Purchasing an asset at a price trading well below its intrinsic or actual value may be termed value investing.
The rationale behind value investing is that markets may misprice assets, and individuals can purchase these mispriced assets for cents on the dollar, which would later realise their actual value, leading to considerable gains for the investor.
Warren Buffet and his late business partner and close friend Charlie Munger are the most recognisable value investors from today’s school of value investing.
This duo was seen to be an unrivalled force in the field of investing, and they had successfully compounded their wealth at a rate much higher than that of the general market, leading to outsized net worth in the billions. However, this investing duo was a group of three consisting of an equally skilled and talented but lesser-known investor known as Rick Guerin.
Their paths were inextricably linked due to their intuitive grasp of and adherence to the principle of purchasing assets for cents on the dollar.
Rick Guerin worked with Buffet and Munger during the 1970s, even owning a part of Buffet and Munger’s iconic investment vehicle, Berkshire Hathaway. Buffet, Munger and Guerin had in 1970 devised an investment plan to purchase shares of and gain controlling interest in a company known as “Blue Chip Stamps”.
Loyalty programme
Blue Chip Stamps had a loyalty programme, where customers earned stamps based on purchases at participating stores, such as grocery stores, gas stations, and pharmacies.
These stamps were collected in books and could be exchanged at redemption centres for various merchandise items, such as furniture and tableware.
These stamps acted as a type of float that provided a means to access leverage without paying any interest on access to liquidity.
The trio had identified that compared with a market capitalisation of $63.5 million; they had unredeemed stamps worth about $43 million, which would likely remain unredeemed.
Moreover, the company had marketable securities worth $72 million, which were liquid, further adding to the lucrativeness of the deal. The actual impetus to take up this deal came from the trio only needing to invest enough to acquire a controlling interest in the company, which would roughly amount to a little over half of the company’s equity. This meant they would only have to put up $38 million to unlock over $117 million for investment activities. Berkshire Hathaway, at the end of 1972, owned 19% of the company, which steadily rose to 60% by 1979, after which the company was merged with Berkshire Hathaway for a stock swap in 1983, which gave Charlie Munger his lion’s share of ownership in Berkshire Hathaway. The float made available by this deal allowed the trio to acquire a controlling interest in See’s Candy (another classic Berkshire Hathaway investment) in 1972 and later acquire it entirely for $25 million.
Wesco Financial Corporation was another company that the control over Blue Chip Stamps’ float permitted them to purchase during that period.
However, Rick Guerin went on to utilise leverage, which Buffet and Munger generally avoided throughout their investment careers. During the stock market downturn in 1973-74, Rick Guerin, who was subjected to margin calls on his loans, ended up losing a large sum of money along with the years of progress he had made with Buffet and Munger in accumulating capital.
Moreover, he was forced to sell his stake in Berkshire Hathaway for $40 per share (which was trading at over $6,17,000 at the time of writing this piece). Buffet had famously quipped that he and Munger knew they would become incredibly wealthy and were in no rush.
Nonetheless, Guerin recovered the losses he had incurred over the next decade, but had not reached the heights of success achieved by both Munger and Buffet in the decades that followed their iconic partnership.
Strategic utilisation
Warren Buffett, Charlie Munger, and Rick Guerin’s experience with Blue Chip Stamps highlights the efficacy of value investing when combined with strategic asset utilisation, particularly the use of float from unredeemed stamps to secure controlling stakes in undervalued companies like See’s Candy and Wesco Financial Corporation. Their approach, characterised by patience and adherence to core investing principles, yielded substantial returns.
In contrast, Guerin’s use of leverage and resultant losses during market downturns illustrate the risks associated with haste and excessive borrowing.
This example underlines that disciplined, patient investing, free of excessive leverage, is crucial for long-term investment success.
(Anand Srinivasan is a consultant; Sashwath Swaminathan is a research assistant at Aionion Investment Services)
Quote: Buffett, Munger, and Guerin’s experience with Blue Chip Stamps highlights the efficacy of value investing
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