From the Heilbrunn Center for Graham & Dodd Investing at Columbia Business School:
HT: Neo Alpha
See also:
Warren Buffet's Columbia University Talk Upon the 50th Anniversary of 'Security Analysis' (he doesn't seem to have much use for EMH)
Spring 2012 Graham and Doddsville Newsletter: Jim Chanos, Julian Robertson et al
Graham & Doddsville: Gotham Capital's Joel Greenblatt on Cash Flow, Short Selling and Genius
*Copied out of the 1988 Annual Report for our November 2007 post "How Buffett Made a Killing in Chocolate, And Warren's Letters to Shareholders":
Warren on arbitrage:
Some offbeat opportunities occasionally arise in the
arbitrage field. I participated in one of these when I was
24 and working in New York for Graham-Newman Corp.
Rockwood & Co., a Brooklyn based chocolate products
company of limited profitability, had adopted LIFO
inventory valuation in 1941 when cocoa was selling for
50 cents per pound.In 1954 a temporary shortage of cocoa caused the price to
soar to over 60 cents. Consequently Rockwood wished to
unload its valuable inventory - quickly, before the price
dropped. But if the cocoa had simply been sold off, the
company would have owed close to a 50% tax on the proceeds.
The 1954 Tax Code came to the rescue. It contained
an arcane provision that eliminated the tax otherwise due
on LIFO profits if inventory was distributed to shareholders
as part of a plan reducing the scope of a corporation’s business.
Rockwood decided to terminate one of its businesses, the sale
of cocoa butter, and said 13 million pounds of its cocoa bean
inventory was attributable to that activity. Accordingly, the
company offered to repurchase its stock in exchange for the
cocoa beans it no longer needed, paying 80 pounds of beans
for each share.
For several weeks I busily bought shares, sold beans, and
made periodic stops at Schroeder Trust to exchange stock
certificates for warehouse receipts. The profits were good
and my only expense was subway tokens.
The architect of Rockwood’s restructuring was an unknown,
but brilliant Chicagoan, Jay Pritzker, then 32. If you’re
familiar with Jay’s subsequent record, you won’t be surprised to
hear the action worked out rather well for Rockwood’s continuing
shareholders also. From shortly before the tender until shortly
after it, Rockwood stock appreciated from 15 to 100, even though
the company was experiencing large operating losses. Sometimes
there is more to stock valuation than price-earnings ratios.This story is from the 1988 Letter to Shareholders of Berkshire Hathaway. I have Warren on dead trees (WODT) but BRK has put the letters online,if you would like to read of his other adventures.
