- So It Begins...Emotionally
- Kissing Ben Graham’s (Cigar) Butt Goodbye
- How Many More Puffs?
- Wanted: Dead or Alive in '65
- Financial Summary 1964
1. So It Begins...Emotionally
The first annual letter written by Warren Buffett to shareholders of Berkshire Hathaway on November 9, 1965, is unusual in how short it is. It’s only a page long and is the shortest of all the annual letters. But before starting an analysis of the 1965 shareholder letter, how did we get here?
It was only a few months before on May 10, 1965, that Buffett Partnership, Ltd., (BPL) had formally taken control of the famed New England textile company called Berkshire Hathaway. But this wasn’t supposed to happen. Buffett never intended for BPL to gain control of Berkshire.
12.5 cents or 1/8th of a dollar.
That was the difference in price per share that separated Buffett from choosing to sell his entire stake in Berkshire in May 1964, a position accumulated since 1962, and doing the complete opposite by buying even more shares until BPL gained control of the company a year later in May 1965. Had Buffett sold out in May 1964, his partnership would have realized 40% annualized returns on the investment, originally acquired at $7.60 per share towards the end of 1962.
What happened was that the long-time owner and president of Berkshire, Seabury Stanton, had met with Buffett in early 1964 and had agreed to buy Buffett’s shares back at $11.50 per share in a public tender offer. However, when the tender offer came in the mail in May of 1964, it was for $11.375, 12.5 cents below the original agreed upon tender offer price. Buffett couldn’t sell out before the tender was announced because he had material, non-public information about a tender offer coming. Buffett was livid.
Irate that he was being squeezed for 1/8th of a dollar and that Mr. Stanton had gone back on his word, Buffett decided to buy even more shares to push the guy out. He began to aggressively buy up shares of Berkshire until formally taking control of the board almost a year later in May 1965.
This is like advertising your iPhone on Craigslist for $100, the guy showing up saying he will only give you $98.91 for it ($11.375/$11.50 = $98.91/$100), and you subsequently throwing a hissy fit. You say no way, and then start buying all the stuff in his car just to prove a point.
2. Kissing Ben Graham’s (Cigar) Butt Goodbye
Had he simply accepted Mr. Stanton’s tender offer, Berkshire would have been a great investment in the mold of his mentor and former employer, Benjamin Graham, who taught him the strategy of buying and selling cigar butts. Buffett could have sold the roughly 111,000 shares owned (or 7% of the 1,583,680 total shares outstanding in early 1964) at the $11.375 tender offer price from Mr. Stanton in May 1964, a significant increase from BPL’s original purchase price of $7.60 in 1962.
But, nope, less than a year later...