I never liked the use of the word “investor” in the financial press. I find it offensive. If you were to create a word-cloud visualization of the language used on wsb, I bet “investor” is largely absent or in the very fine print. And that’s because no one pretends wsb is an investment forum. Investment forums are fucking boring. Jack Bogle and all that shit. Diversification and low-fee indexes. Fucking AOL shit.
So when Charlie Munger, the co-godfather of boring-ass value investing says “I would be comfortable putting 100% of my net-worth into one stock”, what the fuck does that mean? I mean, he’s old as fuck so maybe that’s just ancient crazy talk. Way back in our Magnavox black-and-white vacuum tube history, before algo trading and 401K’s and QE, the market was way easier, right? Back in those days, you could buy a railroad stock in a booming economy growing 30% a year and throwing off shitloads of free cash flow at a PE of 2. Well duh, I’d do that too. But today, with the S&P500 at an all-time high, trading at a PE of 17, with Washington all kinds of fucked up, North Korea and Brexit and all that, no way is that motherfucker putting all his money in one stock.Except he did. Well, Munger and his business partner, Warren Buffett, did. And here’s how I think it went down:
Way the fuck back when, in 1846 to be exact, Henry Wells and William Fargo (yeah, the same guys) founded a company focused on transporting good and valuables between NYC and Buffalo. The civil war made the transporting of valuable shit a good-ass business and so over the years, Wells and Fargo expanded their routes and bought a bunch of other companies, all of which were eventually consolidated under the brand of American Express in 1850. Over the years, AMEX grew and by 1963, they were doing all kinds of shit but this was pre bitcoin and pre Visa/Mastercard, and the credit card business was new and a very tiny percentage of their revenue. Mostly, AMEX made money selling travelers checks and money orders to businesses.
By 1955, while AMEX was busy hustling money, a con man by the name of Anthony De Angelis started a company called Allied Crude Vegetable Oil Refining Co to take advantage of a US government program to sell excess food to Europe for cheap. This was shortly after WW2 and the American’s knew pissed off and hungry Europeans started wars, so they were throwing money at shysters like De Angelis to do their part for world peace.
By 1960, De Angelis was balling and he soon realized he can drive up vegetable oil prices by buying up futures, thereby increasing profits on top of his already government subsidized profits, and so by 1963 he comes up with a plan to corner the vegetable oil market and he starts buying up and storing as much of the shit as he could get his greedy little hands on.
About this time, AMEX gets into the business of guaranteeing the value of assets stocked in warehouses, so that shysters like De Angelis could take these guarantees to the banks and borrow more money to buy more inventory to drive up prices and make more money. It was a very, very small part of AMEX’s business and as fucking crazy as it sounds, the contracts AMEX wrote didn’t require them to cover any losses associated with the inventory they guaranteed. They just promised.
By 1963, De Angelis figures, fuck buying vegetable oil. If I can show the world I own all the motherfucking vegetable oil in existence, and if AMEX and others say my shits real, I could be the fucking OPEC of fried chicken. But why go through the hassle of buying vegetable oil. Instead, I’ll just pocket most of the money I borrow from the banks, buy a shit ton of oil drums, fill them 95% full of sea water, and then top them off with vegetable oil. And that’s what he did. Seriously, I could not make this shit up.
But sometime that year, an anonymous tipster known only as “the voice” calls the oil inspectors and tells them to go check out drum number 6006. And sho ‘nuff, drum number 6006 would not be frying extra crispy anytime soon.But AMEX was a big, diversified business, and although their stock tanks when the story breaks, dropping from $65 to $35 in 1964, it’s still trading at a multiple of 16X earnings.
Enter Warren Buffett. You can read up on the dude elsewhere but his greatness is not exaggerated. There has never been and may never be a value investor like Buffett. Buffett reads the stories like everyone else and then tells his investors he is going to put 40% of his entire fund into AMEX stock to buy 5% of the company. They were like, ‘the fuck you are’, but he does, and the question is why? There was a scandal, no doubt, but at 17x earnings, it was no fire sale. Meanwhile, the country was still dealing with JFK’s assassination and all that Russian/Cuban cold-war missile shit was still going on so times were volatile. In fact, this wasn’t anywhere near the kind of give-aways that he bought up after 2008 and yet he basically went all-in, risking his future and almost half of his investors’ money on what didn’t seem anything close to a sure thing.
Here’s why: Buffett dug deep into the AMEX’s financials and saw that they were not technically liable for any of the losses on the oil swindle. At the same time, this whole credit card thing seemed like a promising business and doctors back in Omaha were still charging steaks to their green cards. Meanwhile, they had cash on hand of about $250m, real assets of around $1B, and total liabilities of around $950m. Unlike banks, they didn’t have the huge overhead of branches, and with all these money orders and traveler checks trading hands, they had a constant “float” of money to invest or about $78m. They also had a CEO who got them out of the shittier businesses they were in, invested deep in the brand and the green card, and was on top of his shit. Unless AMEX shut their doors, this was gonna pass and pass fast.
So Buffett goes all-in and the stock increases 10X between 1964 and 1973.
It takes balls to buy cheap when blood is running in the streets. But to identify value in a pricy and volatile market, and then trade with this level of conviction, that’s a next-level value yolo and some real bad-ass shit.
Comments
Post a Comment