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Warren Buffett’s collection of businesses in the mid-1970s

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Before moving on to discuss the investments Buffett made in the second half of the 1970s and beyond we need to remember the cards he had to play at that time.  We’ll start by looking at the extent of the empire the forty-something Buffett controlled.

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After closing the Buffett Partnership in 1970 he and his wife Susan put the largest portion of their money into Berkshire Hathaway shares which was then principally a New England textile manufacturer, struggling to make profits.

He had taken control of this $20m enterprise in May 1965 attracted by the net assets, and definitely not by the quality of its operating business, although there were brief flickers of hope that even that could be turned around.

Immediately, Buffett ordered investment in textiles to be strictly limited – every dollar put in must generate at least a dollar of true value, a good return on capital employed.   Rarely did Buffett think this was likely and so he generally said no to expansion or fancy new machinery.

Instead BH accumulated dollars from asset sales and the occasional profit.  The search was on for good places for that cash where it would create much more than a dollar of value.

National Indemnity

In 1967 he found just such an investment, National Indemnity, a motor and casualty insurer based in his home town of Omaha, which BH bought for $8.6m.  It had, like GEICO, an excellent business model run by competent and honest managers and was therefore capable of producing an underwriting profit in a highly competitive market by being a highly efficient low-cost operator with reliable high quality service.

Just as important to Buffett was the float, standing at $17.3m in 1967.  It wasn’t long before he had built this up to over $70m.  This large amount of other peoples’ money could go on making capital gains and receiving dividends/interest for BH from its holdings of securities even if the insurance underwriting business suffered from low premium rates for a while.

Buffett became hooked on insurance businesses, especially those with some prospect of profits (or only small loses) and a large float. BH bought more property and casualty insurers, workmen’s compensation insurers and embarked on reinsurance.

The Rockford Bank

Berkshire had also invested over $15m (in 1969) in a small bank situated in Rockford, called Illinois National Bank and Trust.  This produced bumper profits after tax of between $2m and $4m for BH year after year.  The cash flowing from this could be used by Buffett to buy other wonderful business and stock market shares selling at value prices.

Washington Post

In 1974 Berkshire Hathaway spent $10.6m…..

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