In 1972, Warren Buffett (Trades, Portfolio) completed a deal that would change his investment perspective forever. He was convinced by his new partner, Charlie Munger (Trades, Portfolio), to shell out $25 million to buy See's Candies.
At the time of the acquisition, See's was earning around $4 million per annum pre-tax, but since then, the business has produced more than $2 billion in income for Berkshire Hathaway.
As the story goes, Buffett didn't want to pay up to buy See's. In fact, he has said that if the seller wanted him to pay an extra $5 million, he would have avoided it altogether. Munger, on the other hand, has said that he would have paid the extra, although getting the deal past Buffett would have been a problem. At the 2017 Berkshire annual meeting, Munger said:
"And the truth of the matter is that it would have been very wise to buy See's Candy at a slightly higher price. You know if they'd asked it, we wouldn't have done it, so we've gotten a lot of credit for being smarter than we were."
Buffett went on to add:
"To be more accurate, if it had been $5 million more, I wouldn't have bought it. Charlie would have been willing to buy it, so, yeah."
Interestingly, Munger then went on to explain why he thought that the experience of buying deep value stocks and trying to turn them around (but mostly failing) prepared the duo perfectly for taking on a high-quality business like See's:
"We were very lucky that, early, the habit of buying horrible businesses because they were really cheap. It gave us a lot of experience trying to fix unfixable businesses as they headed downward toward doom. And that early experience was so horrible, fixing the unfixable, that we were very good at avoiding it, thereafter. So, I would argue that our early stupidity helped us."
This is an interesting perspective and one that's often overlooked. Most people consider Buffett to be a deep value investor at heart, but he was only chasing deep value up until the early 1970s, after which he changed his strategy. He started looking for high-quality businesses trading at attractive prices, and from there, his wealth took off.
See's tells us quite a lot about this period in Buffett's life and the growth of Berkshire. Buffett was clever enough to see the long term earnings power of the candy business. He realized that the company would still be producing money for its owners several decades later, and that's why he wanted to do the deal.
At the end of the day, that is what investing is all about. As Buffett said in 2017:
"But the main — you know, when we buy a business, essentially, we're laying out a lot of money now based on what we think that business will deliver over time. And the higher the certainty with which we make that prediction, the better off — the better we feel about it."
If you want to know how to be a good investor, this early Buffett deal is highly informative. As noted above, since its acquisition, See's has yielded a total pre-tax income of more than $2 billion. This hasn't happened overnight, but over the past five decades, the business has thrown off cash, which Buffett has used to reinvest across the Berkshire group.
You can't go wrong if you look for businesses like See's to add to your investment portfolio and buy them to hold for the next five or six decades.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- A Look at Berkshire Hathaway's Insurance Business
- Warren Buffett, Harley-Davidson and Buying What You Know
- Buffett and Munger: Investing in the Changing World
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