MOHNISH PABRAI 00:00
And then what they did was that in 1972, See’s Candies came up for sale. And they took 25 million of Blue Chip's float and they bought See’s Candies.
So I told you about $50-60 million of the float was never going to be called back because people were never going to – so this was kind of the free money. So there are about $50-60 million of free money, they took $25 million of free money bought See’s Candies.
Then a year later, there was a savings and loan that were trading well below liquidation value sitting at half of book value, Wesco Financial, where they again invested about $25 million eventually about 80% of Wesco, again using the float money from Blue Chip.
And then in 1977, the Buffalo Evening News, which is a newspaper in Buffalo came up for sale, and that was bought for about $33.5 million. And from like 1972-1977, See’s Candies had generated quite significant retained earnings about $4-5 million a year. So they use the retained earnings of See’s Candies plus some more float from Blue Chip and they bought the Buffalo News.
And then the Buffalo News ran into a lot of trouble so they had 5-6 years of losses, I think they loss about $12 or 13 million, all of that got covered with the earnings from See’s Candies. So they had lot of union problems, they have strikes then they got their competitor sued them because they started a Sunday paper to compete with the other paper in Buffalo.
So they went through a lot of turmoil for 5-6 years with the Buffalo News, but by 1982 everything had settled down the competitor gone out of business and 1982 their earnings were $19 million pre-tax. So on a business they bought for $33 million 5 or 6 years later, you were making almost half of that. And in a few years the Buffalo News was making $50 million a year pre-tax, so it became a nice home run.
So when you look at what happened with Blue Chip Stamps with these three companies, you know with See’s Candies and Wesco Financial and then the Buffalo News, you had about, you know, the original $24 million in effect gave you all these three businesses.
And then in 1983, they merged these businesses into Berkshire Hathaway, and that’s how Charlie Munger got to owning 1.5% of Berkshire Hathaway, Sandy Gottesman also got a significant portion and so on. And so, every 13 shares of Blue Chip in 1983 gave you one share of Berkshire Hathaway, which is around, you know, around a quarter million or so.
And the 60% of Blue Chip that costs about $24 million is today sitting at about $60 billion. So it was a very significant increase but when you look at the, you know, I told you that they've about $5.5 million debt when they raised from Diversified Retailing, so the group that put the money in from Diversified Retailing – so every dollar you put into Blue Chip between 1967 and 1970, today is worth about $2500 – but every dollar you put in through Diversified Retailing is worth about $18,000 and which is why you got a bunch of billionaires out of all of this.
And so that was basically the interesting side of Blue Chip and how it – and the original business Blue Chip itself went to almost immediate decline. So it was – it had revenues of about $100 million in the late 60s and by the late 70s, those revenues were down to about $20 million and then further down I think in the 80s, it was down to 10,000 to 20,000 before they – you know, basically shut down the company and such. And then all we have are the remnants the stamps that all of you got.
But another interesting thing that happened then was that they bought Wesco Financial as a very cheap asset for $25 million, it probably worth, you know, $40-50 million in 1973 and almost nothing they did with Wesco move the needle that much, it wasn’t such a great investment.
But in 1988, 14-15 years after they bought Wesco, the government had set up Freddie Mac and they were going to allow public ownership of Freddie Mac’s shares – you know, Fannie and Freddie were up and running – but they only allowed S&L (savings and loans) to buy Freddie Mac shares.
So you had to be an S&L to buy Freddie Mac shares and any S&L could buy – savings and loan could buy up to 4% of the Freddie Mac shares outstanding, so Wesco owned mutual savings which was a savings and loan and they max the 4%. So they invested $71 million into Freddie Mac shares.
So you make this investment in 1973, you do a few things nothing really moves the needle much, 1988 you make a single investment $71 million. In the year 2000, they sold the Freddie Mac investment, so they sold it for $1.4 billion went up 20x plus they have another $600 million in dividend so it became $2 billion.
And then that money in 2000, if you, you know, moved into Berkshire around that time, you know, you would have something like a 4x on that. So you know, $70 million becomes something like $8 billion.
And the key lesson with the – with all of these stories, so if you think about it from the late 60s to the late 80s for the most part with these different investments, they made 5 decisions. There were 5 meaningful decisions so approximately a decision every 4-5 years. And the five decisions were, you know, taken control of Blue Chip, buying See’s Candies, buying Wesco Financial, buying Buffalo News, and finally the investment in Freddie Mac, so a few bets, big bets, and very infrequent bets.
And so if you think about kind of what transpired with all these different bets is a – there’s a wonderful quote by Charlie Munger which encapsulates this very well and I just read it, “A few major opportunities clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind, loving diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favourable, using resources available as a result of prudence and patience in the past.”
And so, you know, the key mantra is this, Few Bets, Big Bets, Infrequent Bets. That’s I think one of the very core tenants of value investing, but there is another aspect to this which shouldn’t get lost in the middle of all these which is none of this came painlessly. In fact, it came with a lot of pain or as I would say No Pain, No Gain.