A Book with Legs Podcast: Brett Gardner - Buffett's Early Investments

Episode Released: November 18, 2024
Host: Smead Capital Management
Guest: Brett Gardner, Investment Analyst at Disareen Group

Introduction

In this enlightening episode of A Book with Legs, hosted by Cole Smead and Bill Smead from Smead Capital Management, investment analyst Brett Gardner joins the conversation to delve into his newly released book, Buffett's Early Investments: A New Investigation into the Decades When Warren Buffett Earned His Best Returns. Brett brings a wealth of experience as a CFA charter holder and a long-time investor, having purchased his first stock at the age of 16.

Inspiration Behind the Book

Brett Gardner shares his journey of researching and writing the book, sparked by his deep dive into Warren Buffett's investment strategies. "About a decade ago I was rereading Snowball, Al Schwartz's biography of Buffett. It’s now my second favorite Buffett book. I was having difficulty finding the same securities as Buffett himself," Brett explains (02:02).

He challenges the prevalent narrative that Buffett simply stumbled upon undervalued stocks by meticulously reading manuals and annual reports. Instead, he emphasizes Buffett's "tenacious research and creative ways he created value for his partners" (02:26). This realization led him to explore specific investments like Philadelphia and Reading, an anthracite coal company, and Walt Disney Productions, uncovering deeper insights into Buffett's strategic decisions.

Research Methodology

Brett outlines the extensive research process that went into his book. "The initial research was done at the New York Public Library. They had a lot of old annual reports on microcard and Microfiche," he notes (04:31). Utilizing resources like the Mergent Archives and conducting Freedom of Information Act requests, Brett pieced together historical data often unavailable through modern means.

He acknowledges the challenges, especially with many key figures from Buffett's early investment days no longer being alive. "I talked to more academics and people who might be familiar with the companies today who would point me in the direction of other documents," Brett adds (04:38).

Buffett’s Investment Strategies: Hard Power vs. Soft Power

A significant portion of the discussion centers on Buffett's transition from what Brett terms "hard power" to "soft power" in his investment approach. Hard power involves taking control of companies by acquiring significant or majority stakes and dictating corporate policy. Examples include investments in Dempster Mills and Berkshire Hathaway.

Conversely, soft power is characterized by building relationships and influencing from a position of respect and trust. Brett reminisces about his lunch with Charlie Munger, where despite initial nerves, he experienced Munger's personable and humorous side (07:26). This blend of strategic control and relational influence showcases Buffett's multifaceted investment style.

Case Studies: Cleveland Worcester Mills and American Express's Salad Oil Scandal

Cleveland Worcester Mills:
Buffett's investment in Cleveland Worcester Mills serves as a key lesson in capital allocation. Brett explains, "Buffett's biggest learning from Cleveland Worcester Mills was the importance of controlling capital allocation" (15:43). Despite the company's struggles and eventual liquidation, the experience underscored the value of strategic financial management, influencing Buffett's later decisions in Berkshire Hathaway.

American Express's Salad Oil Scandal:
One of the most intriguing segments discusses the Salad Oil scandal and its implications for trust in profitability. Brett details the fraud orchestrated by D'Angelo, where water was used in oil tanks instead of oil, leading to significant financial deception (34:20). American Express's involvement, where they insured these fraudulent assets, put their reputation at risk. Buffett's meticulous approach involved verifying card usage and ensuring trust was maintained. "Buffett didn't jump in immediately; he waited until the facts were clear," Brett notes (46:03). This measured approach highlights Buffett's commitment to informed decision-making over reactive investments.

Buffett’s Relationship with Walt Disney and Corporate Governance

Brett provides a deep dive into Buffett's investment in Walt Disney Productions. He explains Walt Disney's unique control over the company and the challenges it posed for investors like Buffett. "Buffett was aware of the corporate governance risks because he was on the front page of Fortunes," Brett states (55:35). Despite recognizing Walt Disney's genius, Buffett limited his position size, reflecting his cautious stance on governance complexities.

This investment illustrates the delicate balance Buffett maintains between valuing innovative leadership and ensuring sound corporate governance.

Lessons Learned and Buffett's Evolution

Throughout the episode, Brett distills several lessons from Buffett's early investment experiences:

1. Thorough Research: Buffett's success hinges on exhaustive research and understanding the intrinsic value of businesses.

2. Capital Allocation: Strategic allocation of capital is paramount, often determining the long-term success of investments.

3. Building Trust: Establishing and maintaining trust with business partners and within invested companies is crucial for sustainable profitability.

4. Adaptability: Buffett's ability to adapt his strategies based on evolving market conditions and insights has been a cornerstone of his enduring success.

Brett emphasizes that Buffett's journey is not just about identifying undervalued stocks but also about learning from each investment to refine his approach continually.

Conclusion

The episode concludes with reflections on Buffett's nuanced investment strategies and the lasting impact of his early decisions on his illustrious career. Brett Gardner's book sheds light on the complexities and depth of Buffett's methodologies, offering valuable insights for investors seeking to emulate his disciplined and informed approach.

Notable Quotes:

• Brett Gardner (02:02): "I think there's kind of this narrative out there that Buffett was kind of just like, sitting on his ass reading Moody's manuals and finding these insane bargains. The more work I did, the more I realized that narrative was false."

• Brett Gardner (06:05): "Buffett was doing this himself way before Fisher started writing. So Buffett kind of had this instinct that he needed to go around and learn about these businesses himself rather than just read documents."

• Bill Smead (24:03): "Warren has got himself set up to virtually never pay any taxes on anything outside of corporate income tax. He doesn't pay a dividend in his stock. He never sells any stock."

• Brett Gardner (27:53): "One of the things I think Buffett did really well is he had friends and family vouch for him."

• Brett Gardner (55:35): "Buffett was aware of the corporate governance risk because he was on the front page of Fortunes. As he was buying the stock he went out and met. Walt seemed to like him."

About the Author

Brett Gardner is an accomplished investment analyst at Disareen Group with extensive experience in various investment firms. He combines his analytical expertise with a passion for uncovering the intricate strategies of legendary investors like Warren Buffett. Follow Brett on X (formerly Twitter) and LinkedIn for more insights and updates on his work.

Further Listening and Engagement

Listeners interested in delving deeper into Warren Buffett's investment philosophies and early strategies are encouraged to read Brett Gardner's book. For more engaging discussions on value investing and insights from influential authors, subscribe to A Book with Legs on your preferred podcast platform.

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