Becoming Berkshire: 1970 Part 2 - Blue Chip Stamps
Issue 17| 1970 Part 2: Goodbody & Co; Walmart's IPO; Blue Chip Stamps; Berkshire Hathaway; Cornhusker Casualty Company
👋Welcome back to 1970 as we continue our journey throughout this tumultuous year. Before we continue, I want to thank those who have recently subscribed and give a welcoming hug to the several new paid subscribers.
ICYMI: 😊
Thus far, 1970 has brought us the largest corporate bankruptcy, as Penn Central reorganized, and several broker-dealers, such as Hayden, Stone & Co., began to bust. The Federal Reserve put together a trust fund to inject capital into failing broker-dealers, and a newly formed crisis committee leaped from one financial calamity to another.
Goodbody & Co.
The crisis committee and Chairman of the New York Stock Exchange, Bernard J. Lasker, found themselves out of the frying pan and into the fire. The main event was Goodbody & Co, a pillar of the brokerage community, co-founded by the great Charles H. Dow himself in 1891. Larger than Hayden, Stone, Goodbody had 225k customer accounts and was the fifth largest investment enterprise.
A September audit revealed that Goodbody had pledged $34 million of its customer's wholly owned securities, which were legally required to be carefully segregated as collateral for loans. It had also lost track of at least $18 million worth of securities."1 FTX, anyone?
To make matters worse, customers began withdrawing money while the company suffered a "monumental snarl in its extensive commodity accounts."2 The company was now in flagrant violation of the 1:20 net capital rule.
Capital requirements are regulatory standards determining how much liquid capital (quickly sold assets) companies must keep on hand regarding their overall holdings.
On October 26, the S.E.C. ruled that Goodbody must raise substantial new capital by November 5, given the $18 million shortage, or be suspended. Goodbody had to be rescued, and Merrill Lynch, the largest brokerage firm on Wall Street, was tapped to do the rescuing.
"On October 29, Lasker and the crisis committee worked a deal with Merrill Lynch to supply $15 million of the capital to Goodbody in exchange for the acquisition of all Goodbody assets and would be indemnified by the Stock Exchange to the extent of $20 million on possible securities losses and another $10 million to cover possible ligaigion coming out of the arrangement."3 The merger would be the largest in Wall Street history. John Mitchell and the Department of Justice were happy to pass this one through without violating antitrust laws.
It would not be until 2007 that Merrill Lynch would need some rescuing themselves, due to a whopping $7.9 billion writedown from complex debt instruments harmed by the meltdown in the subprime mortgage market. As Mark Twain would say, "History doesn't repeat itself, but it does rhyme."
It is fascinating to think how much Buffett and Munger have lived through, yet so many have doubted their wisdom by uttering that “this time is different.”
Walmart
The calm of the 50s and the electric thrills of the 60s had been replaced by sullen feelings, befitting the coming decade of shortages, deadbeats, debts, and limits.4
One bright note was Walmart’s public offering of 300,000 shares that traded over the counter.
The company was founded by Sam Walton, who shared many similarities with Buffett. They were both raised with Midwestern values, were geniuses, worked at JCPenney, and were famous for their frugal ways. Sam was known for making his employees stay two or three to a room during work trips.
By the late '60s, Walmart was well positioned for serious growth. It had a great management team and a retail concept it believed in. By 1969, Walmart had 14 variety stores and 18 Walmarts.
I'm currently reading Sam Walton: Made in America, so I had to throw that in.
Blue Chip Stamps
Rick Guerin, who ran Pacific Partners, stumbled upon a company named Blue Chip Stamps in the mid-60s. Rick asked Charlie Munger if he could pitch the idea to his friend Warren, who knew about "floats."
Trading stamps were quite the fad in the 1950s and '60s, as merchants handed out stamps from Green Stamps, Blue and Gold, and Blue Chip to customers as incentives. Sperry & Hutchinson ("S&H") Green Stamps was the dominant stamp company during the 1950s. At the pinnacle of its success, S&H delivered more stamps than the postal service. To compete with S&H, Blue Chip Stamps Company was created by nine retailers, including Chevron Oil and Thrifty Drugs.
Blue Chip became the largest stamp company in California, and small retailers complained they were not getting a fair shake. 1963, the Department of Justice filed an antitrust suit against Blue Chip Stamps and its nine retailers. The nine retailers had shut out the S&H Green Stamp Company by starting their own stamp company and selling it to themselves at a discount.
In 1967, a consent decree was entered calling for a complete reorganization of the company so that the nine retailers could no longer exert complete control. Under the Court's order, Blue Chip was ordered to offer 621,600 shares of its common stock to smaller retailers. Any of the 621,600 shares that small retailers did not purchase would end up on the open market. That's when Buffett, Munger, and Guerin started picking up shares.
Munger's partnership had bought 20,000 shares, and Guerin bought a similar amount. Buffett's partnership purchased 70,000 shares before its dissolution. Buffett and Munger purchased a large block from Source Capital, a closed-end shop run by Fred Carr, one of the famous managers from the go-go years.
"Retailers would deposit money at Blue Chip in return for their stamps; then, the money was used to operate the stamp company and to purchase the merchandise handed out when stamps were redeemed. Shoppers were given certain stamps for each dollar spent in a store, which they pasted into books and then redeemed for prizes such as toddler toys, toasters, mixing bows, watches, and other items. Because it took time to accumulate enough stamps to redeem merchandise - and because some stamps were forgotten or tossed in the back of a drawer, the float built up."5
"The trading stamp was a marketing giveaway. Retailers handed stamps to their customers with their change. Customers pasted them into little booklets. The small thrill of saving stamps fit neatly into a disappearing world: a world of thrift, a world that feared debt, that viewed these "free gifts" as the reward for taking the trouble to collect and save those stamps."6
"When you had all the major oil companies and grocers giving out a single stamp, it became like money. People would leave their change behind and take the stamps. Morticians gave out stamps. Prostitutes gave them. It was ubiquitous; People even counterfeited them."7
"Blue chip had something called float. The stamps were paid for in advance; the prizes were redeemed later. In between, Blue Chip had use of the money; sometimes for years. Buffett had first encountered this tantalizing concept with GEICO, which was part of why he wanted to own National Indemnity."8
"Every now and then, Charlie and I catch on early to a tide-like trend, one brimming over with commercial promise. For example, though American Airlines (with its "miles") and American Express (with credit card points) are credited as being trailblazers in granting customers "rewards," Charlie and I were far ahead of them in spotting the appeal of this powerful idea. Excited by our insight, the two of us jumped into the reward business way back in 1970 by buying control of a trading stamp operation, Blue Chip Stamps. In that year, Blue Chip had sales of $126 million, and its stamps papered California."9
"In 1970, about 60 billion of our stamps were licked by savers, pasted into books, and taken to Blue Chip redemption stores. Our catalog of rewards was 116 pages thick and chock full of tantalizing items. When I was told that even certain brothels and mortuaries gave stamps to their patrons, I felt I had finally found a sure thing."10
Berkshire Hathaway
Textile Operations
Buffett's reliance on the textile mill diminished as Berkshire continued to diversify. "The textile business became progressively more difficult throughout the year."11 The division managed to profit $107,288 on sales of $24.5 million as Ken Chace and management had been "swimming against a strong tide."12
Insurance Operations
Berkshire "enjoyed an outstanding year for growth in the insurance business, accompanied by a somewhat poorer underwriting picture as the combined ratio rose to 100%."13
During the year, National Indemnity formed a subsidiary insurance company, Cornhusker Casualty Company. The first of many insurers that would be scattered across the country, the "home-state" operation—Cornhusker Casualty Company, formed in early 1970 as a 100% owned subsidiary of National Indemnity, writing standard business through Nebraska agents only—was off to a strong start. Combining big-company capability and small-company accessibility proved to be a strong marketing tool with first-class agents.
Banking Operations
"Net operating gains before security gains came to well over 2% of average deposits."14 With lower interest rates throughout the country, Buffett found it challenging for management to maintain earnings while utilizing a high-cost deposit mix.
Unfortunately, at the end of 1970, the Bank Holding Company Act was passed, which affected Berkshire because of its controlling ownership of The Illinois National Bank. Berkshire would have to spin off the bank or risk being a bank holding company.
I cannot overstate the importance of
‘s book, The Complete Financial History of Berkshire Hathaway, and how helpful his work is to my research. It's a must-own for any Berkshire Hathaway fan.Mr. Mead calculated Illinois National's return on assets and equity as 1.9% and 12.5%, respectively.15
These are significant numbers, considering how conservative the bank was. Mr. Mead pointed out that Illinois National Bank operated with seven times the amount of assets as it did equity capital, while banks today operate with 10-12 times leverage.16
I’ll see everyone in 1971!
I want to thank the following Substacks that helped with my research:
Lastly, thank you to those who supported my daughter’s fundraiser. Here is the link for those wishing to spread the gift of cheer this holiday season.
https://www.yumraising.com/secure/mcphersonms_mcpherson_winter__overnight_field78/Zosab3777/candy
Becoming Berkshire 1930-1971:
Issue 15| The Go-Go Years of the 60s
Issue 14| 1969- Part 2 Illinois National Bank
Issue 13| 1969 - Part 1 Buffett Retires
Issue 12| 1968 - Sun Newspaper & Blacker Printing Company
Issue 11| 1967 Part 2 - National Indemnity
Issue 10| 1967 - Buffett & Clyde
Issue 9| 1966 Part 2 - Warren Buffett & The House of Mouse
Issue 8| 1966-Hochschild, Kohn & Co.
Issue 7| 1965 - Hostile Takeover
Issue 6| 1964 - Buffett's Folly
Issue 5| 1963/64 - The American Express Salad Oil Swindle
Issue 4| 1963 - Breakfast at Berkshire’s
Issue 1| 1930-1949 - An Oracle is Born
Brooks, John. The Go-Go Years: The Drama and Crashing of Finale of Wall Street’s Bullish 60s. (New York: Allworth Press, 1973). Pg. 330.
Id.
Brooks, John. The Go-Go Years: The Drama and Crashing of Finale of Wall Street’s Bullish 60s. (New York: Allworth Press, 1973). Pg. 333.
Farrell, Johan A. Richard Nixon: The Life. (New York: Doubleday, 2017) Pg. 448.
Lowe, Janet. Damn Right! (New York: John Wiley & Sons, 2000).Pg. 111.
Schroeder, Alice. The Snowball: Warren Buffett and the Business of Life. (New York: Bantam, 2008), 275.
Id.
Id.
Warren Buffett’s 2008 Letter to Shareholders.
Id.
Warren Buffett’s 1970 Letter to Shareholders.
Id.
Id.
Id.
Mead, Adam J. The Complete Financial History of Berkshire Hathway: A Chronological Analysis of Warren Buffett & Charlie Munger’s Conglomerate Masterpiece. (Hampshire, Harriman House, 2021.) Pg 61.
Id.
thanks !
Thanks for the informative post. I'd venture to say that very few people really dig into the Bank Company Holding Act. Worth noting that the BHCA was originally passed in 1956, with significant revisions in 1970 (which you refer to above). Key changes included the inclusion of one-bank holding companies, which were previously exempt, ensuring that all entities controlling banks were subject to Federal Reserve supervision. The amendments strengthened the Federal Reserve's authority to regulate nonbanking activities. Additionally, the updates eliminated certain exemptions that allowed some entities to evade regulation.