Buffett used this one lesson to turn $2 million of profits into $82 million
From Greg Wilson, chief analyst the Legacy Portfolio: At three times the book value, it would be their most expensive purchase ever. It would also become the key to their unbelievable investment success…
Warren Buffett and Charlie Munger offered $25 million for the business. But the See family wanted $30 million.
The See family later relented and agreed to the lower price. And so, in 1972, Buffett and Munger bought See’s Candies.
Munger later reflected that he and Buffett had been naïve about See’s. They had wrongly decided to place a low bid on the company, even though the company was of the highest quality.
He said, “If they had wanted just $100,000 more for See’s, we wouldn’t have bought it. We were that dumb back then.”
Munger was trying to point out that the key to investing well isn’t always getting the cheapest deal. The key is learning how to invest in high-quality companies.
The See’s Candies acquisition was a significant departure from the normal deals Buffett and Munger had been doing. They had been buying companies well below their net asset values. They made money when those companies traded up to their full net asset values.
(Buffett called this technique “cigar butt investing.” You buy a company on the cheap and get out the last one or two puffs.)
Despite See’s having only $8 million in net assets, Buffett and Munger paid $25 million for it.
The reason: It was a near-perfect business.
The product was simple and not prone to much change. It was beloved by customers who came back again and again. When costs went up, management could raise prices. Customers might mind, but not enough to stop buying.
The company also had a good reputation. Since opening in 1921, it was known for never compromising quality ingredients or quality service for profits.
Capital expenditures—the costs to keep the business running and growing—were low. Once a store or distribution center was built, it didn’t have to spend a great deal to keep it running. And that meant, as time went on, more money would go to the bottom line.
The end result was a company with a sustainable competitive advantage… which could continue to grow with very little capital… and could return tons of cash to the owners of the business for decades to come.
This is Warren Buffett’s most important investment lesson.