Warren Buffett and Berkshire Hathaway
Warren Buffet is one of the most respected investors in the world. He is enormously successful with his investment technique, i.e. Value Investing. This technique means that you purchase shares that are undervalued on the market. In other words, the stock exchange shows that a certain share is very cheap and is actually worth more. It becomes very cost effective to purchase these shares and to later sell them at their true value. If the stock exchange overvalues your shares, you can even sell them for yet more profit.
The annual shareholders meeting of Berkshire Hathaway Inc. is attended by over 35,000 shareholders.
Buffett is the general director of Berkshire Hathaway, an investment fund that holds shares in other companies and purchases complete companies. Buffett is known for his down to earth way of doing business. He has, to date, accrued equity capital worth around $ 52 billion during his career. More than a year ago Buffett gave $ 37 billion, 50% of his equity capital at the time, to the Bill & Melinda Gates Foundation.
The key to his success is the way in which he selects the companies. Buffett has an excellent insight into companies. He naturally applies certain criteria, but has a good business instinct too. You need to have a strong stomach when dealing with such a large amount of money.
And one thing is certain, if anyone has excellent control of his emotions, it is Buffett!
Buffett has a refined strategy which enables him to beat the Standard & Poor's 500 every year. This index provides a reliable image of the developments in the United States stock exchange markets. Table 1 on the next page shows by how much percent the book value of a Berkshire share rose each year since the incorporation of Berkshire Hathaway. This percentage is compared to the annual percentage increase of the S&P 500. The third row shows by which percentage Buffett exceeds the index. A percentage decrease is shown between brackets. As you can see, S&P 500 has only been able to achieve a higher percentage than Buffett in three out of 43 years.
The average annual value increase of a Berkshire share is 21.6%, while that of an S&P share is 9.9% on average. Buffett’s goal was 15%, and it is clear that he exceeded that goal by far. The result is even more impressive if you consider the fact that these are results after tax. The income tax and levies on the achieved increase have been deducted, while the S&P 500 does not take the tax into account.
Between 1964 and 2009, the value of a Berkshire share rose from $19 to $102,000, which is an annual increase of approximately 21.1%, as you can see on the following graph.
How is it possible that this man achieves a much better result than the average investor? We can find the answer in the circumstances of Warren Buffett's youth and his first steps in the investment world. We also look at the companies in which Buffett holds an interest and, more importantly, the management of these companies. There is a red thread in all these companies, which provide a clue as to what Buffet's criteria are.
Life and first steps in the investment world.
Warren Buffett was born in Omaha, Nebraska in the United States on 30 August 1930. His parents were Howard and Leila Buffett. His father Howard was a local stock broker and representative for the Republican Party. Buffett loved doing numbers even as a small child, and was excellent at mental arithmetic. At age six he started selling cans of coke in the street. He would purchase 6 cans of coke for 25 cent and sell them for 5 cent a piece. In doing so, he achieved a 16% profit. At the age of eight, he started reading his father's books on the stock exchange. He also purchased his first shares: Cities Service Preferred.
He was living in Washington DC because his father was a representative. This is where Buffett became a business man. At the age of 13, he was doing two paper rounds. He delivered both the Washington Post and the Times-Herald. The used the money he earned, approximately 175 dollars a week, to purchase second hand pinball machines for 25 dollars, which he placed in hairdressers.
These pinball machines generated a weekly income of 50 dollars. A year later he purchased a Rolls Royce, year of manufacture 1934, for 350 dollar and leased it for 35 dollars a day. In short, when Buffett obtained his high school diploma at the age of 16, he had already been able to save $6000.
The book The Intelligent Investor by Benjamin Graham has had a great impact on Buffett's work. He read this in his final year at the Wharton Business School in Nebraska. When he obtained his diploma, he left for New York to attend lessons given by Benjamin Graham at Columbia Graduate Business School. Graham had a mathematical approach when it came to investing which strongly appealed to Buffett. When Buffett obtained his MBA diploma, he returned to Omaha to work in his father's brokerage office. He did stay in touch with Graham to, for example, discuss his own investment ideas. In 1954 Graham asked Buffett if he was interested in moving to New Work to work for the Graham-Newman Corporation. This way he could experience Graham's strategy and philosophy every day. However, there were a lot of frustrations within the company as Buffett had a lot of ideas of his own which were not valued. This led to the end of the partnership in 1956. Graham, 61 at the time, decided to retire. Buffett returned to Omaha, having gained a lot more experience. By then he was 25 years old and was able to incorporate an investment company with the financial support of family and friends.
This investment company consisted of seven partners who put in a total sum of $105,000. Buffett was the chairman and invested $100. The partners received an annual interest of 7% plus the 75% of the profit achieved by the company. The remaining 25% would go to Buffett. In the 13 years that followed an average annual profit of 29.5% was achieved. The Dow Jones index closed lower than it had been in January in five of the 13 years; Buffett clearly did well. He realised a profit every year. He promised his partners 'only to invest based on the value of a share and not on the basis of its popularity'. He said that 'he tried to limit a possible capital loss to a minimum, although a temporary decline in the exchange rate would not be that great that it merits a panic response and a sale at a loss'.
Buffett didn't always hold minority positions in companies, but also held majority interests and bought companies. In 1961 he purchased Dempster Mill Manufacturing Company, a company that manufactured agricultural tools. The year after he purchased shares from a textile company, Berkshire Hathaway.
Buffett's reputation improved, more and more people asked him to invest their money. This resulted in more and more shareholders, and lead to the incorporation of an increasing number of investment companies. In 1962, there was a reorganisation, and Buffett merged them all into one company. The office was first at his private home address, but then moved to the current address, Kiewit Plaza in Omaha. The assets of the company had increased in 1965 to 26 million dollar.
In 1969, Buffett dissolved the company. The stock exchange was very dangerous at the time. There were less and less cheap shares with a 'beautiful potential to grow'.
In the 1960's the expensive growth shares were very popular on the stock exchange. Investors were prepared to pay 50 to 100 times the profit per share. Buffett was not interested in taking part in this and wrote the following in a letter to his partners: "Let me make one thing clear, I am not prepared to let go of my tested and successful strategy, which I control completely (even if that means I might not cash apparently easy money), for the benefit of an investment method I don't understand, which I have not applied successfully before and that could result in the loss of a large part of our capital".
Upon setting up the Buffett Partnership, the goal was to annually perform 10% better than the Dow Jones Index. Between 1957 and 1969 Buffett did do better, achieving 22% on average. Everyone received their share in 1969. Some shareholders started investing in securities, some went to Bill Ruene, study friend of Buffet and asset managers.
Some shareholders invested in Berkshire Hathaway along with Buffett. Buffett's share amounted to 25 million dollar, which was sufficient to have full control over Berkshire. In the next couple of years the wealth of Buffett and Berkshire Hathaway grew exponentially.
The first years of Berkshire Hathaway
In 1889 Berkshire Cotton Manufacturing was incorporated. Forty years later the activities of Berkshire were merged with that of other textile companies, making Berkshire one of the largest industrial complexes of New England. Berkshire met 25% of the demand for cotton in the US. In 1955 the company merged with Hathaway Manufacturing, resulting in Berkshire Hathaway. After the merger, the company had 15 factories, more than 12,000 employees and a return of more than $120 million. Still, the value of the company decreased by half in ten years’ time. At one point, Berkshire even suffered a loss of 10 million dollar. Still Buffett's investment company decided to manage the company in 1962. Buffet ran the company with Ken Chance for twenty years.
They tried to improve the situation, but the return on the equity never exceeded 10%.
At the end of the 1970's, the shareholders of Berkshire doubted whether they would continue investing in the textile sector. Buffett openly admitted that the textile sector was in trouble, but did have a strategy: Textile companies were the largest employers in the area, the staff was generally older and would find it difficult to find work elsewhere, the management of the textile companies want to cooperate with an reorganisation, the unions were reasonable, and Buffett was sure that the sector had the potential to be profitable.
Still Buffett aimed to make Berkshire profitable without heavy capital injections. He made the following statement in an annual report: "I will never close down a company that makes slightly too little profit, for the sole purpose of slightly increasing the return of our investment fund, but I also feel it is equally wrong to continue putting money into companies which clearly will never be profitable. Adam Smith would disagree with my first statement, Karl Marx would disagree with my second. I walk the middle road, and I feel good about that."
In the early 1980's, it became clear that achieving high returns on investment in the textile sector was simply impossible. Foreign competitors had cheaper labour. In order to be able to compete, more capital injections were needed. There was high inflation at that time, so not a pretty prospect. Particularly as everyone knew that the return on investment could continue to be low.
Buffett had to make a choice. He could put more money in Berkshire to maintain its competitive position, but then the Berkshire Hathaway fund would look forward to a period of low returns. If he did not invest, the company would go bankrupt due to the competition of the foreign manufacturers with their cheap labour.
In July 1985 Buffett dissolved Berkshire Hathaway. Still, Buffett said there was an important lesson to be learned from this story: Turnarounds seldom succeed.
Despite everything, Berkshire Hathaway had generated sufficient funds for Buffet's investment fund (that continued under the name of Berkshire Hathaway fund) in earlier years to purchase an insurance company. That story became a lot more successful.
The insurance sector
In March 1967, Berkshire Hathaway purchased non-transferrable shares of two insurance companies based in Omaha for 8.6 million dollar: National Indemnity Company and National Fire & Marine Insurance Company.
Insurance companies add value to the portfolio of an investment fund.
The premium received represents a steady stream of income for an insurance company. Insurers invest that money until they need to pay a claim for damages. It is impossible to predict when this will happen and that is why insurers always trade in negotiable instruments, mainly shares and securities. Buffett therefore not only purchased two sound companies, but also an investment portfolio.
In 1967 National Indemnity and National Fire & Marine Insurance held a joint securities portfolio worth $25 million and a shares portfolio worth $7 million. Two years later, the joint value had risen to approximately $42 million (!). Again and again Buffett had proven himself to be an experienced investor. He had already been successful with his investment portfolio at Berkshire Hathaway. Upon Buffett's purchase of the company, the value of the portfolio was $2.9 million, and a year later it was worth $5.4 million. In 1967, Berkshire made a lot more money investing than it did with selling textile products.
The insurance sector was an extremely profitable sector in the late 1960's. In 1967, National Indemnity earned $1.6 million on the $16.8 million it received in premium. Just one year later the profit rose to $2.2 million and the premium income went up to $20 million.
This made Buffet invest in the insurance sector more. He purchased three insurance companies in the 1970's and reorganised five.
Despite all the success, Buffett started to have doubts about the sector. Certain costs were rising and he was unable to do anything about it. This was due to a number of factors. The consumer price index rose by the annual average of 3%, however, the transport costs and medical assistance fees rose by three times as much. The damages awarded by the courts rose substantially, to the disadvantage of the insurance companies.
The costs incurred by insurance companies rose by 1% each month. It was therefore important that the premium income rise as fast, as otherwise the profit margin would suffer significantly. However, the premium income did not rise, they dropped. A lot of insurance companies lowered their prices in order to increase their market share. They therefore sold insurance policies at a loss. Buffett was not interested in adopting this policy, he instead decided to differentiate himself from the competition. First and foremost, the balance sheet must be in good financial order. It did not matter how many people took out an insurance with Berkshire, it was more important for these insurances to be sold at a reasonable price. First the insurers left Berkshire because they were offered lower prices by other insurance companies, but eventually these companies went bust and, sure enough, the insurers all returned to Berkshire. Buffett said the following about this: "We grow when the supply on the market is limited, and we lose market share when the sector seems threatens to be flooded. We apply a policy of stability and we will not be persuaded to take part in a price war. This strategy has, time and again, proven to be the most sensible and, above all, the most profitable.
Buffett's investment portfolio also includes various companies outside the insurance sector.
Companies outside the insurance sector
Buffett was not just interested in insurance companies, he also invested in companies operating in other sectors. After National Indemnity Company and National Fire & Marine Insurance Company he took over the following companies: A newspaper, a candy factory, a furniture shop, a jewellers shop, a publisher of encyclopaedias, a vacuum cleaner manufacturer and a company that makes and sells uniforms.
We can gain an insight into how Warren Buffett sees and assesses a company by looking at how these takeovers were realised.
Blue Chip Stamps
After having taken over Berkshire Hathaway, Buffett started purchasing shares of the holding Diversified Retailing. The holding owned various companies, including the department store Hochschild-Kohn in Baltimore and Associated Retail Stores, a chain of 75 stores selling women's clothing. Buffett was able to purchase Diversified Retailing below its book value and described the management of the holding as being "first class". However, these two criteria having been met could not prevent the department store and the chain of stores having a difficult time. This was due to the economic climate at the time. Buffett sold Hochschild-Kohn three years after having purchased Diversified Retailing. In 1987 Associates Retail Stores was sold.
However, taking over Diversified Retailing was not a failure as there were still three other companies in the holding. One of these companies was Blue Chip Stamps.
This company supplied supermarkets and petrol stations with stamps they gave their customers. The customers needed to put these in a savings booklet and each full booklet meant that they could choose various products. In order to sell these products, the supermarkets and petrol stations set up a money reserve, which was managed by Blue Chip Stamps. At the end of the 1960's Blue Chip Stamps managed over 60 million dollar. This was used to purchase other companies. Berkshire Hathaway continued to buy shares of Blue Chip Stamps, as did Buffett. After the takeover of Diversified Retailing, the investment fund was the majority shareholder of Blue Chip Stamps. By 1983 Berkshire Hathaway was the sole shareholder of Blue Chip Stamps.
See's Candy Shops
In January 1972, Blue Chip Stamps purchased the manufacturer and distributor of boxed chocolates, See's Candy Shops, which was located at the West Coast. See's was for sale and the asking price was $40 million. As See's still had $10 million in cash in their portfolio, the company effectively cost $30 million. Buffett made an offer of $25 million and a deal was struck. Chuck Higgins was the managing director of See's since before Berkshire's takeover. In 1995, he owned 225 candy stores, which sold a total of 27 million pounds of candy per year. In 1993, the turnover generated was approximately $201 million and $24.3 million in profit was made. They realised this at a time when the chocolate consumption in the U.S. declined. According to Higgens the formula for his success was offering high-quality products and an excellent service to his customers.
In 1982, $125 million was offered for See's, five times the $25 million Buffett paid for it. However, Buffett decided to hang on to See's, which turned out to be a wise decision. In the eleven years that followed, See's generated 212 million for Berkshire. Berkshire had 'only' invested $44 million to achieve this result.
Blue Chip Stamps purchased Buffalo News in 1977 for 33 million dollar from the heirs of Edward H. Butler's widow. Ever since he was a child, Buffett had dreamed of one day owning his own newspaper. When he was young, Buffett published a newsletter with a friend with tips for horse racing gamblers. This newsletter was called Stable Boy Selections. That is when Buffett realised that he wanted to own a newspaper one day. He proudly tells everyone about 'his' Buffalo News and rightly so.
There are two ways of measuring the success of a newspaper. The first is the percentage of families that purchase this paper on a daily basis. On the basis of that percentage, Buffalo News is the number-1 newspaper from the major cities. The second way is by assessing the 'news volume': The part of the newspaper that contains news (and therefore does not include advertising). Buffalo News has a news volume of 52.3%, higher than any other American newspaper. Buffalo News also won a prize for the 'most news worthy' newspaper in the United States. The news volume plays an important role in the profitability of a newspaper. This is because a newspaper will attract a wider and more varied group of readers, which in turn causes the percentage of families that purchase the newspaper on a daily basis to rise. Companies know that and want to advertise more in the newspaper. This generates additional revenue. At the same time Buffalo News was able to greatly reduce the costs, which meant that the newspaper could be made without being fully dependent on advertisers. The management of chief editor Murray Light and publisher Stan Lipsey played a major role in the success of Buffalo News. They have both been working for Buffalo News since it was taken over by Blue Chip Stamps thirty years ago. They turned the Buffalo News into one of the most prestigious American newspapers.
Nebraska Furniture Mart (NFM)
The Nebraska Furniture Mart is a one-shop complex in Omaha, and the largest shop in interior design in the United States. In 1983, Berkshire purchased 90% of its shares, while the remaining 10% was owned by the family managing the company. Mrs. Rose Blumkin was the chairperson of the board of directors. One chapter refers to Mrs. B., as she was commonly referred to, as an example of an excellent manager. Her way of working is adopted by all the managers working for Warren Buffett. When Buffett took over NFM, Mrs. B. was 90 years old! She still worked in the business seven days a week. Her son Louie Blumkin remained the director after the takeover, and his three sons, Ron, Irv and Steve also worked in the business. Mrs. B.'s motto was: "Sell cheap, and tell the truth". In 1983, NFM generated a turnover of approximately 100 million dollar. Ten years after the takeover, the turnover had risen to 209 million dollar and Berkshire received approximately 78 million dollar in profit. Buffett was happy with the fact that NFM hardly had any debts at the time. The initial thought was that NFM could not grow any more, as Omaha's population was not expanding greatly and most of the people in Omaha had already purchased goods from the store. Buffett made sure that the sales area increased, making it possible for people who lived hundreds of kilometres away to purchase goods at Nebraska Furniture Mart.
In front of Nebraska Furniture Mart in Omaha
One of Mrs. B.'s sisters purchased a small jeweller's store with her husband Louis Friedman. Friedman's son Ike and later Ike's son and sons-in-law worked in the business. They applied the same principle as Mrs. B.: "Sell cheap, and tell the truth". The company became hugely successful. They had one shop rather than a chain of stores, which meant they were able to keep the costs lower than the competitors could. Sales sky rocketed. They too had a large sales area, mainly as a result of post order sales. The costs are no more than 18% of the turnover, while for most competitors this percentage would be around 40%. The lower costs allow them to lower the price, and gain a greater market share.
The Fechheimer Brothers Company
Bob Heldman, director of Fechheimer Brothers and shareholder of Berkshire Hathaway sent a letter to Warren Buffett in January 1986, after having read the advertisements in the annual report. He felt that his company met all the criteria. They met, and in the summer of that year Buffett purchased the company. Fechheimer is a manufacturer and distributor of uniforms. The company was incorporated in 1842 and was owned by the Heldman family since 1941. Several generations of the Heldman family work in the company. Two brothers, Bob and George, run the business with their sons Gary, Roger and Fred. The family needed money in order to buy out some family members and striking a deal with Buffett was the perfect solution. They received money from Berkshire Hathaway and continued to hold an interest in the company.
To this day, Buffett never set foot in any of the shops. He considered the prospects for the uniform sector to be excellent at that time. The family was also doing well: They continued to supply new generations of managers.
Berkshire Hathaway paid approximately 46 million dollar in 1986 in return for an 84% interest in the company. The turnover then proceeded to increase from $75 million to $122 million. This cost Berkshire approximately $2 million a year. Fechheimer generates an annual profit for Berkshire of 49 million dollar.
The Scott & Fetzer Company
Scott Fetzer (the Scott & Fetzer Company) manufactures all sorts of products and is market leader in various sectors, such as Kirby vacuum cleaners, the World Book Encyclopaedia, Wayne central heating systems, zinc wells, tools, and waste water pumps, and Campbell Hausfeld compressors.
The head office of this company is located in Westlake, Ohio and Ralph Schey is the director. There are 17 branches, generating a joint turnover of 700 million dollar. When Buffett took over this company, he split it into three divisions: Kirby Vacuum Cleaners, World Book and Scott Fetzer Manufacturing Group. These three divisions were managed by Ralph Schey. In 1986, Berkshire paid $315 million for Scott Fetzer, which was one of the highest amounts ever paid by Berkshire for a takeover. Still, the profit generated by Scott Fetzer was certainly worth it: These three divisions generated almost 35% of the profit for Berkshire outside the insurance sector.
In 1992 a record profit was achieved of 110 million dollar. Buffett said it was remarkable as their equity is worth 116 million dollar and they had very little debt. This is what makes Scott Fetzer so special. The profit is still steadily rising. The reason for this success? According to Buffet: Director Ralph Schey.
In July 1991, Berkshire purchased the H.H.Brown Shop Company. This company manufactures, imports and sells shoes. The profit before tax amounted to 25 million dollar in 1992. Buffett said the following about this: "The shoe sector is a very tough sector at the best of times". A shoe company must therefore have an excellent management in order for it to achieve success. When Berkshire took over H.H.Brown, Frank Rooney took charge.
In 1929 Ray Hefferman purchased H.H.Brown for $10,000. Frank Rooney married Hefferman's daughter. On his wedding day, his father in law told him that he did not want Frank to work with him in the company. Rooney decided to work for Melville Shop Company, and eventually became the director. When Hefferman became ill at the age of 90, Rooney took charge of the company. Despite the risks involved in the shoe sector, Buffett purchased H.H.Brown. He had three reasons for doing so: the company was clearly profitable, Frank Rooney was prepared to stay on as director and H.H.Brown had a special system involving an annual additional payment. The main chefs were given a salary $7,800 plus a percentage of the profit after re-investments. Buffett approved of this method. Often managers are paid without taking into consideration the profit, loss or re-investments.
In the autumn of 1993, Buffett purchased an interest in Dexter Shoe, one of the largest independent shoe manufacturers in the US. This deal was special as the owners of Dexter Shoe wanted to be paid in Berkshire shares. Buffett usually pays in cash, but he was keen on having this company and decided to pay a part with 25,221 Berkshire shares. The success of H.H.Brown made Buffett familiar with the shoe sector, and Dexter Shoe was the one company he had been looking for. This was due to the following reasons: The profit of Dexter Shoe had been steadily increasing for years. The company manufactures shoes that nobody else manufactures, i.e. moccasins and boat shoes. Dexter Shoe also believes in following a long-term vision, and that is exactly Buffett's philosophy. Buffett admitted that he would have purchased Dexter Shoe no matter what, with shares or with cash.
These are the best examples of companies Buffett selected. You can see the six criteria Buffett applies. The company must have a good result before tax (Scott & Fetzer Company), the result increases gradually each year (Dexter Shoe), it has little to no debt (NFM), and the management is excellent (Buffalo News), it is a simple company without incomprehensible technology (See's Candy Shop) and the company makes an offer and names a price (Fechheimer Brothers Company).
Rose Blumkin, Nebraska Furniture Mart
Warren Buffett said the following about Mrs. Blumkin, the now deceased director of the Nebraska Furniture Mart in Omaha:
"If I had the choice between attending Business School for a couple of years or working with Mrs. Blumkin, I would immediately choose working for her. It would be a tough couple of months, but once completed, you would know how to run a business. All you need to know is how she runs a business."
Recently Warren Buffett said the following about Mrs. Blumkin: "I would rather fight with two grizzly bears than enter into a fight with Mrs. Blumkin".
The managers in the companies Buffett took over were all different, but did have qualities in common. This was by no means accidental. Buffett selected them exactly because of these qualities. Mrs. Blumkin had all these qualities, and that is why we take a look at her life in order to gain some idea of what Buffett's criteria are with regard to the management.
Nebraska Furniture Mart (NFM) is a normal company that is managed by a dedicated family. There are no debts, so no interest needs to be paid. Those savings allow NFM to offer its customers goods at lower prices. That increases the market share of the company and gives NFM a competitive edge (see paragraph 5 of chapter 2). The turnover and profit have grown year after year. Mrs. B. started the company at the age of 44, but only stopped after 60 years, when she was 104 years old. NFM is a huge success. The company employs 1500 people (in a one-store complex!) and the turnover achieved on furniture is $365 million. What are the secrets of Mrs. B.'s success?
Rose Gorelick was born in 1893 in Schidrin, a Jewish village in Russia. She had seven siblings and the family was very poor. Rose never received any type of education. When she was not even six years old, she helped her mother in her supermarket. When she was 13 years old, she left Schidrin. She walked bare foot (she carried her shoes over her shoulder to save the soles of her shoes) approximately 29 kilometres to the nearest train station.
She went by 25 shops, looking for work. She was offered a job at a laundrette. Within three years, she became the manager of the shop and his six male colleagues. In 1913, she married Isadore Blumkin. The following year the Great War broke out, and Blumkin did not want to fight for the tsar. He fled to America and three years Rose joined him. She joined her husband in Fort Dodge, Iowa. She later heard that her birth village had been overrun by the Germans and that 1900 of 2000 people in the village had been murdered.
Mrs. B. found life in Fort Dodge difficult because she could not speak English. That is why she moved to Omaha where there was a tiny Jewish community and people spoke Russian. In 1919 they opened a second-hand clothing store, which was pretty successful. Business was going so well after four years that Mrs. B. decided to arrange her family to come over from Russia. Her mother, father, seven brothers and sisters moved in with her. Mrs. B. sent them to school, and as soon as they were old enough they started working with her in the business. Mrs. B. also had four children of her own. In 1929, during the Depression, Mrs. B. had to help in the business. She advised her husband to lower the prices. They broadened the product range and came up with new ideas for advertising.
In the early months of 1937, Mrs. B. borrowed $500 from one of her brothers which she used to open a furniture shop in the basement of another building opposite her husband’s clothes store. She left for Chicago to buy the inventory and told the manufacturers: "I am from Omaha. I am starting a furniture business. I don't have any money, but you can trust me. I will pay". To which the manufacturers responded: "As we are speaking to you now, we will trust you with everything".
She returned to Omaha with furniture worth $12,000. On 7 February 1937, Nebraska Furniture Mart was opened and she immediately had customers after having advertised only once. According to her, this was due to her motto: "Sell cheap, and tell the truth".
Rose's husband died in 1950. Their only son, Louis, took over the business in 1948. He became a nationally renowned business man in his own right. Mrs. B. continued to run the carpet department. NFM had never borrowed any money and therefore never had to pay interest. This meant they were able to sell their products for 20% to 30% less than their competitors. In the 1930's the shop continued to thrive.
Mrs. B. focussed on keeping the customers happy by offering lots of choice and excellent quality. Her colleagues spent more time on the work floor with the customers than any other large furniture business. She spent 100% of her time on the work floor. She never spent money unless it was in the interest of the customer.
In 1983 Warren Buffett visited the Nebraska Furniture Mart. At the time NFM had a turnover of $88.6 million. Buffett told Mrs. B. that he was interested in purchasing the business. "I became tired of the children trying boss me around. So I thought, I will just sell and then he can manage it all." said Mrs. B. later. Without showing her books or inventory, she told Buffett that everything was paid, how much money was in the band and they shook hands. She sold 90% of the business for $60 million at the age of 90. Mrs. B. signed the agreements by just drawing a sign on the paper. She had never learned how to read or write.
When Mrs. B. was 91, she still worked full-time in the business. She told a reporter: "I go home to eat and sleep and that is it. I can't wait 'till I see daylight again and go to the business again". 
Buffett said the following about Mrs. B's qualities: "She tries to find how she can offer the best quality to the customer. She works more than anybody else. She knows what she knows and she knows what she doesn't know. She knows exactly what she can do. If you want to sell her, for example, 10,000 tables, she knows how to buy them. If you want to sell her a hundred shares of General Motors, she will tell you: "Forget it", because she doesn't know anything about General Motors shares".
In summary, the values of Rose Blumkin were:
- The customer always comes first. Give them what they want and they will always come back.
- Spend 100% of your time on the work floor.
- Don't spend anything unless it is in the interest of the customer.
- You allow your customer to benefit from you save by offering low prices.
- Don't run into debt.
What happens after a takeover by Warren Buffett?
Part of Buffett's investment strategy is making the right choices when taking over companies. In order to find out what happens after a possible takeover, we need to take a look at a letter sent by Buffett to someone wanting to sell his family business. This letter was published in the Berkshire report in 1990.
What did this letter say?
Warren Buffett explains in the letter that Berkshire Hathaway does not have a 'takeover' department, or an army of managers with MBA diplomas. Buffett never arranges new company management after taking over a company. If he does decide to take over a company, it will continue to work freely and independently. The family members that ran the business before the takeover will often continue to do so after the takeover. Buffett stimulates a successful manager to continue working for the company.
Buffett holds a majority interest in a company for tax reasons. The former owners will usually hold a minority interest.
Buffett only gets involved with how the capital is spent and the remuneration of the top managers. The rest is up the company to decide. Some managers discuss matters with him, others do not. According to Buffett this is a question of personality.
Buffett also wrote the following in this letter:
You will not be richer after the sale. Your equity just takes on a different shape. You exchange an interest in a family business for cash. Eventually you will put your money in shares and securities, of which you will know less than the company you ran.
The division of the assets also often leads to conflicts within family businesses. It is therefore ideal for Berkshire to hold a majority of the shares and for you to hold a minority interest. The former owners divide the sum among the family members, but also still hold shares in the company they worked so hard for all these years. Buffett has a new profitable company, receives part of the profit and leaves the day-to-day running to the existing management.
In conclusion, the following events happen after a takeover:
- Buffett takes a majority interest in a company.
- The management remains unaltered, something Buffett encourages.
- Buffett only interferes with how the capital is spent.