My Review of Brett Gardner's "Buffett's Early Investments"

 A Nerdy Look at Buffett’s Early Investments

Investment analyst Brett Gardner did yeoman’s work in piecing together Warren Buffett’s investment process in the early days of his career, first as an individual investor and later through his partnerships.  He went through contemporaneous annual reports, Moody’s manuals, and news stories from the early 1950’s to the mid-1960’s to understand what information Buffett had available to him at the time he made his investments. 

He also availed himself of previously published biographies of Buffett which brought out the legwork Buffett undertook by going beyond the numbers in talking to the managements, employees, and customers of the firms.  Further, he investigated the history, and the managements of the companies Buffett invested in. His is the work of a truly obsessive finance nerd and the reader is the beneficiary of his work.

Gardner investigated 10 investments a few of which I never heard of, such as Marshall-Wells and Cleveland Worsted Mills and several that I am familiar with including Studebaker, American Express and Disney. We should note that Buffett was and is a generalist. There is no industry theme associated with his investments.

Buffett, being a student of the great Benjamin Graham (See: https://shulmaven.blogspot.com/2023/08/my-review-of-seth-klarmans-ed-of-graham.html) who stressed corporate balance sheets as the central focus of investment analysis. Graham was looking for a margin of safety in buying companies that were trading below the value of their working capital, thereby buying the fixed assets for free. This, of course, was not the only factor, but it was significant.

Buffett’s early investments were balance sheet focused. However, he later focused on the importance of controlling the firm’s capital allocation process and the value intangible assets that did not appear on the balance sheet. In the case of American Express it was its brand name which did not take a hit after the company was victimized by the salad oil scandal of the mid-1960’s. In the case of Disney, it was its film library that was carried on the books at close to zero. Thus, instead of buying average companies at cheap prices, Buffett moved on to buying wonderful companies at a fair price. The other thing that Buffett did was to concentrate his investments. He went all in with some investments accounting for a third of his portfolio.

Now the question remains what an investor can do today. The average investor is not plagued by the curse of bigness. It is very difficult for an individual investment to move the needle in a large fund. Buffett himself has admitted that for years. Next the small investor can find unloved and uncovered stocks not on the radar screen of large institutional investors. Of course, this takes a lot digging and a lot of leg work but can be done. However, the one major disadvantage an investor faces today that Buffet didn’t face in the 1950’s is that the overall stock market is trading at levels where there are few companies that offer the margin of safety that Buffett had when he was starting out.