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Rupert Hargreaves
Rupert Hargreaves
Articles (1237)  | Author's Website |

That Time Warren Buffett Bought a Share of a Duck Club

A look at one of Buffett's lesser-known investments

May 06, 2020 | About:

Today, Warren Buffett (Trades, Portfolio) gets a lot of attention for the investments that he owns in Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) equity portfolio. Every single time the Oracle of Omaha makes a change to the portfolio, media outlets around the world comment on his decisions and dissect the stock (or stocks) acquired.

Buffett's buying and selling activity is all very interesting, but due to Berkshire's size, it's not as exciting as it could be. In his early days, Buffett was happy to look for value wherever it could be found in the market. If this meant driving around to pick up share certificates of what he believed was a substantially undervalued insurance company, he would do it.

I think these are the most exciting investments of his career because they showcase the investor's skill in due diligence and persistence to find value and uncover the best investments.

Unfortunately, Berkshire just cannot make these investments today. The group is too big. It has to invest billions in every opportunity in order to move the needle, and it can't do that with undiscovered micro-cap stocks. Buffett would have to find hundreds of them to invest a few hundred million dollars without having a significant influence on the market. Even that wouldn't be enough.

Buffett's duck club

One of Buffett's early hidden micro-cap value investments was Atled Corp. As Buffett explained at the 2018 Berkshire annual meeting of shareholders, the company had 98 shares outstanding when he bought just one of them.

As the story goes, the company initially set out to sell 100 shares. A group of 100 "guys in St. Louis" chipped in "$50 or $100" to form a duck club in Louisiana. They used the funds raised to buy some land. However, two members of the party didn't come up with their money. They defaulted on their obligations, so only 98 shares were issued.

Atled was Delta spelled backward, and the duck club was set up with the name Delta. Here's how Buffett described the rest of the story:

"But apparently somebody shot — fired a few shots into the ground and oil spurted out. And those Delta duck club shares — and I think the Delta duck club field is still producing.

I bought stock in it 40 years ago for $29,200 a share. And it had that amount in cash and it was producing a lot, and they sold it. If they kept it, that stock might've been worth $2 million or $3 million a share, but they sold out to another oil company.

Actually, I didn't have any cash at the time. And I went down and borrowed the money. I bought it for my wife. And I borrowed the money. And the loan officer said, "Would you like to borrow some money to buy a shotgun as well?"

This is one of those great stories of an undervalued investment that generates substantial returns for patient investors who are willing to look at the stock with a long-term horizon.

Most investors would not have been interested in Atled. The stock was difficult to buy, and the investment was tricky to understand. But Buffett's experience with these types of investments helped give him the confidence required to purchase one share of the 98 shares outstanding and sit on it.

He was so confident about its long-term potential that he decided to buy the investment with borrowed money. This is something he discourages any investor from doing today, but he was happy to make the trade back then because he knew and understood the risk.

Disclosure: The author owns shares in Berkshire Hathaway.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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RichCommerce
RichCommerce premium member - 2 months ago

In his own words from 1995: https://youtu.be/fdfpQbhlG5Y

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