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In 1969 the Buffett Partnership was getting quite complex. The bulk of its money was invested in minority holdings of listed companies. But a substantial amount was invested in two major holdings.
Diversified Retailing (Associated Retail Stores) was 80% owned by the Partnership with 10% owned by Charlie Munger’s California-based investment fund and 10% owned by Sandy Gottesman’s fund (First Manhattan Company).
Today I want to concentrate on the other big holding – Berkshire Hathaway, of which the Partnership owned 70.3% (691,441 shares out of 983,582).
The Berkshire Hathaway shift
Berkshire Hathaway, under President Ken Chace, had been transformed since Buffett took control in 1965.
Chace wrote to BH shareholders in early 1970 explaining what had happened:
“Four years ago your management committed itself to the development of more substantial and more consistent earning power than appeared possible if capital continued to be invested exclusively in the textile industry” (President’s letter April 1970).
He says that initially Buffett put the money released from textiles into marketable securities “pending the acquisition of operating businesses meeting our investment and management criteria.”
Chace was a lifelong textiles man; an industry he knew and loved.
Buffett was a capital allocator with a much broader investment horizon. It made sense to him to take money from any area that was making low returns on capital employed and apply it to other areas (firms, shares, bonds etc.) likely to produce high rates of return.
Dearth of managers that are good capital allocators
I’ve come to realise that few managers have this sort of broad horizon view. They know about one industry and one industry only.
It is absurdly risky, they say, to step outside of the familiar – they would be out of their depth.
They would be criticised, or worse, if any extra-industry investment went wrong, for taking excessive risk.
In many cases they are absolutely right. They are narrow-scope people……… To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
