Corporate Insiders Have Forgotten The Warren Buffett Feud With Seabury Stanton

Many of you reading this are familiar with the backstory of how Berkshire Hathaway came to be the chosen investment vehicle that built Warren Buffett’s vast fortune. Buffett noticed that the price of Berkshire tended to bump in price every time there was an announcement of a mill closing, and he thought there was a gap in value between the $7-$8 prevailing price and the $20-$21 stated book value of the stock.

The decision to cheat Warren Buffett out of roughly a dime per share in a tender offer led to Seabury Stanton’s ouster as head of the Berkshire Hathaway textile mills. This potential consequence of personally insulting an activist investor was on my mind as I saw Sally Smith’s resignation from CEO of Buffalo Wild Wings after taking gratuitous shots at activist investor Marcato Capital. My view is that it is far better for the job-holder and the corporation itself to focus on the merits of the insurgent activist’s arguments rather than engage in ad hominem battles of identity.

Because Berkshire’s stock price was so low compared to the book value, patrician CEO and Chairman Seabury Stanton would use the liquidated proceeds from the mill closings to buy back its stock. Although this may be obvious, it is useful to keep in mind the premise—anytime a smallish company wants to repurchase a meaningful percentage of its stock, it needs to locate shareholders willing to part with the stock lest the business end up bidding against itself or—even worse!—run afoul of SEC rules and congressional laws on stock price manipulation.

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The Secret to Investing in Bonds

If you read an intermediate level finance textbook, you will encounter advice that discusses the relative safety of bonds. Usually, you will encounter information that says something to the effect of—national governments have the safest debt obligations, then state and/or local governments, then large businesses, and then small businesses. Those notions may be useful as vague generalities, but provide little insight when you are actually trying to determine how to invest your money: What are the exceptions? How can you tell when, say, a high-quality large business is giving you a “safer” bond offering than a government entity?

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