YouSaid · the spoken record

Jacob McDonough

lines on the record: 63
first: 2023-09-01
most recent: 2023-09-01
sittings or episodes: 1
sources: podcast

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“Five million dollars a second year. And so in 1962, when he first invested it, I had a $12 million valuation Berkshire did. And so he got about $9 million of profits his first two years in charge. So he got most of his money back right away. They also had some tax credits, tax loss Carrie Fords built up from years of losses before he took over, which again was in the annual reports leading up to this time period. So the profits he made were tax-free. And so this was really $9 million of cash flow in his first two years after tax cash flow he could actually take out of the business and reinvest. Like I said, he didn't put it back into the textile mill. He didn't throw good money after bad. He put the money into stocks first, which one interesting thing is some of the stock portfolio was some quality companies. They owned American Express, Disney, and Wrigley at the time. Those were just three of the companies. And 55 years later, those are still quality businesses. So very durable. And even close to the time.”
2023-09-01 · We Study Billionaires · TIP573: Berkshire's Beginnings w/ Jacob McDonough · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, that's very true. There's some CEOs that like Buffett treat shareholders' money in a very conservative way and they don't act like it's their own personal bank account to dip into. It helped that Buffett owned a lot of stock himself. So it was, he was one of the shareholders that helps align incentives, but he definitely didn't waste any of the shareholders' monies by any means. And so, yeah, one thing he was able to do right away, like you said, cut costs. And I didn't really realize this until I was studying this time of period for my book. But when he took over Berkshire, cost a good sold drop by 10%, which might not sound too crazy, but like you said, the margins were very low. So any little bit of cost savings you can achieve would be meaningful. And in his first year, that cost savings, 10% of cost of goods sold ended up being about $5 million of cost savings. And so it really flipped from being negative profits to maybe break even and then him having that cost savings flipped to them having some solid profits the first couple years he was in charge. His first year, they had $4 million of profits in.”
2023-09-01 · We Study Billionaires · TIP573: Berkshire's Beginnings w/ Jacob McDonough · IDENTIFIED FROM THE TRANSCRIPT
“The business. They were purposely closing down some of the plants, buying back stocks of the capital in the business was going down. They're shrinking, getting lower and lower sales as some plants closed. Obviously, Berkshire's crossed a trillion dollars in assets this last quarter, actually. So they've the opposite from a shrinking dying business into what it is today is just incredible.”
2023-09-01 · We Study Billionaires · TIP573: Berkshire's Beginnings w/ Jacob McDonough · IDENTIFIED FROM THE TRANSCRIPT
“Well, what was very key was right away he was able to generate some cash profits, which we could talk about later, how he's actually able to do that. But he was able to generate some cash profits right away. And most people would take that cash and put it back into the business they're used to, what they're currently in. But instead, Buffett took that cash and temporarily put it into a stock portfolio of stocks. That portfolio did really well, more than doubled in a couple of years. And I assume he was just looking for an acquisition to make in the meantime. He bought a couple businesses after that. So he bought national indemnity and insurance company and he bought Illinois National Bank, a bank that was located in Rockford, Illinois. Those two businesses ended up being very good, produced plenty of cash flow and stuff. And so those are some of the early decisions that really kicked off Berkshire on its journey from being this bad business that was doomed to go extinct eventually and kind of help generate some cash to move in the right direction. Because before buffets at Gover, like I said, they were buying back stocks. So they were really shrinking.”
2023-09-01 · We Study Billionaires · TIP573: Berkshire's Beginnings w/ Jacob McDonough · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so I know in some of the biographies, they do a good job of explaining how he met with the previous management team or the previous CEO of Berkshire, and they agreed on a price Berkshire was going to buy back Buffett Steak or BPL steak, his fund his fund owned at a certain price. And back then, stocks were quoted in eighths, like one-eighth of a dollar or a point is how they were quoted back then. And so whatever price they agreed upon, the actual offer that came back was like an eight of a dollar below what they agreed upon. So apparently Buffett has said he felt a little cheated. And so that's kind of when his decisions changed on what to do there, whether he was going to take the lower price that, you know, was below what they agreed upon or if he was going to continue buying even more of the stock, which is the route he ended up going. And so interesting to think what could have been, but I'm sure glad he went down this path because it's been a lot of fun to study over the years as he took over this company.”
2023-09-01 · We Study Billionaires · TIP573: Berkshire's Beginnings w/ Jacob McDonough · IDENTIFIED FROM THE TRANSCRIPT
“Relatively small company, at least in terms of valuation. And so you knew management talked about they're going to buy back stock. In one sense, you knew there was a large buyer of stock that would want to continue purchasing stock. So as Buffett accumulated a stake in the company, he's talked about he might have thought that management will come and want to buy back some of his stock, given he'd be a major shareholder. He would be someone they could buy from. And so that might have been his plan from the beginning. It didn't really work out that way for him, but it was very unique in that time period what Berkshire was doing.”
2023-09-01 · We Study Billionaires · TIP573: Berkshire's Beginnings w/ Jacob McDonough · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, it was very unique what Berkshire was doing during this time period. They were buying back a decent amount of stock, which today plenty of companies buy back stock, but back in the 50s it was more rare. And especially it was rare for a company like Berkshire to be doing that. So number one, they had some excess capital, but number two, they had some unprofitable plants that management before Buffett was involved, management decided to close some of those plants, gather up that capital, and buy back stock. Like I said, that was unique for that time period. And management wrote about their plans to do that in some of the annual reports back in that time period. So that's clearly something Buffett could see they were doing. And he might have liked that capital allocation strategy, at least it still didn't make it a, you know, it wasn't going to be a high growth stocker. It wasn't going to get the market too excited, but still it was, even though it was a bad business, they were doing some interesting things or unique things from a capital allocation standpoint that might have attracted Buffett. And it was a relatively...”
2023-09-01 · We Study Billionaires · TIP573: Berkshire's Beginnings w/ Jacob McDonough · IDENTIFIED FROM THE TRANSCRIPT
“Most of the business. And that means it's a pretty capital intensive business. Some companies might have some funding from suppliers in terms of accounts payable or funding from customers in terms of like deferred revenue. But Berkshire didn't really have too much of that and didn't have too much debt either. And so there wasn't too much leverage. It was mostly funded with equity capital, like I said. And so it took a lot of assets to run the business.”
2023-09-01 · We Study Billionaires · TIP573: Berkshire's Beginnings w/ Jacob McDonough · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so in terms of valuation, it was selling when Buffett first bought the stock. It was selling for a third of book value about that and below net current assets. So I could define both of those and maybe it helped to give a little more info on how the balance sheet looked for Berkshire since that was a big reason why Buffett wanted to invest in the first place. But book value is the shareholders' equity, the equity capital in the business. So it was selling for about a third of that. And net current assets would just be just the current assets minus all liabilities. And so yeah, to explain further, the balance sheet for Berkshire looked like it was pretty heavy in inventory needs. They owned real estate. They had manufacturing facilities. And so they had a lot of PP&E as well, property, plant, and equipment to operate those plants. And they had a decent amount of receivables as well. But there was not very much in terms of liabilities to offset these assets. So what this means is equity capital basically funded.”
2023-09-01 · We Study Billionaires · TIP573: Berkshire's Beginnings w/ Jacob McDonough · IDENTIFIED FROM THE TRANSCRIPT
“Japanese competitors that had much lower operating costs, wages, labor was much cheaper in Japan back in the 50s. I believe the minimum wage in Japan might have been 15 cents an hour versus, I believe a dollar an hour in the US at the time. So it was a tough business, but the market knew that. So it was a pretty cheap low valuation, which attracted Buffett in the first place.”
2023-09-01 · We Study Billionaires · TIP573: Berkshire's Beginnings w/ Jacob McDonough · IDENTIFIED FROM THE TRANSCRIPT
“For Sears Roebook. And so they had good service, apparently, at least in one point in time. But even with that being said, Sears was not going to pay them a premium. If Berkshire charged too much, Sears would go find another supplier. There was nothing special that Berkshire did. That's some other textile manufacturers couldn't do. And there was no real brand to Berkshire because, like I said, they didn't make the whole suit coat, so there was no Berkshire brand on the suitcoat, really. It was just inside lining and not many people really opened up that jacket and really care about what's on the inside there. And then it sold through places like Sears, Berkshire didn't really have their own distribution and there was no Berkshire type store. So the end consumer wouldn't really be aware of Berkshire too much. And so there's no brand, not too many competitive advantages. So it was pretty much a commodity business. And a commodity business, the low cost producer usually wins. And Berkshire and the annual reports even back in this time period would mention that they were not the low cost producer. In Japan, there was so”
2023-09-01 · We Study Billionaires · TIP573: Berkshire's Beginnings w/ Jacob McDonough · IDENTIFIED FROM THE TRANSCRIPT
“Just as a stock for his fund. And so I don't think he had any expectations he'd take it over and manage the company for so many decades. I don't think that was quite part of the plan. So I think it was one of the same story he had been following for many years, buying a cheap stock and hopefully something happens where eventually he can sell for a little more and keep running that playbook. And so maybe what might help is a little background of Berkshire why it was so cheap or unloved. So Berkshire had a long history before Buffett got involved. It was a textile manufacturer, like you mentioned. And one of the products they did, they worked on was they made the inside lining of suitcoats. So they didn't make the whole suitcoat, but just when you open up like the jacket, the inside lining there was one of the things they made. And so at one time, I know they made half of all suitcoat linings in the US, at least for men's suitcoats. And they were supplier of the year one time at least.”
2023-09-01 · We Study Billionaires · TIP573: Berkshire's Beginnings w/ Jacob McDonough · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, that's always an interesting place to start. It's definitely an interesting story and very unique. But basically Warren Buffett himself had a history of purchasing cheap stocks. So the main answer there, Berkshire was a cheap stock. It had a low valuation. And when Buffett was pretty young, that's how he got his career off the ground, how he started making money early on. He was looking at cheap stocks, those that maybe had a lot of assets. You could liquidate the company for a profit based on what the valuation was. More so hypothetically, I mean, I don't think too many actually liquidated, but he was more of a balance sheet investor. And looking at stocks that maybe were selling below liquidation value or at least had very reasonable expectations of the future or pretty low expectations of the future for that business. And so Berkshire was one of those cheap stocks. He managed a fund at the time. He called it an investment partnership, Buffett Partnership Limited, BPL. And so he actually started buying Berkshire.”
2023-09-01 · We Study Billionaires · TIP573: Berkshire's Beginnings w/ Jacob McDonough · IDENTIFIED FROM THE TRANSCRIPT