Most investors are familiar with some of Warren Buffett's greatest investments - like Coca-Cola and American Express - but far fewer have studied the Oracle of Omaha's early career successes.
The early Buffett years, from the late 50's to the early 70's, were fundamental in his investing career, providing the building blocks for his reputation as one of the world's greatest investors.
Indeed, before Berkshire Hathaway became the conglomerate we know today, Buffett ran several partnerships, which invested using three different strategies. Firstly, Buffett has his "generals", which were usually undervalued securities where he had nothing to say about corporate policies. Generals made up the bulk of Buffett’s portfolio. Then there were the "work-outs", which were undervalued securities where corporate action was required for the market imbalance to correct itself. And finally the "control" situations where Buffett aimed to influence policies of the company in order to unlock value.
Buffett’s work-out and control situations are without a doubt, a style of activist investing. These situations were not rare occurrences. In fact, many of Buffett’s earliest investments were activist situations.
Dempster Mill - successful restructuring
One of the first investments Buffett mentions in his early partnership correspondence is Dempster Mill Mfg. This was in fact a “general” that became a “work-out” and then transformed into a “control” situation.
Dempster stock was first acquired for Buffett’s partnerships during 1956, at a time when the company’s stock was trading at $18. Book value stood at $72 per share, with $50 per share of current assets. Dempster had been a highly profitable company but when Buffett began buying, it was only breaking even. According to Buffett:
“...[The lack of profitability] reflected a poor management situation, along with a fairly tough industry situation… Certainly, if even moderate earning power can be restored, a higher valuation will be justified, and even if it cannot, Dempster should work out at a higher figure…”
Between 1956 and 1961, Buffett sat on Dempster’s board of directors. Using this position, he was able to get to know Dempster inside out and quickly realised where the company was going wrong.And after this period of observation, Buffett made his move. With his partnerships holding 70% of Dempster’s outstanding stock, during 1961 Buffett replaced Dempster’s management team, cut costs and sold assets.
After a successful restructuring, which only lasted a year, during 1963 Buffett sold Dempster for around $80 per share. A total gain of 186%…
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