1 year ago

The “Masters of the Universe” Portfolio



The Secret to Getting Very Rich – Part VI I recently wrote a blog posting geared toward Entrepreneurs and Investors on the power of raising prices and wanted to include it in this eBook. Below is full text: I’ll give you the BLUF. That’s military parlance for “Bottom Line Up Front”: Raise your prices above the price of inflation every year. That’s it. That’s the secret. How can you do that? As an Entrepreneur build a strong brand which allows you to do so. As an Investor look for companies with strong brands that are already doing that. I felt a bit like Newton when the apple fell on his head and I felt a little foolish for not grasping it earlier. Let me show you how I reached that conclusion. You’ve heard it for years. Over and over, time and again. To invest like Warren Buffett, recognize you are not merely buying a piece of paper, you’re buying a piece of a business. This sage advice has been blasted at you in magazines, newspapers and blog postings over the last thirty or so odd years. What exactly does it mean? We’ve all heard the “moat”, the “margin of safety”, the mantra: ‘Price is what you pay; value is what you get. In an annual letter to Berkshire shareholders, Buffett stated 1972 was a turning point. He bought See’s Candy, a legendary West Coast manufacturer and retailer of boxed chocolates. See’s had about $4m pre-tax with $8m in net tangible assets. The family controlling See’s wanted $30m. Buffett didn’t want to pay more than $25m and nearly lost out on the deal. Luckily for him, he says, the sellers decided to take his $25m bid. He notes, to date (2014) See’s has earned $1.9b pre-tax while its growth required added investment of only $40m over that time. Buffett says See’s was able to distribute huge sums that helped him buy other businesses that, in turn, have produced large distributable profits. He says See’s had a HUGE asset that didn’t appear on the balance sheet; a broad and durable competitive advantage (Brand!) that gave See’s significant pricing power and he gained a business education about the value of powerful brands which opened his eyes to many other profitable investments.

In an outstanding lecture at the University of California, Irvine, Mohnish Pabrai elaborates. Pabrai says 12 years after the purchase, See’s book value went from $8m to $20m. Unit volume growth was only about 2 percent per year in the number of pounds sold, yet earning went up significantly more than that. At the same time California’s GDP growth was around 5 or 6 percent. According to Pabrai, the only input Buffett provided to management was a new price list on 1 January of every year. If inflation was running say, 3 percent per year, Buffett would raise prices by 12 percent. Buffett discovered he could raise prices above the price of inflation year after year and it didn’t have an impact on sales. Pabrai says Buffett got a huge education in brands and branding that was fundamental to his subsequent purchase of a large stake in Coca Cola. Pabrai notes Buffett, a long time ‘cigarbutt’ net-net investor, purchased See’s at over 3X book value. Pabrai claims with the river of cash from See’s that funded other things for Buffett, he could have paid $100m and it still would have been a good deal. ************* In conclusion, I hope you found this short eBook useful in developing your own investment philosophy. I wrote it for several reasons. One reason was to distill my own investing philosophy culled from multiple sources into a single reference I could refer to often without picking through different books, blogs and magazines. Another was to get more practice thinking and writing. I’ve released the eBook free of charge to anyone and everyone. Feel free to copy and distribute it as you wish. Please contact me via email with any questions, comments, or suggestions; or to slam it in general.

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