Becoming Berkshire: The Go-Go Years of the 60s

Issue 15 | 1962-1969 A summary of Buffett & Berkshire's investments during the 1960s.

Oct 26, 2024

The 1960s was one of history's most tumultuous and divisive decades. The civil rights movement marked the era, the Vietnam War and antiwar protests, countercultural movements, political assassinations, and the emerging generation gap.

Television became a significant force in American life, influencing fashion, politics, and public opinion. Shows like The Twilight Zone and live news of events like the Vietnam War brought social issues into homes.

Internationally, the Cold War continued to shape global politics, with the Cuban Missile Crisis of 1962 bringing the world to the brink of nuclear conflict and escalating the U.S.-Soviet rivalry.

Post-WWII prosperity continued into the 1960s, with strong economic growth driven by manufacturing, consumer demand, and government spending. The GDP grew steadily, and the unemployment rate remained low. The market thrived in this environment, with the Dow Jones Industrial Average (DJIA) reaching new highs.

The companies that dominated the decade were AT&T, General Motors, Dupont, Exxon, General Electric, IBM, Texaco, Eastman Kodak, Union Carbide, and Sears Roebuck.

The Dow Jones opened at 685 in 1960 and finished at 800.36, capping a volatile decade.

The 60s introduced a new generation of money managers, far removed from the likes of Graham's generation, who managed capital with memoirs of the depression.

There is a Missing Generation on Wall Street because nobody went there from 1929 to 1947. To the older generation, the Depression of the thirties was a profound, traumatic experience. Stocks crashed in 1929, but that was not the worst. They rallied in 1930 and then started a steady erosion that scarred anyone who experienced it for life. United States Steel, which sold at $262 on September 3, 1929, drifted down to $22. General Motors slipped to $8 from $73. Montgomery Ward went from $138 to $4.1
Wall Street had reawakened to a younger breed, many of whom had not been alive in 1929 and were bored with their elder’s endless recitations. For them, speculation bore no curse; the bull market of the sixties was as free as first love. Even the stocks that they traded were new electronic issues, big conglomerates, and small growth stocks. Investments in mutual funds went from $1.3 billion in 1946 to $35 billion in 1967, and pension funds increased in size to $150 billion. Performance fund managers sold companies like Alcoa, Union Carbide, Telephone, and Texaco and purchased growth stocks like IBM, Polaroid, and Xerox.2

“Wall Street's 1960s were in many ways a replay of its 1920s - refuting the optimism of those who believe that reform can make social history into a permanent growth situation rather than a cyclical stock. The go-go years were also utterly characteristic of the larger trends of their time, reflecting and projecting all the lights and shadows of a troubled, confused, frightening decade, the precise like of which had never been seen before and surely will never be seen again. Manners and fashions change, but the wish to become rich remains constant, and the styles and motives of the greatest money-seekers reflect those changes as delicately as do those of great lovers.”3

1962 - Berkshire Hathaway

The original Berkshire Hathaway mill was torn down and replaced by a ...

Buffett started the partnership, Buffett Limited Partners, in 1957 when its assets totaled $303,726; by 1962, its assets were $7,178,500.

On December 12th, 1962, the Buffett partnership began purchasing shares in an unprofitable textile company from New Bedford, Massachusetts, for $7.50 per share.

The Company had a book value of $22.51 per share, three times the current price of $7.50 per share. Being the protégée of Mr. Graham, Buffett must have purchased this Company strictly from the quantitative aspect of it trading below its net working capital.

1963 - American Express

Image result for BUFFETT AMERICAN EXPRESS

In 1963, De Angelis decided to corner the soybean market by using the soybean oil collateral from American Express Warehouses to purchase future soybean contracts. He bet that the price of soybean oil would continue to rise, increasing the value of his future contracts.

As the soybean market crashed and De Angelis defaulted at several firms, he set a shockwave across the financial markets the week before the Assassination of JFK.

Buffett believed the scandal would not tarnish the brand, so he did some good ole fashion boots-on-the-ground research. Buffett visited his local Steakhouse and sat behind the register to see what customers would pay. Buffett noticed that customer after customer was paying with the American Express card, and they were unfazed by the salad oil events that unfolded. Buffett verified that the brand remained strong and its customers were loyal to American Express.

Buffett came away with two realizations:

American Express was not going insolvent
Its name was one of the largest franchises in the world.

“American Express did not have a margin of Safety in the Ben Graham sense of the word, and it is unthinkable that Graham would have invested in it. The Graham canon was quite clear: a stock out to be purchased on the basis of “simple and definite arthimtical resigning from statistical data.” In other words, on the basis of working capital, plant and equipment, and other tangible assets.
But Buffett saw a type of asset that eluded Graham: the franchise value of American Express’s name. For Franchise, think: a market lock. The Cardinals own the franchise for baseball in St. Louis; no team need apply. American Express was nearly that good. Nationally, it had 80% of the traveler’s check market, and a dominant share in charge cards. In Buffett’s opinion, nothing had shaken it, and nothing could. The loyalty of its customers could not be deduced from Graham’s “simple statical data”; it did not appear on the company’s balance sheet as would a tangible asset, such as factories of a Berkshire Hatahway. Yet there was value in the franchise- in Buffett’s view, immense value.
American Express had earned record profits in each of the past 10 years. Salad oil or not, its customers were not going away, and yet the stock market was pricing the company as if they already had.”4

American Express had a competitive moat and was the type of business Charlie would call a “great business.”

Interestingly enough, although I consider myself to be primarily in the quantitative school (and as I write this, no one has come back from recess - I may be the only one left in the class), the really sensational ideas I have had over the years have been heavily weighted toward the qualitative side where I have had a "high-probability insight". This is what causes the cash register to really sing. However, it is an infrequent occurrence, as insights usually are, and, of course, no insight is required on the quantitative side - the figures should hit you over the head with a baseball bat. So the really big money tends to be made by investors who are right on qualitative decisions, but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions.

Buffett had a “high probability insight” that American Express would survive the scandal and that the security price would eventually rise.

1964 - Berkshire Hathaway

This date in 1965: two iconic shots of cassius clay's first fight as muhammad ali vs sonny ...

On May 6, 1964, Berkshire Hathaway, then run by a man named Seabury Stanton, sent a letter to its shareholders offering to buy 225,000 shares of its stock for $11.375 per share.
I had expected the letter; I was surprised by the price. Berkshire then had 1,583,680 shares outstanding. About 7% of these were owned by BPL, an investing entity that I managed and in which I had virtually all of my net worth. Shortly before the tender offer was mailed, Stanton had asked me at what price BPL would sell its holdings. I answered $11.50, and he said, “Fine, we have a deal.” Then came Berkshire’s letter, offering an eighth of a point less. I bristled at Stanton’s behavior and didn’t tender.
That was a monumentally stupid decision…
Irritated by Stanton’s chiseling, I ignored his offer and began to aggressively buy more Berkshire shares.5

1966 - Hochschild-Kohn

Hochschilds was a good match for Baltimores unpretentious and thrifty personality.

In January 1966, Gottesman brought Buffett an idea: Hochschild-Kohn, a venerable department store headquartered in downtown Baltimore. Buffett and Munger flew into Baltimore, and they liked the Kohn family immediately. Lous Kohn, who had a financial background, was going to run the business for them … Buffett and Munger looked at the balance sheet and made a $12 million bid on the spot.
Buffet, Munger, and David “Sandy” Gottesman formed a holding company, Diversified Retailing Company, Inc. (“DRC”), to “acquire diversified business, especially in the retail field.” The Partnership owned 80% of DRC. Gottesman and Munger each took 10%. Buffett and Munger then went to Maryland National Bank and asked for a loan to make the purchase.
Buffett had never borrowed any significant money to buy a company. But they figured the margin of safety reduced their risk, and interest rates were cheap at the time.6

1966 - Walt Disney Company

54 Years Ago Today Walt Disney Passed Away at Age 65 : DisneyFanatic.com

While Buffett was in New York, he went to see the Company's latest film, Mary Poppins. Needless to say, Buffett was not so interested in Julie Andrews, but in the stock. Settling into a seat with his tweeds, briefcase, and popcorn, he noticed the other patrons staring at him. He suddenly realized he was the only adult unaccompanied by a child and must have looked rather odd.
But when the theater went dark, the other moviegoers forgot him. Buffett saw that they were riveted to the picture, and he asked himself, in effect, what it would be worth to own a tiny bit of each of those people's ticket revenues - for today and tomorrow and as many tomorrows as they kept coming back to Disney.
In the summer, when the Buffetts were in California, they went with the Mungers to Disneyland. While the kids did the park, Buffett and Munger discussed it financially, ride for ride, a kind of Fellini fantasy version of a corporate balance sheet.
Subsequently, Buffett visited Walt Disney himself on the Disney lot. The animator, meeting him in shirtsleeves, was as enthusiastic as ever. Buffett was struck by his childlike enchantment with his work- so similar to Buffett's own.
Disney stock, meanwhile, was trading at only about ten times earnings. Buffett tried to analyze it not as a stock but as a whole company, perhaps as a business down the street in Omaha that was willing to sell him part ownership. In Buffett's view, its most valuable feature was its library of old cartoons and films, such as Snow White and Bambi. A Ben Graham would not have been interested in such an imprecise asset. However, Buffett estimated that, on a proportional basis, the library alone was worth the price of a share. Plus, we would own a slice of Disneyland, and he would have the unpretentious Mr. Disney as his partner. With such thoughts in mind, Buffett bought 5 percent of Disney for $4 million.
Buffett, it should be understood, was not abandoning the Graham credo of hunting for securities that were well below "intrinsic value." But his definition of value was changing, or rather, broadening. To Buffett, the value of Disney's film library, even though imprecise and mainly off the books, was no less real than a tangible asset such as a factory.7

“We bought 5% of the Walt Disney Company in 1966. It cost us $4 million dollars. $80 million bucks was the valuation of the whole thing: 300 and some acres in Anaheim. The Pirate’s ride had just been put in. It cost $17 million bucks. The whole company was selling for $80 million. Mary Poppins had just come out. Mary Poppins made about $30 million that year, and seven years later, you’re going to show it to kids the same age. It’s like having an oil well where all the oil seeps back in.”8

7 - National Indemnity

It was on March 9, 1967, that Berkshire purchased National Indemnity and its companion company, National Fire & Marine, from Jack Ringwalt for $8.6 million.
Jack was a long-time friend of mine and an excellent, but somewhat eccentric, businessman. For about ten minutes every year he would get the urge to sell his company. But those moods – perhaps brought on by a tiff with regulators or an unfavorable jury verdict – quickly vanished.
In the mid-1960s, I asked investment banker Charlie Heider, a mutual friend of mine and Jack’s, to alert me the next time Jack was “in heat.” When Charlie’s call came, I sped to meet Jack. We made a deal in a few minutes, with me waiving an audit, “due diligence” or anything else that would give Jack an opportunity to reconsider. We just shook hands, and that was that.
When we were due to close the purchase at Charlie’s office, Jack was late. Finally arriving, he explained that he had been driving around looking for a parking meter with some unexpired time. That was a magic moment for me. I knew then that Jack was going to be my kind of manager. 9

Berkshire paid $8.6 million to acquire National Indemnity in early 1967. National Indemnity and National Fire & Marine had combined equity totaling $6.7 million. National Indemnity earned $1.4 million the year before, but that was an outlier as the average net income over the previous 12 years was $437,000 … Additionally, National Fire & Marine was also earning profits. Although its earning level is unclear prior to the acquisition, the company earned $164,000 before realized gains on investments in 1967.10

1968 - Sun Newspaper

Buffett’s love of newspapers started when he was 13 years old. He would deliver copies of the Washington Post at 4:30 am while his father served in Congress. At the end of 1968, Berkshire purchased Sun Newspaper and Blacker Printing Company for $626,000 and $600,000, respectively.

According to legend, Lipsey, who was friends with Susie Buffett, walked into Warren’s office at Kiewit Plaza and offered to sell his company.

The Sun was a chain of weekly neighborhood newspapers that published seven editions in the Omaha suburbs. Its meats-and-potatoes stories were neighborhood doings; the Sun's editor, Paul Williams, competed by publishing stories that the leading paper, the Omaha World-Heald, issued, often stories that exposed the follies and misdeeds of city bigwigs ... Buffett took a particular interest in the muckraking aspect the Sun"... Lipsey says " I didn't like the Sun's business prospects. Still, I knew that Warren had enough money that journalism wouldn't suffer because of the economics. In 20 minutes, it was done."

"I figured we'd pay a million and a quarter for it and take out a hundred thousand a year," Buffett says. This return was 8%, about as much as a bond would provide—less than he expected to earn on a business or a stock, and the term outlook suggested that the return would decline.11

1969 - Illinois National Bank

Illinois National Bank building (former Central Illinois L… | Flickr

On April 3, 1969, Berskhire Hathaway, Inc. acquired 81,989 shares, out of a total of 100,000 shares outstanding, of the common stock of the Illinois National Bank and Trust Co. of Rockford, Illinois, at a cash price of $190.00 per share. They also have made a tender offer to acquire the remaining outstanding shares at the same cash price. ⁶

Buffett considered Rockford Bank one of the most well-run and profitable he had ever seen. It was managed by Eugene Abegg, who was 71 years old.

Abegg, who owned one-quarter of the shares, had been negotiating to sell the business to someone else before Buffett came along. The potential buyer had started criticizing the deal and wanted an audit. This affected Abegg, and he decided not to go ahead with the deal. Meanwhile, Buffett worked out what he was willing to pay, which turned out to be about $1 million less than the other buyers.
Abegg was so fed up with the other bidders that he pressured his fellow shareholders to accept Buffett's offer, threatening to resign if they did not.⁷

The crusty Abegg was just the type of fellow that Buffett liked.

The Illinois National Bank, which Buffett soon came to refer to by its colloquial name of Rockford Bank, had been chartered in the days before the U.S. Treasury assumed the exclusive right to coin money. Buffett was fascinated to discover that it still issued its own currency. The ten-dollar bills featured Abegg’s picture. Buffett, whose net worth was now more than $26 million, could have bought almost anything he wanted, but not this. Gene Abegg had done him one better. He and the United States Treasury had the privilege of issuing their own currency, but not the Buffett Partnership or Berkshire Hathaway. The idea of legal tender with your own picture on it captivated him. He began carrying a Rockford bill in his wallet.

Berkshire paid $190 per share to acquire Illinois National, plus $2 per share to an investment bank for services rendered in the transaction.12

From what I could find in my research, the purchase price was approximately $15.6 million; however, it has been challenging to get an exact number. Jacob McDonough’s brilliant work in Capital Allocaiton shows that Berkshire paid just under Book Value for this well-capitalized bank.

With total Assets of $117.3 million, shareholder equity of $16.8 million, and a net profit of $1.7 million in 1968, the bank had an ROE of 10% and ROA of 1.4%.

The acquisition was part of Buffett’s strategic shift away from the faltering textile business that Berkshire was initially known for. It was evident that textiles was no longer a viable business. Buffett continued to allocate capital away from the division and into sectors with better long-term prospects, like financial services and insurance, which were cash-generating and had predictable earnings. Moreover, Buffett appears to have targeted businesses with float, as National Indemnity and Illinois National Bank were flush with cash.

I hope everyone enjoyed this recap of Buffett & Berkshire in the 60s; I’ll see everyone in 1970!