BERKSHIRE HATHAWAY'S TOBACCO HISTORY PART V

WARREN BUFFETT AND CHARLIE MUNGER – CONFLICTED ON TOBACCO [i]

For more than 40 years Warren Buffett and his partner Charlie Munger have wrestled with whether to invest in tobacco. They have invested in stocks and bonds of tobacco related companies -not a surprise. These businesses all meet the Buffett tests of a good investment. Yet, the partners have acted sometimes in ways that appear to contradict their decision-making rules. They have made it clear that their reasons go beyond making money.

We have already discussed their RJR stock and bond deals. But there have been others where the two partners chose to buy only a small stake or to buy the entire company when its profits in tobacco were not so obvious.

BAYUK CIGAR - 1982

In the Spring 1982, Buffett built a 5.7% stake in Bayuk Cigar. In September, Bayuk got embroiled in a lawsuit; Bayuk was sued for breaching an agreement to sell its cigar business to American Maize. Over the next 4 years, Bayuk did liquidate its operations and assets and distributed its cash. This netted Berkshire a return greater than 2.5 x its initial investment.

US TOBACCO (UST)- 1993

In April 1993, Berkshire took a sizable position in UST, the leading smokeless tobacco manufacturer in America. The specifics of this deal are a bit murky. But Berkshire’s stake could have been near 5%, and its stake would have been worth over $290 million. At the time, UST, like many tobacco companies, sported one of the highest operating margins of any large publicly traded company and generated lots of cash. But Buffett’s purchase likely had less to do with fundamentals and long-term planning and more to do with timing.

He bought following “Marlboro Friday.” That day, Philip Morris cut its Marlboro cigarette price 20%. This caused the entire industry to steeply sell off - even UST, with no direct exposure to cigarettes. UST was never listed under marketable securities positions in any of Buffett’s Annual Letters to Shareholders, and no specific mention was made of the purchase or subsequent sale, suggesting that the stake was a short-term opportunity for Buffett. Altria (Philip Morris) acquired UST in 2009.

MCLANE – 2003

In May 2003, Walmart sold its subsidiary McLane Company to Berkshire Hathaway. McLane is one of the largest supply chain service companies in the United States, with 20,000 employees servicing 110,000 convenience stores, mass merchants, drug stores, and chain restaurants. McLane is one of the largest wholesalers of tobacco products.

In 2022, McLane accounted for over 23% of Altria’s revenue. Altria’s reported numbers suggest that McLane’s wholesale volumes likely make up 11% of total industry volumes. Not entirely reliant on tobacco products, nevertheless this Berkshire-owned entity is practically a royalty on the tobacco industry.

CONWOOD TOBACCO (DATE UNKNOWN)

In 2017, Charlie Munger discussed an early meeting with Conwood Tobacco management.

We were young and poor then, by modern standards. We were offered the chance to buy a company that has since done sensationally well. We sat in a hotel lobby in Memphis, talked about it, and decided we didn’t want to do it. It was just like putting $100 million in a bushel basket and setting it on fire as we walked away. They're number two in the market. They all believe in their product, every damn one of them chewed tobacco. The figures were just unbelievable. There was virtually no financial risk. Nothing but money.

Yeah. It's an addictive product. People are totally hooked. It causes maybe 5% of the cancer you get from cigarettes, but it's not zero. With that product, you definitely are going to kill people that have no reason to die. It's the best deal we ever saw; we couldn't lose money doing it, and we passed.

Do we miss what we would easily have had? We were way better off not making a huge profit from a product we knew going in was a killer. Why should we do that? On the other hand, if it was just a marketable security, we wouldn't feel that same morality.

A CONFUSING RATIONALE

Warren and Charlie will not own tobacco operations outright but will buy non-controlling stakes. They also do not oppose owning companies that buy and sell tobacco products on a large scale. This rationale is confusing. What Buffett and Munger say about tobacco and how they invested don’t match up. Buffett always says, “We don’t buy a stock – we buy a piece of a business.” Yet they seem to rationalize, “Buying a tobacco stock is not the same as a buying a business. That’s okay. But we just wouldn’t want to own the whole thing.”

Their position underscores how hard it is to reconcile buying “tobacco,” – even for two of the greatest investors ever. The purpose here is not to criticize, but to note that on this question, these two men of enormous talent don’t seem to have a better answer than anyone else on the ethics of tobacco.

[i] I am indebted to Devin LaSarre for much of the material in this series about Buffett and Tobacco. Devin’s excellent reporting on tobacco stocks and his specific analysis of Buffett’s investments prompted me to dig deeper, recall personal events from 40 years ago, and learn new lessons from what happened then. Please follow Devin’s writing. You can begin with this article: Invariant - The Real Story of Buffett, Berkshire, and Tobacco,  Devin LaSarre  May 14, 2023  LINK