Blue Chip Stamps is one of the more interesting companies in the Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) story.
The business was founded by a group of store owners who wanted to replicate the business S&H Green Stamps had already successfully established. This was a loyalty scheme whereby customers received stamps for shopping and could redeem them for a variety of items. Blue Chip was founded by the companies that could not get into this elite club.
In itself, the business model was not that attractive, but what was attractive was the company's float, or the money retained in the business to meet obligations. As many of the stamps were not actually redeemed, this float was akin to free money. According to an analysis by Mohnish Pabrai (Trades, Portfolio), the "permanent float" at Blue Chip was somewhere in the region of $60 million between 1970 and 1980.
Efficient capital allocators
Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) eventually got onto the board of Blue Chip and started using this money to buy other businesses. Blue Chip was very similar to Berkshire Hathaway BRK.ABRK.B when Buffett first became involved with the company. It was throwing off a considerable amount of cash, but the business was ultimately doomed to failure.
In a lecture at the Pasadena Convention Center that Charlie Munger (Trades, Portfolio) gave in 2011, he said that even with all of the money Buffett had to play with, between Berkshire and Blue Chip, he bought only three companies in several decades: See's Candies, Buffalo News and control of Wesco.
Munger went on to say that the reason why Buffett managed to succeed in the early years is that he only made a few select acquisitions. Buffett bought three businesses and was very patient waiting for opportunities. That's not to say that there weren't other opportunities offered to the Oracle of Omaha. There were, but he only wanted to invest in the best.
Unique operators
Of course, another reason why Berkshire Hathaway has been so successful is the uniqueness of its two leading operators, Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio).
In his speech in Pasadena, Munger said that the willingness to learn has been fundamental in helping both Buffett and him grow Berkshire and themselves over the years. They only found out after they acquired See's (according to Munger) that they could raise prices by 10-15% every year, and no one cared.
This understanding then changed Berkshire Hathaway's investment pattern. The duo spent more time seeking out businesses that had a substantial competitive advantage and a devoted customer base.
Making mistakes
But that's not to say that Buffett and Munger didn't make mistakes. In fact, in his Pasadena speech, Munger claimed that they had both been ignorant in their careers, and had made some significant errors.
For example, they bought one of the four major department stores in Baltimore. Luckily they managed to get out without losing too much money, and redeployed the capital into a more profitable, niche furniture retailer that has made them a lot of money.
Buffett has also commented in the past that buying Berkshire Hathaway was his biggest mistake of all time. Like Blue Chip, he was able to turn this business around by reinvesting the cash it was throwing off into other, more profitable businesses -- insurance in particular. In this respect, Berkshire Hathaway was different to Blue Chip as Buffett had no choice but to try and reignite growth of the business. He had let his temper get the better of him by acquiring the business in the first place (by falling out with management) and had the stark choice of either turning it around or losing all of his investment. Luckily, he made the right choice. Blue Chip was a little different, but the logic behind the turnaround was the same: Take the cash generation and the float and redeploy the capital into more successful businesses.
Learning from your mistakes
Of course, you could also argue that Munger and Buffett didn't turn these businesses around at all. They realized there was no point in trying to drag along unprofitable businesses that could not grow, so decided to manage the decline rather than throwing good money after bad.
Learning is a key part of the investment process, Munger said. He said that many people graduate from Ivy League business schools, thinking they know it all, when in fact they do not. Life is full of learning, and you must be willing to change your investment strategy as you learn more along the way.
Even Buffett and Munger have made mistakes, but because they have learned from their mistakes and changed their way of looking at the world, they have been hugely successful.
Munger's speech in 2011 underscored this point. Life is a learning process, and those who are willing to learn and change will succeed over the long term. No one knows everything, not even Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio).
Disclosure: The author owns shares in Berkshire Hathaway.
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