Before continuing the series on the Warren Buffett partnership years, I want to take a step back and look at an investment idea Warren Buffett advertised in 1951, at the ripe old age of 21.
In his early 20s, Warren Buffett penned a series of articles that were published in The Commercial and Financial Chronicle, profiling some of the stocks he liked best at the time.
The first of these articles was titled the “Security I Like Best” and has since become a legendary example of his early investing intellect. The company profiled was GEICO. The young investor liked this company because it was cheap and it seemed that the market was overlooking its future potential. At only eight times earnings, Buffett believed “no price is being paid for the tremendous growth potential of the company.” This was Buffett’s first interaction with GEICO, which has since become a major part of Berkshire Hathaway.
Over the years, the Oracle of Omaha has made billions of dollars from this investment.
But it’s not the GEICO article I am going to focus on in this piece. 15 months after this article was published, Buffett wrote another investment advice column this time advising readers to acquire Western Insurance Securities Co.
This business was a classic value investment. At the time the article was published, it was trading in a range of $12 to $20 compared to earnings per share of just $16, indicating a potential price to earnings ratio of less than one.
Just like GEICO, Buffett liked Western both because it was cheap on a historical basis and had tremendous future growth potential. He wrote:
“Earnings within the casualty industry are expected to be on a very satisfactory basis in 1953 and 1954. Western, while operating very profitably during the entire trying period, may be expected to report increased earnings as a result of expanding premium volume, increased assets and the higher rate structure. An earned premium volume of $30,000,000 may be conservatively expected by 1954. Normal earning power on this volume should average about $30 per share with investment income contributing approximately $8.40 per share after deducting all senior charges from investment income.”
The author went on to note that the company had capable management in the form of a Mr. Ray DuBoc who had a commendable reputation in the insurance industry:
“The management headed by Ray DuBoc is of the highest grade. Mr. DuBoc has ably steered the company since its inception in 1924 and has a reputation in the insurance industry of being a man of outstanding integrity and ability. The second tier of executives is also of top caliber.”
This is a great example of the way Warren Buffett worked around this time. He was just only looking for cheap securities. He wanted to find dirt cheap stocks with good management teams and blue sky growth potential.
Disclosure: The author owns shares in Berkshire Hathaway.