Becoming Berkshire: 1969 - Buffett Retires

Issue 13 - Part 1| Warren Buffett dissolves his partnership as he begins to focus more on Berkshire Hathaway.

Sep 20, 2024

That's one small step for a man, one giant leap for mankind. - Neil Armstrong

In 1969, Neil Armstrong became the first man to land on the moon. Boeing's 737 Jumbo Jet made its maiden flight from Seattle to New York. Charles Manson went on a killing spree, Sesame Street premiered, and Buffett retired from managing money.

Turning to monetary policy:

Despite continued high rates of money growth, Keynesian economists, including the staff of the Board of Governors, forecasted a recession. Instead, the economy grew, and the unemployment rate fell to 3.4 percent. While interest rates treaded water, inflation rose and reached 6 percent. The stimulative effects of rapid money growth trumped the contractionary effect of the tax surcharge passed by Congress. Bill Martin, the chairman of the Federal Reserve, realized his mistake and implemented a highly restrictive monetary policy in 1969. Despite growing recession, he held off on any reduction in rates until inflationary expectations would subside. However, his term as FOMC chairman ran out in January 1970, and he left the Fed before he could return the country to price stability. Bill Martin held his position as FOMC chairman for nearly 19 years, a record that will likely never be exceeded.

The Nixon administration marked the end of America's long period of post-World War II prosperity and the onset of high inflation and unemployment—"stagflation." Nixon adopted a policy of monetary restraint to cool what his advisers saw as an overheating economy. Gradualism, as it was called, hoped to restrict the growth of the money supply to rein in the economic boom that occurred during Lyndon Johnson's last year in office.1

As the decade came to an end, many high-flying go-go stocks began to experience sharp drawdowns. While Chemical Bank fought off Saul Steinberg's Leasco Data Processing from its hostile takeover, the Dow had hovered close to 1,000. In June of 1969, it dipped below 900.2 By July, when U.S. troops began withdrawing from Vietnam, the Dow had dropped nineteen percent.3

One by one, the high-fliers crashed: Litton Industries—a hallmark of the conglomerate era—fell 70% from its peak; Ling Temco-Vought, another, plunged from $169 to $250.4 Brokerages closed their doors.5 The Stock exchange slogan “Own your share in American Business” was dropped without explanation.6 Performance funds were routed.7 National Student Marketing Corporation (“N.S.M.C.”) was modestly revalued from 140 to 3 & 1/2, taking the Harvard endowment along for the ride. The Dow Industrial closed out 1969 at an even 800.8

National Student Marketing Corporation

N.S.M.C. was founded by Cortes Randell in 1965. The Company preached that the growing numbers of college students (a result of the post-war baby boom) would create a huge demand for youth-related products such as employment services. Half of the nation’s population was under 25 at this time. By 1968, just in time for the grand national speculative fervor, Randell had nearly six hundred campus reps and was ready to take N.S.M.C. public. The stock was a market darling that went from $6 to $140 and could do no wrong. However, Randell began playing games with the accounting to keep up with earnings growth. They deferred expenses to overstate income and included “unbilled receivables” as net income. Eventually, the House of Cards came tumbling down, and Randell spent eight months in federal prison for stock fraud.

But the question remains: how could he have fooled the Morgan Guaranty, the Bankers Trust, Harvard, and Cornell, the whole brain trust of institutional investing, for as long as he did—and, of course, taken the innocent investing public along with them? The answer appears to be simple he was plausible, and they were gullible as well as greedy that in times of speculative madness, the wisdom and experience of the soundest and somberest may yield to a hysteria induced by the glimpse of fool’s gold dished by a young man with a smile on his lips and a gleam in his eye.9

George Goodman captured the spirit of the 60s in his seminal book, The Money Game:

In rising markets, you can almost feel the greed tide begin. Usually it takes from six months to a year after the last market bottom even to get started. The greed itch begins when you see stocks move that you don’t own. Then friends of yours have a stock that has doubled; or, if you have one that has doubled, they have one that has tripled. That is what procudeces bull market tops. Obviously no one rationally would want to buy at the top, and yet enough people do produce a top.10

Buffett Limited Partnership

1969 was the end of an era for Buffett as he decided to hang it up at the partnership.

The investing environment on which I have commented in various other letters has generally become more negative and frustrating as time has passed. Maybe I am merely suffering from a lack ofmental flexibility.11

Buffett had difficulty finding new opportunities, and the fund had grown to over $100 million.

The following Forbes article is one of Buffett’s earliest interviews and sums up his partnership and investment thesis spectacularly. Enjoy!

Warren Buffett has lived in Washington and New York and studied at Columbia University Business School, but he has never stayed in these places very long. He has always returned to his home town, Omaha, Nebr. If he were a doctor or lawyer or ordinary businessman, this might not be surprising. But Buffett is what is usually called a Wall Streeter, a Money Man. For the last 12 years he has been running one of the most spectacular investment portfolios in the country.
Since adjectives like “spectacular” don’t prove much, we’ll tell you exactly how spectacular Warren Buffett has been: $10,000 invested in his Buffett Partnership in 1957 is now worth $260,000. The partnership, recently at $100 million, has grown at an annual compounded rate of 31%. Over that 12-year period it hasn’t had one year in which it lost money. It gained 13% in 1962 and 20% in 1966, years when the Dow average fell 7% and 15%, respectively. It hasn’t lost money this year, either.
“Oh,” you say, “a hot stock man.” Not at all.
Warren Buffett has accomplished this through consistently following fundamentalist investment principles. A lot of young money men who now are turning in miserable performances began with the same investment ideas in the early Sixties but then forgot them in the Great Chase of the Hot Stock. Buffett, however, stayed with his principles. He doesn’t talk about concept companies or story stocks. He has never traded for a fast turn on an earnings report or bought little unknown companies, as Fred Carr does. He doesn’t hedge (i.e., go short) like A. W. Jones, who devised the hedge fund, Buffett is not a simple person, but he has simple tastes. He buys a stock for simple, basic reasons, not tortuous or sophisticated ones. His stocks, you might say, are sort of like Omaha.
His big successes over the years have been in the stocks of ordinary companies: American Express, not Control Data; Cleveland Worsted Mills, not Xerox; Walt Disney, not Kentucky Fried Chicken; Studebaker, not Teledyne. He won’t buy a conglomerate: They don’t make sense to him. Ditto technological companies: “I can’t understand them. They’re not my style.”
Buffett tells a story on himself: “William Morris of Control Data is a relative through marriage, and I could have bought it at 16 cents a share [now $150], but I asked: ‘Who needs another computer company?’”
Besides having no use for glamour stocks or conglomerates, Warren Buffett scorns what might be called the numerology approach to the stock market—charting, resistance points, trend lines and what have you. He’s a fundamentalist. “I’m 15% Phil Fisher,” he says, “and 85% Benjamin Graham.”
For the benefit of those not familiar with stock market literature we had better explain. Fisher and Graham are two of the great stock market fundamentalists. Fisher is what might be called a real-world fundamentalist. That is, he is primarily interested in a company’s products, its people, its relationships with dealers. Graham, the now retired coauthor of the textbook Security Analysis and the more readable The Intelligent Investor, could be called a statistical fundamentalist. That is, he analyzes the basic underlying statistics, assets, sales, capitalization and their relationship to the market price. Obviously neither method is much help in picking hot new stocks because hot new stocks, by definition, don’t have any fundamentals, statistical or otherwise.
Warren Buffett studied under Graham at Columbia, later worked for him at Graham Newman Corp. But let’s start from the beginning.
Born in Omaha in 1929, Buffett was taken to Washington in 1942 after his father, now deceased, was elected to the House of Representatives as a Republican. He lived there most of the time until his father retired permanently from politics in 1952. Back home in Nebraska, he studied at the University of Nebraska and pondered the stock market. “I’d been interested in the stock market from the time I was 11, when I marked the board here at Harris Upham where my father was a broker. I ran the gamut, stock tips, the Magee charting stuff, everything. Then I picked up Graham’s Security Analysis. Reading it was like seeing the light.” The light led Warren Buffett back East where he studied under the Master at Columbia Business School. Then back to Omaha and selling securities for two years. In 1954, when he was 25, he started Buffett Partnership, Ltd. with $100,000 and seven limited partners (he is the only general partner). The arrangement, still in effect, provided for Buffett to get 25% of the annual profits after each partner got 6% on his money. In 12 years this arrangement made Buffett a very rich man indeed. (He made us promise not to use a number, but figure out for yourself what would happen to even a small sum compounded for 13 years at 31%!)
Warren Buffett has applied Graham’s principles quite systematically. Says Graham in The Intelligent Investor: “Investment is most intelligent when it is most business-like”—in other words, not swayed by emotions, hopes, fads. This is Buffett’s most important tenet. “When I buy a stock,” Buffett says, “I think of it in terms of buying a whole company just as if I were buying the store down the street. If I were buying the store, I’d want to know all about it. I mean, look at what Walt Disney was worth on the stock market in the first half of 1966. The price per share was $53, and this didn’t look especially cheap, but on that basis you could buy the whole company for $80 million when Snow White, Swiss Family Robinson and some other cartoons, which had been written off the books, were worth that much. And then you had Disneyland and Walt Disney, a genius, as a partner.”
TEACHER GRAHAM: … to distill the secret of sound investment into three words, we venture the motto: Margin of Safety.
PUPIL BUFFETT: I try to buy a dollar for 60 cents, and if I think I can get that, then I don’t worry too much about when. A perfect example of this is British Columbia Power. In 1962, when it was being nationalized, everyone knew that the provincial government was going to pay at least X dollars and you could buy it for X minus, say, 5. As it turned out, the government paid a lot more.
GRAHAM: The investor with a portfolio of sound stocks … should neither be concerned by sizable declines nor become excited by sizable advances.
BUFFETT: Imagine if you owned grocery store and you had a manic-depressive partner who one day would offer to sell you his share of the business for a dollar. Then the next day because the sun was shining or for no reason at all wouldn’t sell for any price. That’s what the market is like and why you can’t buy and sell on its terms. You have to buy and sell when you want to.
Almost any of Warren Buffett's investments fall into this category, since he buys them when the price is going down and sells when they’re going up. Unlike Phil Fisher but like Ben Graham, Buffett doesn’t talk about evaluating management except in the very basic terms of whether it is trustworthy or not. His American Express investment is a perfect example of how his mind works. Buffett bought American Express after the salad oil scandal but not before doing some fast research on his own, which among other things included talking to the company’s competitors and going over restaurant receipts in an Omaha steak house. All of this convinced Buffett that American Express had an unassailable position in travelers’ checks and was fast developing the same sort of position in credit cards.
“Look,” says Buffett, “the name American Express is one of the greatest franchises in the world. Even with terrible management it was bound to make money. American Express was last in the traveler’s check market and had to compete with the two largest banks in the country. Yet after a short time it had over 80% of the business, and no one has been able to shake this position.”
Not for Warren Buffett are computers or a vast staff and impressive offices. Until recently, even when he was managing $20 million, Warren Buffett was the entire staff of Buffett Partnership, Ltd. Even today the staff consists of four housed in three small rooms in Omaha’s Kiewit Plaza. He gets some of his best ideas thumbing through Moody’s investment manuals, financial and general publications like the Wall Street Journal, New York Times and the American Banker, and industry journals when a specific industry interests him. This is the way he bought Western Insurance at $16 when it was earning $16 a share, and National American Insurance at one times earnings in the 1950s. Then in 1962 he found Gurdon Wattles’ American Manufacturing selling at a 40% discount from net worth. “If you went to Wattles of American Manufacturing or Howard Ahmanson of National American Insurance and asked them to be partners, you could never get in at one times earnings,” says Buffett.
When the reading puts him on to something, he’ll do some informal field research. In one case in 1965 Buffett says he spent the better part of a month counting tank cars in a Kansas City railroad yard. He was not, however, considering buying railroad stocks. He was interested in the old Studebaker Corp. because of STP, a highly successful gasoline additive. The company wouldn’t tell him how the product was doing. But he knew that the basic ingredient came from Union Carbide, and he knew how much it took to produce one can of STP. Hence the tank-car counting. When shipments rose, he bought Studebaker stock, which subsequently went from 18 to 30.
Warren Buffett is one of those disciplined types who is perfectly willing to sell too soon. As Buffett puts it, he tries to buy $1 worth of stock for 60 cents, and when it goes to $1, he sells it, even if it looks like it is going higher. With that kind of investing, he doesn’t have to worry too much about dips in the market. Nor about “stories” or “concepts”: “If the stock doesn’t work out in the context I picked it for, it probably will in another,” he says. Example: He bought his Disney stock with his eye on basic value, but it first went up when Disney died and has continued to rise because of the leisure boom. Says Buffet: “With value like that I know I’m not going to get stuck with a Kentucky Fried Computer when it goes out of fashion.”
As his fund got bigger and bigger, Warren Buffett began taking bigger and bigger positions, because his basic policy was to hold only nine or ten stocks. At one point, before selling the stock in May 1964, Buffett Partnership owned 5% of American Express. Inevitably, this led him to some control situations. For example, he and his friends own 70% of the stock of Berkshire Hathaway, a New England textile manufacturer that Buffett originally got into because the company had working capital of $11 a share versus a stock price of $7. They also own several small businesses.
Ans so Good Bye…
Alas, good reader, if all this appeals to you, forget about having Warren Buffett handle your money. From now on he’s not going to be handling anybody’s except his own. After this coming January Buffett is closing up shop and dissolving the partnership. He has no desire to be a Getty or a Rockefeller. Besides, he’s getting stale. “My idea quota used to be like Niagara Falls—I’d have many more than I could use. Now it’s as if someone had dammed up the water and was letting it flow with an eyedropper.” He attributes his problem to a market that no longer lends itself to his kind of analysis, where real values are hard to find. He blames some of it on the Performance Game; so many people are playing it now that, by definition, few will be able to get above-average results. Also, conglomerates and tender offers have picked off many of the bargains. But this may be—and probably is— mere rationalization. The motives behind Warren Buffett's quitting are probably much simpler. He has made a fortune and is no longer motivated to count boxcars and read statistical manuals. He comes close to the truth when he says: “You shouldn’t be doing at 60 what you did at 20.” He plans putting most of his money into municipal bonds, for income, and he’ll continue to hold companies where he has a controlling interest: Berkshire-Hathaway, the Illinois National Bank in Rockford, Ill. and a small Omaha weekly newspaper. He is interested in public affairs, but he plans to back various projects from offstage. What else? “I don’t believe in making life plans,” is all he will say.
Buffett plans to continue living in the rambling old Omaha house, typically suburban, where he has lived since his marriage in 1952; whenever he has needed more space he simply tacked on another room, including an indoor handball court, which keeps him lean. Here the pace isn’t frantic and his three children can have a healthy upbringing. Of course, everybody knows the smart boys gravitate to Wall Street. Only the sluggards stay home.12