BERKSHIRE HATHAWAY’S TOBACCO HISTORY PART II

INTRODUCTION

My last post about Warren Buffett and tobacco investing brought a surprising response. The post had lots of readers and more than the usual feedback. Shared information, that I did not have before, prompted this follow-up post.

HOW BUFFETT LOOKED AT HIS RJR HOLDLINGS

One very knowledgeable investment analyst shared this:

I suspect Warren sniffed out the fact that Ty Wilson’s ultimate goal was to do a big acquisition in consumer products.   And the Nabisco deal that Ty made was quite large vs. the 1984 RJR market value.  

I think Buffett is of the mind that if he wouldn’t want to pay an acquisition premium (and probably a high multiple) to buy a company like Nabisco himself, he is not going to own shares where the CEO/Board are planning to do so.  Such a deal would be a form of “thesis-drift.” Against Buffett’s guiding principles.  

As your figures point out, RJR stock price was dramatically re-rated by the market in the intervening years (1980-84).   Warren got what he came for, and since he didn’t control RJR’s capital management, he moved on.

A great observation! I had not made the connection between Buffett and the Nabisco acquisition.  But it certainly makes sense. We don’t know exactly when in 1984 Buffett sold his RJR. Let’s assume it was after Ty Wilson spun off Sea-Land and sold Aminoil, AND before anything was known about Nabisco.  Both of those divestitures made the stock worth more – a pile of cash from Aminoil and a Sea-Land spin-off that gave value to the shareholders and freed RJR from a troublesome business that did not fit a consumer goods strategy.

But maybe Buffett held on until he sensed another consumer goods acquisition. If so, he would not likely have deemed that a good thing. RJR had already made two major consumer goods acquisitions – Del Monte in 1979 (a disaster) and Heublein in 1982, putting RJR in the KFC chicken business (not great). So, Buffett might have known we were going to buy Nabisco. Or he might have just been leery, fearing we would make a bad acquisition – which we did with Nabisco Brands.

BUFFETT’S FRIEND BUYS INTO RJR

A second excellent analyst weighed in with a great story about a legendary mutual fund manager who Buffett had mentored, Bill Ruane.  Like Buffett, Ruane had studied business at Columbia University:

Your last post made me curious if Sequoia Fund had owned RJR back in the 80s. Using old Sequoia reports, I found that it did own some shares in March 1980.  It mentioned RJR briefly in a September 1980 report.  And in September 1981, Sequoia’s position was up to 10.5% of the fund, and 10.9% in March 1982.

Bill Ruane was one of two investment managers Buffett recommended to clients when he shut down his partnership in 1969. Buffett and Ruane communicated frequently.  Reflecting Buffett’s philosophy, in March 1980, Sequoia's entire portfolio was trading at a P/E ratio of about 5. 

The Sequoia reports show that Bill Ruane made RJR purchases that paralleled Warren Buffett. Ruane eventually even listed “Tobacco” as a stock category. We don’t know when he sold the RJR, but I hope he kept it beyond 1984 when Warren bailed. By the end of 1985 his stake in RJR would have grown to $26 million, a gain of over 80% (including dividends) in three years.

I DON’T NEED A LECTURE

I recall vividly an investor conference in New York that I attended with one of RJR’s top executives. A major investment firm sponsored the meeting, and Bill Ruane was there. During a meeting break, he introduced himself to the executive and me. I knew that he ran Sequoia but did not know he was investing in RJR. I don’t think my boss knew who Ruane was.

Bill Ruane began to talk with us about “asset allocation” although he did not use that phrase. He suggested that we might look at how we used our considerable cash flow, perhaps a bigger dividend and fewer acquisitions. When he walked away, my boss said, “I don’t need a damn lecture in Finance 101.”

Actually, what we all needed at RJR was a seminar on “Asset Allocation.” But it took nearly 40 years, and a lot of soul searching, before I realized how true that was.

More about RJR’s asset allocation record in a future post.