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The Value Of Knowledge: $2.68 Million For Lunch With Warren Buffett

An anonymous bidder paid $2.68 million to have lunch with Warren Buffett in an auction for charity this year.  Lunch with the Oracle of Omaha has gone for as much as $3.46 million in past years.

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Why do people place so much value in having a meal with Buffett?

Because Warren Buffett is one of the best investors alive today.  Learning from the best is incredibly valuable.  Smart and successful investors are willing to pay millions to learn from Warren Buffett.

“The most important investment you can make is in yourself.”
- Warren Buffett

Fortunately, you don’t have to pay millions to learn from Warren Buffett and other super investors…

You can gain deep insights into the tools and techniques of Buffett and other investing greats by learning from case studies of their investments.

To that end, ValueWalk has partnered with Sure Dividend to bring you the investing course Invest Like The Best.  The online course includes:

  • 49 Case studies on real-world investments from super investors
  • Biographical and historical information
  • Videos that delve deeper into the strategies of these super investors
  • A final exam to reinforce what you learn in the course

The course goes beyond Warren Buffett; it covers the following super investors:

  • Warren Buffett
  • Benjamin Graham
  • Joel Greenblatt
  • Seth Klarman
  • Peter Lynch
  • Phil Fisher

When you finish this course, you will have a deeper understanding of the strategies, tools, and techniques that the world’s best investors have used to compound their wealth over the long-run.

The course is not priced at the ‘Buffett Lunch’ level.  Invest Like The Best normally costs $247 for lifetime access.  For a limited time only, readers of ValueWalk can save $50 and get lifetime access for just $197. This offer expires at Midnight on December 28th, 2017 (US Central Time); No exceptions.

Better yet, the course comes with a risk-free 7 day trial period.  If the course isn’t perfect for you just email [email protected] and get a full refund, no questions asked.

There is no risk to trying Invest Like The Best (because of the 7 day trial), but there is serious upside to learning the investing tools, techniques, and strategies of the best investors in the world.  Click here to get instant access to Invest Like The Best now.

Invest Like The Best uses case studies to demonstrate how the best investors make decisions.  The case study format is a favorite of the Harvard Business School because of its effectiveness in transferring knowledge.

One of the 49 case studies from Invest Like The Best is below to give you an idea of what the course offers.

Warren Buffett on the Sanborn Maps Investment

Sanborn Maps is likely to be one of the most quintessential Warren Buffett investments that you've never heard of.

For the purpose of this course, Sanborn Maps will be used to compare Buffett's historical 'cigar butt' investment style to his later preference for buying franchise businesses with durable competitive advantages and a strong probability of growing earnings and revenues over long periods of time.

I could gladly tell you my perspective on the Sanborn Maps investment from the reading and researching I've done. However, there is an excellent primary resource that is likely to be much more insightful: excerpts from letters that Warren Buffett wrote to the investors in The Buffett Partnership.

Buffett's writings related to the Sanborn Maps investment are shown below:

“Sanborn Map Co. is engaged in the publication and continuous revision of extremely detailed maps of all cities of the United States. For example, the volumes mapping Omaha would weigh perhaps fifty pounds and provide minute details on each structure. The map would be revised by the paste-over method showing new construction, changed occupancy, new fire protection facilities, changed structural materials, etc. These revisions would be done approximately annually and a new map would be published every twenty or thirty years when further pasteovers became impractical. The cost of keeping the map revised to an Omaha customer would run around $100 per year.

This detailed information showing diameter of water mains underlying streets, location of fire hydrants, composition of roof, etc., was primarily of use to fire insurance companies. Their underwriting departments, located in a central office, could evaluate business by agents nationally. The theory was that a picture was worth a thousand words and such evaluation would decide whether the risk was properly rated, the degree of conflagration exposure in an area, advisable reinsurance procedure, etc. The bulk of Sanborn's business was done with about thirty insurance companies although maps were also sold to customers outside the insurance industry such as public utilities, mortgage companies, and taxing authorities.

For seventy-five years the business operated in a more or less monopolistic manner, with profits realized in every year accompanied by almost complete immunity to recession and lack of need for any sales effort. In the earlier years of the business, the insurance industry became fearful that Sanborn's profits would become too great and placed a number of prominent insurance men on Sanborn's board of directors to act in a watchdog capacity.

In the early 1950’s a competitive method of under-writing known as "carding" made inroads on Sanborn’s business and after-tax profits of the map business fell from an average annual level of over $500,000 in the late 1930's to under $100,000 in 1958 and 1959. Considering the upward bias in the economy during this period, this amounted to an almost complete elimination of what had been sizable, stable earning power.

However, during the early 1930's Sanborn had begun to accumulate an investment portfolio. There were no capital requirements to the business so that any retained earnings could be devoted to this project. Over a period of time, about $2.5 million was invested, roughly half in bonds and half in stocks. Thus, in the last decade particularly, the investment portfolio blossomed while the operating map business wilted.

Let me give you some idea of the extreme divergence of these two factors. In 1938 when the Dow-Jones Industrial Average was in the $100-$120 range, Sanborn sold at $110 per share. In 1958 with the Average in the $550 area, Sanborn sold at $45 per share. Yet during that same period the value of the Sanborn investment portfolio increased from about $20 per share to $65 per share. This means, in effect, that the buyer of Sanborn stock in 1938 was placing a positive valuation of $90 per share on the map business ($110 less the $20 value of the investments unrelated to the map business) in a year of depressed business and stock market conditions. In the tremendously more vigorous climate of 1958 the same map business was evaluated at a minus $20 with the buyer of the stock unwilling to pay more than 70 cents on the dollar for the investment portfolio with the map business thrown in for nothing.

How could this come about? Sanborn in 1958 as well as 1938 possessed a wealth of information of substantial value to the insurance industry. To reproduce the detailed information they had gathered over the years would have cost tens of millions of dollars. Despite “carding” over $500 million of fire premiums were underwritten by “mapping” companies. However, the means of selling and packaging Sanborn’s product, information had remained unchanged throughout the year and finally this inertia was reflected in the earnings.

The very fact that the investment portfolio had done so well served to minimize in the eyes of most directors the need for rejuvenation of the map business. Sanborn had a sales volume of about $2 million per year and owned about $7 million worth of marketable securities. The income from the investment portfolio was substantial, the business had no possible financial worries, the insurance companies were satisfied with the price paid for maps, and the stockholders still received dividends. However, these dividends were cut five times in eight years although I could never find any record of suggestions pertaining to cutting salaries or director's and committee fees.

Prior to my entry on the Board, of the fourteen directors, nine were prominent men from the insurance industry who combined held 46 shares of stock out of 105,000 shares outstanding or (0.044%). Despite their top positions with very large companies which would suggest the financial wherewithal to make at least a modest commitment, the largest holding in this group was ten shares. In several cases, the insurance companies these men ran owned small blocks of stock but these were token investments in relation to the portfolios in which they were held. For the past decade the insurance companies had been only sellers in any transactions involving Sanborn stock.

The tenth director was the company attorney, who held ten shares. The eleventh was a banker with ten shares who recognized the problems of the company, actively pointed them out, and later added to his holdings. The next two directors were the top officers of Sanborn who owned about 300 shares combined. The officers were capable, aware of the problems of the business, but kept in a subservient role by the Board of Directors. The final member of our cast was a son of a deceased president of Sanborn. The widow owned about 15,000 shares of stock.

In late 1958, the son, unhappy with the trend of the business, demanded the top position in the company, was turned down, and submitted his resignation, which was accepted. Shortly thereafter we made a bid to his mother for her block of stock, which was accepted. At the time there were two other large holdings, one of about 10,000 shares (dispersed among customers of a brokerage firm) and one of about 8,000. These people were quite unhappy with the situation and desired a separation of the investment portfolio from the map business, as did we.

Subsequently our holdings (including associates) were increased through open market purchases to about 24,000 shares and the total represented by the three groups increased to 46,000 shares (44%). We hoped to separate the two businesses, realize the fair value of the investment portfolio and work to re-establish the earning power of the map business. There appeared to be a real opportunity to multiply map profits through utilization of Sanborn's wealth of raw material in conjunction with electronic means of converting this data to the most usable form for the customer.

There was considerable opposition on the Board to change of any type, particularly when initiated by an outsider, although management was in complete accord with our plan and a similar plan had been recommended by Booz, Allen & Hamilton (Management Experts). To avoid a proxy fight (which very probably would not have been forthcoming and which we would have been certain of winning) and to avoid time delay with a large portion of Sanborn’s money tied up in blue-chip stocks which I didn’t care for at current prices, a plan was evolved taking out all stockholders at fair value who wanted out. The SEC ruled favorably on the fairness of the plan. About 72% of the Sanborn stock, involving 50% of the 1,600 stockholders, was exchanged for portfolio securities at fair value. The map business was left with over $l.25 million in government and municipal bonds as a reserve fund, and a potential corporate capital gains tax of over $1 million was eliminated. The remaining stockholders were left with a slightly improved asset value, substantially higher earnings per share, and an increased dividend rate.”

Buffett's Sanborn Maps investment showed remarkable analytical skills, robust negotiating abilities, and a willingness to identify an outcome that benefits all stakeholders. Investors can learn much from this story; these lessons are discussed in detail below.

What Investors Can Learn From The Sanborn Maps Investment

One of the first lessons that investors can take away from Buffett's Sanborn Maps investment is the great potential available in the securities of smaller publicly-traded corporations.

At the time of Buffett's investment, Sanborn Maps was trading at a market capitalization near its stated shareholders' equity of $4.5 million dollars. Even adjusted for inflation ($4.5 million in 1959 amounts to just over $38 million in today's dollars), Sanborn Maps was a very, very small business to be buying shares of.

Sanborn's rather inconsequential size was one of the primary reasons it was so significantly undervalued; large, institutional investors were prevented from investing in it, which excluded it from the investment universe of much of the money in the stock market. With that said, there are significant risks associated with investing in small capitalization securities, including a lack of readily available third-party analysis. The potential reward makes up for these increased risks in many cases (with Buffett's Sanborn Maps investment being a pertinent example).

Another important lesson is to avoid companies with minimal insider ownership. In Buffett's description of his Sanborn Maps investment, he notes that the company's board of directors owned only token amounts of Sanborn Maps' stock despite having the financial ability to become more significant shareholders.

This results in a substantial divergence between the interests of shareholders and the interests of board members. Fortunately, in most well-run publicly-traded companies, executives and board members are required to own a certain amount of company stock. Employers will often lend money at reasonable interest rates to employees so that they can purchase equity and reach these ownership requirements sooner.

The following analysis from Sure Dividend contains some interesting insights into the insider ownership levels of some of the most shareholder-friendly businesses around - the Dividend Kings, stocks with 50+ years of consecutive dividend increases:

The last lesson that investors can take away from Buffett's Sanborn Maps investment is the importance of having a robust margin of safety. The margin of safety is an investing concept popularized by Benjamin Graham, and is the difference between a company's intrinsic value and its market value. As an example, if you are buying a stock for $20 per share and you believe it's actually worth $50, then your margin of safety is $30 per share.

The bigger the margin of safety, the better. Here are Warren Buffett's thoughts on the margin of safety:

"You have to have the knowledge to enable you to make a very general estimate about the value of the underlying business. But you do not cut it close. That is what Ben Graham meant by having a margin of safety. You don’t try to buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. And that same principle works in investing." - Warren Buffett

The difficult part about investing with the margin of safety approach is the calculation of intrinsic value. Usually, calculations of intrinsic value are prone to uncertainty and this necessitates conservative estimations. The Sanborn Maps investment is quite unique because the company had a very well-defined floor for its intrinsic value due to its portfolio of marketable securities. By buying a company for $45 per share that held publicly-traded securities worth $65 per share, Warren Buffett was earning an immediate and significant return on investment.

Final Thoughts

Warren Buffett's Sanborn Maps investment was remarkable for several reasons:

  • It generated a 50% return on investment for the Buffett Partnership despite a holding period of just over two years.
  • It had a very well-defined margin of safety, which allowed Buffett to make a large calculated bet that ended up rewarding his investors handsomely.
  • The Sanborn Maps investment involved the liquidation of corporate assets using methods that benefitted all stakeholders.

The Sanborn Maps investment is very different than Buffett's behavior today at the helm of Berkshire Hathaway. However, it's been included in this course to show that Buffett was not always the long-term, buy-and-hold investor that he is now.

The next several chapters of this course will provide more insight into Warren Buffett's investment strategy by studying other remarkable investments that he made through his long and successful career.

If you are interested in investing in yourself and taking your investing acumen to the next level, give the Invest Like The Best course a try to access the other 48 case studies.

For a limited time only, readers of ValueWalk can save $50 and get lifetime access for just $197. This offer expires at Midnight on December 28th, 2017 (US Central Time); No exceptions.

The course also comes with a risk-free 7 day trial period.  If the course isn’t perfect for you just email [email protected] and get a full refund, no questions asked.  Click here to get instant access to Invest Like The Best now.