As I mentioned in the previous part of this series, when he was managing his first investment partnerships, Warren Buffett tended to keep his cards close to his chest, and not reveal portfolio positions. Investors just had to trust that the young managing partner was making the right decisions.

That being said, there were several investments that he did describe in detail in his letters. Sanborn Map was one (covered in pt. 3), and another was Dempster Mill.

Buffett and Dempster Mill

What’s fascinating about these particular investments is how Warren Buffett unlocked value. It is widely believed that Warren Buffett made his money by investing in deep value securities and holding until the market realised the value.

This is only partly true. He did buy deep value stocks, but in the early years, on multiple occasions Buffett became an activist, buying up large chunks of these companies and pushing for change. He even used his voting power as a shareholder to remove the existing management teams and install his own operators.

Dempster Mill was one of these activist situations. Buffett described the company in his 1961 letter to partners as follows:

“Dempster is a manufacturer of farm implements and water systems with sales in 1961 of about $9 million. Operations have produced only nominal profits in relation to invested capital during recent years. This reflected a poor management situation, along with a fairly tough industry situation. Presently, consolidated net worth (book value) is about $4.5 million, or $75 per share, consolidated working capital about $50 per share, and at yearend, we valued our interest at $35 per share…”

Buffet took time acquiring a large interest in this business for his partnerships. He started buying in 1956 and continued buying until 1961 when he owned 70% of the business with 20% of partnership assets invested.

The company’s original management didn’t seem to understand the business and was eroding shareholder value. Unwilling to sit around and wait for the value of his investment to evaporate, Buffett decided to take action. He installed a new manager, Harry Bottle, who started to lay off workers and close unprofitable operations. He also liquidated inventory.

Essentially, Bottle was tasked with liquidating the business to realise the hidden value on the balance sheet.

Bottle’s efforts were highly successful. After restructuring the business, Dempster put itself up for sale and was eventually sold for $80 per share generating a near threefold return for Buffett.

Is unlikely that this investment would have produced a positive return for Warren Buffett and his investors if he hadn’t of got involved. This whole scenario is just one of the many cases in his career where Buffett’s direct involvement at a company has produced a favourable return for the Oracle of Omaha.

Disclosure: The author owns no share mentioned.


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