I ended the second part of this series on Warren Buffett’s first investment partnerships with a number of examples of his early partnership investments. These included Genesee Valley Gas, Western Insurance and Union Street Railway.
Unfortunately, Buffett rarely gave detailed explanations of why he was buying securities in his early letters to investors. He reserved detailed explanations for a few key investments, one of which was Sanborn Map.
Warren Buffett and Sanborn Map
Buffett began buying Sanborn Map in 1958 for his partners but didn’t reveal the name of the company until his 1960 letter when the situation had concluded itself.
“Last year mention was made of an investment which accounted for a very high and unusual proportion (35%) of our net assets along with the comment that I had some hope this investment would be concluded in 1960. This hope materialized. The history of an investment of this magnitude may be of interest to you.”
The Sanborn trade is fascinating because it shows Buffett at his best. He devoted 35% of partnership assets to a deeply undervalued investment where he acted decisively to bring about the realisation of value for investors and shareholders.
The situation was a fairly simple one. Sanborn’s legacy business produced maps for insurance companies, particularly fire insurance companies, to help them price risk within built-up areas. This subscription business was highly profitable and management had been investing cash flows produced from the sale of maps into the market.
As a result, the company had a large portfolio of securities, which, by the time Buffett found the business, was worth more than the entire maps business.
“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.”
As profits at the maps business had stagnated, the market had sold the stock leading to this valuation discrepancy. Sensing opportunity, Buffett pounced and acquired nearly half of the company’s outstanding shares. He then pushed for change, petitioning management to spin-off the investment portfolio to shareholders. He ultimately succeeded, unlocking a significant amount of value for shareholders and his investors.
This virtually risk-free trade is just one of many that have helped establish Warren Buffett as the world’s greatest investor. His ability to go all-in when the time is right has enabled Buffett to build the fortune he has today.
Disclosure: The author owns no share mentioned.