Becoming Berkshire:1966 Part 2 - Warren Buffett & The House of Mouse

Issue 9 | 1966 Part 2

Apr 10, 2024

Welcome to Issue 9 of Becoming Berkshire; we remain in 1966 as we have more to cover. In addition to the Buffett Partnership investing in Hochschild, Kohn & Co., Buffett acquired 5% of the Walt Disney Company, and Berkshire Hathaway paid its only dividend of 10 cents per share!

The Walt Disney Company

Buffett was so fascinated by Mary Poppins' theatrical success that it piqued his curiosity about the type of Moat Disney had and their ability to produce durable earnings.

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

Roger Lowenstein’s excellent biography Buffet: The Making of an American Capitalist details Buffett’s investment in the Walt Disney Company:

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. 1

Disney Parks to Lay Off 28k Employees, Cites California COVID-19 Restrictions

Buffett described his 1966 Disney investment during a discussion with Norte Dame Business School students and faculty in the spring of 1991:

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 th oil seeps back in.
Now the [numbers today are] probably different, but in 1966 they had 220 pictures of one sort or another. They wrote them all down to zero – there were no residual values placed on the value of any Disney picture up through the ‘60s. So [you got all of this] for $80 million bucks, and you got Walt Disney to work for you. It was incredible. You didn’t have to be a genius to know that the Walt Disney company was worth more than $80 million. $17 million for the Pirate’s Ride. It’s unbelievable. But there it was. And the reason was, in 1966 people said, “Well, Mary Poppins is terrific this year, but they’re not going to have another Mary Poppins next year, so the earnings will be down.” I don’t care if the earnings are down like that. You know you’ve still got Mary Poppins to throw out in seven more years, assuming kids squawk a little. I mean there’s no better system than to have something where, essentially, you get a new crop every seven years and you get to charge more each time.
$80 million dollars [sigh]. I went out to see Walt Disney (he’d never heard of me; I was 35 years old). We sat down and he told me the whole plan for the company – he couldn’t have been a nicer guy. It was a joke. If he’d privately gone to some huge venture capitalist, or some major American corporation, if he’d been a private company, and said “I want you to buy into this. This is a deal,” they would have bought in based on a valuation of $300 or $400 million dollars. The very fact that it was just sitting there in the market every day convinced [people that $80 million was an appropriate valuation]. Essentially, they ignored it because it was so familiar. But that happens periodically on Wall Street.
I wanted to go see Mary Poppins, to see if she’d be recycled, and she was showing at the Loews Theater on 45th and Broadway in New York, and here I am with a briefcase at 2:00 in the afternoon heading in to see Mary Poppins. I almost felt like I had to rent a kid.2

Similar to American Express, Buffett found value in Disney's franchise model. This may have been another investment influenced by the architect of Berkshire, Charlie Munger, who favored higher-quality companies and didn’t mind paying a higher price for them. If Buffett had only held onto the shares, his $4 million investment would have been worth almost $11 Billion today with a $215 Billion market cap!

Berkshire Hathaway 1966 Annual Letter

Sales remained flat at $43.3 million from the prior year as one division fell as the other increased. Buffett touched on the cyclical nature of the textile industry and spoke about the importance of a strong financial condition. “It has always been among the goals of Berkshire Hathway to maintain a strong financial condition.”3

Technological changes in the textile file required continuous investment in plant and equipment, and he began to weigh the possible rewards and risks of potential capital expenditures. Berkshire ended the year with $5.4 million in working capital, and he likely questioned if allocating capital outside of the textile industry would achieve a greater return on capital. Buffett mentioned the "Company has been searching for suitable acquisitions within, and convened without the textile field."4

Buffett was managing the partnership and Berkshire Hathway, and it seemed unclear if Buffett wanted to continue with Berkshire. I say this because Buffett paid a 10-cent dividend, which would break the internet if it happened today. It was not until 1967 that Berkshire became the investment vehicle we know today.