example, he might ask what company in your industry you would buy stock in besides your own and ask why. The funny thing is, you get similar answers as long as you ask about competitors. If you could remove one competitor, which would it be? Doing this, you can quickly get a picture of who is best.
The nice thing about investing is that you don’t need to learn anything new. You can if you want to. But you don’t have to. If you learned about Wrigley’s chewing gum 40 years ago, you still understand it. You build a database in your head over time.
When buying a company privately, there are no negotiations. He will either take or reject your offer and you will either accept or reject his. In terms of his decision making, if he was happy yesterday not owning a company, he will be happy the next day if he still doesn’t own it.
Q-06: How does the Asian crisis affect companies like Coke?
A: Coke recently announced (in 1998) that Coke was going to miss projections. Warren loves news like this. The market for Coke is going to grow faster outside of the US than in the US. People in new markets will ultimately realize that hey can get a can of Coke is a bargain in terms of the proportion of their working day that they need to give up to get Coke. For historical reasons, note that if you bought in bulk in 1998, you’d get it for about 20 cents a can.
The one thing people don’t understand about all Colas is that it doesn’t have any taste memory. You can drink one every hour and you don’t get sick of it after awhile. You can not say that about orange soda, cream soda root beer, etc. People around the world can become heavy users. You can not do that with other products. The average person in the US drinks 64 ounces of liquid a day. You can have all 64 ounces by drinking Coke (or any Cola). With any other product, you will get sick of it after a while. Because of this, over the world, sales of Coke will increase per capita over time.
As a side note, today (2009) I see 30 packs going for $6 which is 20 cents a can. The product has gotten cheaper in terms of peoples earning power.
Part 3 can be found here.
Part 4 can be found here.
Part 5 can be found here.
Warren Buffett gave a talk to MBA students at The University of Florida in 1998. This article is the second of a 5 part series on the videos. Included in this article are take aways from his talk.
Featured in this article are a short thesis on The Walt Disney Company, The Coca-Cola Company, DreamWorks Animation SKG Inc and several of Berkshire Hathaway Inc other holdings that Warren was so kind as to discuss them.
Part 1 can be found here
Video 4
Q-04: How do you determine what a fair price for a business is?
A:He doesn’t have huge returns in mind but he has the idea of not loosing money in mind.
Using See’s Candy as an example. See’s Candy sold 16 million pounds of candy at $1.95 a pound in 1972. The basic premise was if there was any untapped pricing power there. Charlie Munger and Buffett agreed that there was. See’s Candy could just as easily sell for $2.25 per pound? If so, that’s a 30 cent increase in sales for each pound sold. Keep in mind that Berkshire Hathaway Inc paid $25 million for it. That 30 cent increase in pricing over 16 million pounds translates to about $5 million. That $5 million increase in sales at this already profitable company essentially translates into another $5 million in earnings. When you look at the price paid and the earnings potential it is a no brainer. And See’s Candy has share of mind in the people of California. People view it to be a high end product. From what Warren implies, it is as well liked as Coke. Also, See’s Candy also doesn’t require a lot of capital expenditures. It is the kind of business where you raise prices every year. He is very confident in the fact that See’s Candy will make more money in 10 years. A near guarantee of increased sales is another example of moat. All this for $25 million.
Also, don’t forget that in the case of See’s candy that it is a traditional gift to give your girlfriend/fiancé/wife.
Warren goes on to say that he has never hired a consultant in his life. His idea of consulting is to buy a box of candy.
Warren also talks about Disney. Think of Disney. All over the world people have an idea about Disney. Every mother has the same vision in their mind when you say Disney. You can not say that about Universal Pictures or 20th Century Fox. This is true all over the world. If you have kids you want to put away for a while and let them watch a video, will you watch 20 videos to choose an appropriate one for your child or will you buy the Disney video knowing that it is appropriate for your child. You’ll just buy the Disney movie and have piece of mind and you’ll know that your child will watch it 20 times. So, we got an explanation of Disney’s moat. It’s their brand. Warren also gives the example that if you have one video for $16.95 and a Disney video for $17.95 that you’ll pay the extra dollar. You’ll get a little more money per sale as Disney and sell more videos. How do you compete with this? You can’t. Ironically, back in 1998 Warren mentions that Dreamworks is trying to become a new Disney. Today, Disney has a distribution deal with Dreamworks.
Part of Coca-Cola’s moat is that it is associated with happiness around the world. It is advertised at the Olympics, The World Cup and sold at Disney World. Everywhere people are happy, Coke is sold. There is no way RC Cola can do this. RC Cola can’t do anything to change this.
Part 5:
Q-05: Have you ever bought a company where the numbers told you not to? And how much is qualitative and how much is quantitative?
A: The best buys are almost when the numbers tell you not to because you feel so strongly about the company. This refers to buying a wonderful company and 20, 30 years out it will be worth more and still be wonderful. You’re not just getting a cigar butt on the cheap. For example, windmill companies are cigar butts. Warren Buffet bought a windmill company once at a 3rd of working capital and did make money on it. With windmills though, you sell a product once and that’s it. There is only a one time sale. It is not the thing to be investing in. He also had a phase where he bought a street car company. The point is that the best buys are often those companies that are so good that you think you are overpaying.
With Net Jets, he was a customer for 3 years before he bought. Just like See’s candy, he did not need a consultant. He knows the service is good from using it.
Warren usually understands the qualitative in 10 minutes. Almost every business has taken him 5 or 10 minutes in terms of qualitative analysis. General Re is an example of this. If you don’t know the business instantly, you won’t understand it in 2 months. This is what he refers to as “Circle of Competence”. You need to have a background of understanding. You also need to be honest to yourself about what you do and do not understand. What is important is staying within your circle. If you know 30 companies well, the key is knowing what those 30 companies are. The size of the circle doesn’t matter, staying inside of it does.
In Warren Buffett’s early days, he would use what Philip Fisher called the scuttlebutt approach. He did a lot of this in his early years just to become familiar with businesses. He’d talk to customers, ex-employees, suppliers, etc.
For example, he might ask what company in your industry you would buy stock in besides your own and ask why. The funny thing is, you get similar answers as long as you ask about competitors. If you could remove one competitor, which would it be? Doing this, you can quickly get a picture of who is best.
The nice thing about investing is that you don’t need to learn anything new. You can if you want to. But you don’t have to. If you learned about Wrigley’s chewing gum 40 years ago, you still understand it. You build a database in your head over time.
When buying a company privately, there are no negotiations. He will either take or reject your offer and you will either accept or reject his. In terms of his decision making, if he was happy yesterday not owning a company, he will be happy the next day if he still doesn’t own it.
Q-06: How does the Asian crisis affect companies like Coke?
A: Coke recently announced (in 1998) that Coke was going to miss projections. Warren loves news like this. The market for Coke is going to grow faster outside of the US than in the US. People in new markets will ultimately realize that hey can get a can of Coke is a bargain in terms of the proportion of their working day that they need to give up to get Coke. For historical reasons, note that if you bought in bulk in 1998, you’d get it for about 20 cents a can.
The one thing people don’t understand about all Colas is that it doesn’t have any taste memory. You can drink one every hour and you don’t get sick of it after awhile. You can not say that about orange soda, cream soda root beer, etc. People around the world can become heavy users. You can not do that with other products. The average person in the US drinks 64 ounces of liquid a day. You can have all 64 ounces by drinking Coke (or any Cola). With any other product, you will get sick of it after a while. Because of this, over the world, sales of Coke will increase per capita over time.
As a side note, today (2009) I see 30 packs going for $6 which is 20 cents a can. The product has gotten cheaper in terms of peoples earning power.
Part 3 can be found here.
Part 4 can be found here.
Part 5 can be found here.
