The Weekend Edition includes a market update plus Morningstar adds links to two additional articles.
I thought I knew everything there was to know about the world’s greatest-ever investor, Warren Buffett - it turns out that I was wrong.
There are thousands of books on Buffett, outlining how he was mathematically gifted as a child, how he studied economics and business at Columbia University and the University of Pennsylvania, how he joined the firm of his idol, Ben Graham, out of university, how he formed his own investment partnership at age 25 and went on to crush the market (achieving 32% annual returns vs the Dow’s 9% over 11 years), and how he bought into Berkshire Hathaway and expanded it into a now US$1 trillion company, with famous investments in the likes of American Express, See’s Candy, Washington Post, Coca-Cola, and Apple.
Buffett has also been incredibly generous with his knowledge in his Berkshire shareholder letters since penning his first one in 1977.
Yet a new book manages to break new ground on Buffett and unearth some hidden gems. Brett Gardner, in Buffett’s Early Investments, looks at 10 of the companies that Buffett invested in between 1950 and 1966, when he was in his 20s and 30s. In a unique twist, Gardner analyzes each of the companies using only the financial information that was available to Buffett before he bought them - annual reports, analysts’ research, manuals of corporate financial data, and other little known sources. Gardner did this because he wanted to understand why Buffett invested in these stocks, and why many of them turned out successfully.
The 10 investments that Gardner profiles are Marshall-Wells, Greif Bros. Cooperage, Cleveland Worsted Mills, Union Street Railway, Philadelphia and Reading Coal and Iron, British Columbia Power, American Express, Studebaker, Hochschild, Kohn & Co., and Walt Disney.
Five of the investments were made during Buffett’s investment partnership from 1957-1969, and the other five were from before that time.
Let’s look at one of these bets in detail because I think it had a large influence on Buffett’s investment philosophy and why Berkshire Hathaway is set up the way it is.
Philadelphia and Reading Coal and Iron
Philadelphia and Reading was an anthracite coal company. Anthracite coal was central to America’s energy production up until the early 1900s. At its peak, it contributed about 20% of the country’s energy output. Yet competition from more efficient energy sources, including other types of coal, resulted in hard times for Philadelphia and Reading. The company had filed for bankruptcy on multiple occasions, including in 1937.
Philadelphia and Reading was run by local businessmen. They owned few of the company shares and they continued to invest cash (unwisely) into the barely breakeven coal business.
That didn’t stop Buffett from buying shares in the company in 1952. At the time, Philadelphia and Reading was US$19 per share. The stock then fell to US$9 per share. This didn’t seem to faze Buffett because he proceeded to buy more of the stock. By 1954, the company had a market capitalization of US$18 million – it was tiny. However, Buffett had made it his largest personal position, having invested US$35,000.
At first glance, the company’s financial statements didn’t make for pretty reading. Revenue had dropped by 40% over the previous five years, and profit had deteriorated to almost zero.
But it was in the balance sheet rather than the profit and loss statement where Buffett saw value. The company had net assets of US$9 per share and Buffett estimated that it had off-balance sheet assets of US$8 per share.
Thus, Buffett was buying at close to US$9 per share, when he thought the company was worth almost double that.
That’s only half the story, though. It turns out that Buffett’s mentor and investment idol, Ben Graham, was on Philadelphia and Reading’s board – which is how Buffett is likely to have become interested in the stock in the first place. Like Buffett, Graham had stated buying the company’s stock in 1952.
In 1954, a group of investors from Baltimore bought more than 11% of stock in Philadelphia and Reading and they sought an alliance with Graham and his partner, Mickey Newman. Both parties were unhappy about the company continuing to invest in the coal business. Newman had also detected significant tax losses on the company’s balance sheet which could be used to acquire profitable businesses whose income would be shielded from future taxes.
Obtaining three of nine board seats, the alliance set about transforming the company. They changed the company’s name from Philadelphia Reading Coal Iron Company to just Philadelphia Reading Corporation. Newman then did a private deal to buy Union Underwear, the country’s largest manufacturer of men’s and boys’ underwear, operating as a licensee of the Fruit of the Loom trademark.
The other board members were infuriated by the deal and it went to a shareholder vote. The stockholders approved the purchase.
Philadelphia and Reading paid US$15 million for Union Underwear, which was earning US$3 million in pre-tax profits. Those profits would be partly shielded by the tax losses of Philadelphia and Reading. And the deal was struck on highly attractive terms, using US$9 million from a non-interest bearing loan.
Soon after, Graham became the company’s Chairman, Newman its President, and it appointed the former head of Union Underwear as its CEO. Thus, the group obtained full control of Philadelphia and Reading.
The company then acquired Acme Boots for US$3.2 million at a valuation of just 4x earnings. Again, much of the purchase was financed with non-interest bearing debt.
By 1956, the company was earning US$7 per share.
Newman and Graham ended up making numerous purchases of cheap companies, including the aforementioned Fruit of the Loom. And Newman eventually bought 73% of the company in 1965 for about US$64 million (valuing the whole company at US$88 million). That compares to the company’s $18 million market cap when Buffett was buying in 1952-1954. However, it’s not known when exactly Buffett sold his shares in Philadelphia and Reading.
Two footnotes to the story. The first is that Berkshire Hathaway ended up buying Fruit of the Loom and still owns it today. The second is that it isn’t hard to see the similarities between Philadelphia and Reading and Berkshire Hathaway, a struggling textile mill that Buffett started buying in 1962 and took full control of in 1965.
Four factors behind Buffett’s early success
Gardner goes into detail on the other nine investments, and the opportunities that Buffett saw in them. From illiquid asset plays like Union Street Railway to investing in the visionary leadership of Walt Disney (and selling out too early after Walt died) to backing a great company in American Express hit by a temporary scandal, the book shows Buffett’s willingness to be bold and take big bets, to have the patience to see many through, and to be ruthless when necessary, as he was with management when taking over Berkshire Hathaway.
Gardner concludes that Buffett’s success early in his career came down to four factors:
- Activism. Buffett wasn’t afraid to take significant stakes in companies and then push for management changes to bridge the gap between the stock price and its underlying value.
- A concentrated portfolio. Buffett was confident enough to make large purchases in companies he knew were undervalued. For instance, American Express became 40% of his investment partnership at one stage. Not many fund managers would have the brass to do this.
- His extensive research. Buffett read voraciously on companies, he talked with management, and he visited factories. He wanted to know everything about the business before investing.
- Filtering ideas. While well-read, Buffett was also able to simplify industries and companies and figure out their key drivers.
*Gardner’s book has been released in the US and is due for release in Australia next month.
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My article this week looks at the challenges of building a dividend portfolio with ASX 200 dividend yields hitting near 25-year lows. I explore several conventional and not-so-conventional ideas that offer opportunities for income investors.
James Gruber
Also in this week's edition...
How much you do need to retire? It's an oft-asked question that receives different answers depending who you speak to. Brendan Coates and Joey Moloney suggest that you ignore the lobby groups who persistently warn of people running out of money in retirement. They say most Australians need to save a lot less than you might think — provided they meet an important condition.
It's a pleasure to welcome renowned global market strategist, Russell Napier, to Firstlinks. Russell is a former colleague of mine who has the ear of many of the world's best fund managers. In an interview, Russell outlines his contrarian view that investors need to worry about imminent deflation rather than inflation. If right, he says that will result in accelerated Government efforts to upend the monetary system to one of 'national capitalism', where Governments tell investors how and where to invest their capital. And he goes through which assets to own and avoid in this scenario.
On Christmas Eve, the Department of Finance quietly released an improved budget outcome for the first five months of the 2025 financial year. It was markedly different to the more pessimistic outlook that Treasury gave just a week before that. Clime's John Abernethy says it highlights how consistently our Government departments get their budget forecasts wrong, impacting RBA decision making and market pricing. He says it's a problem that warrants greater scrutiny.
Bitcoin divides investors like few other assets. Yet, despite being around for 16 years, it's surprising how many investors don't understand what bitcoin is and what it does. VanEck's Russel Chesler offers a helpful guide on the ins and outs of bitcoin.
Munro's Qiao Ma is bullish on global small and mid-cap stocks. She highlights three US-based companies that offer compelling upside.
Lawrence Lam has studied and worked with some exceptional companies and leaders, and he shares the secret ingredients behind their successes.
Two extra articles from Morningstar this weekend. Two extra articles from Morningstar for the holiday weekend. Shaun Ler discusses the takeover fight for Insignia and Jon Mills gives an update on BHP after its half-year results.
Lastly, in this week's whitepaper, Capital Group offers insights into how key market forces - a buoyant US economy, significant opportunities in artificial intelligence, and the renewed appeal of fixed income - are likely to shape portfolios in the year ahead.
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Weekend market update
The optimism investors have shown during President Trump’s first week back in the White House tempered a bit on Friday. The S&P 500 and Dow Jones Industrial Average both slipped about 0.3%, with the Nasdaq Composite falling 0.5%. The pullback followed the S&P notching its first record close of 2025 on Thursday. Results next week from big tech names—Microsoft, Meta, Tesla and Apple—will put this year's rally to the test. Bitcoin traded above US$105,000, brent crude oil rose 0.3% snapping a six-day losing streak, while gold lifted 0.5% to US$2,778 an ounce.
From AAP netdesk:
On FridayAustralian shares have finished higher for the fourth time this week after Donald Trump demanded cuts in interest rates and the price of oil. The benchmark S&P/ASX200 index on Friday finished up 30.2 points, or 0.36%, to 8,408.9, while the broader All Ordinaries gained 31.3 points, or 0.36%, to 8,660.4
For the week the ASX200 rose 1.2%, its third-straight week of gains and its best weekly performance in 2025, a year in which it has so far gained 3.1%.
Eight of the ASX's 11 sectors finished higher on Friday, with energy and technology lower and mining and telecommunications basically flat.
The consumer discretionary sector was the biggest gainer, rising 2.1% as Kmart owner Wesfarmers grew 3.2% to a more than one-month high of $74.66.
But Kogan.com dropped 15.2% to a six-week low of $5.07 after the online retailer reported "implementation and technology challenges" had adversely impacted the sales and profitability of its Mighty Ape business during the peak holiday trading period.
In the heavyweight mining sector, goldminers were generally lower. Northern Star fell 0.6%, Evolution slipped 1.8% and Westgold retreated 4.7%.
BHP rose 0.5% to $39.31, Fortescue grew 1% to $18.81 and Rio Tinto advanced 0.3% to $118.33.
Three of the big four banks finished higher, with CBA gaining 0.5% to $158.65, NAB advancing 0.6% to $39.40 and Westpac rising 0.2% to $33.02. ANZ was the outlier, dipping 0.1% to $30.18.
The energy sector fell 1.2% amid the drop in oil prices this week, with Woodside retreating 1.9%, Santos dipping 0.1% and Ampol declining 0.7%.
From Shane Oliver, AMP:
- Global and Australian shares rose over the last week to record or near record levels as newly inaugurated President Trump talked big about boosting the US economy, provided no negative surprises and there was a lack of detail regarding his tariffs. This saw US shares rise 1.7% for the week, Eurozone shares gain 1.3%, Japanese shares rise 3.9% and Chinese shares gain 0.5%. The positive global lead helped boost the Australian share market by 1.2% taking it to within 1% of its record high with IT, financial, retail and property shares leading the rise, but with tariff worries and a fall in oil prices weighing on resources shares. Bond yields were little changed – flat in the US, up a bit in Germany and Japan but down a bit in Australia. Oil prices fell on Trump’s policies to boost production and his exhortation to OPEC to do the same. Metal prices fell, iron ore prices were flat, gold prices rose, and Bitcoin rose, briefly touching a record high. The absence of detailed tariff announcements saw the US dollar fall and the $A rise.
- Trump’s first week was pretty much as expected with no big negative surprises for markets but expect lots of noise to come. While Trump’s return provided lots of angst and excitement, depending on your perspective, with a flurry of executive orders marked by big US policy reversals in several areas it was really no more than expected by investment markets and so shares were able to rally, bond yields were little changed and the US dollar fell as his initial policies to a large degree had already been factored in. In other words, there was a bit of “buy on the rumour, sell on the fact”. This was particularly the case in relation to tariffs with markets taking some comfort from the lack of specific announcements on Day One. That said there is a long way to go yet.
Here are five key takeouts from Trump’s first week:
- First, Trump’s return confirms, for better or worse, an ongoing backlash against progressive centre left policies - bigger government, higher taxes, woke policies, high immigration and climate policies are losing support partly in response to the “cost of living” crisis. This is not quite the economic rationalist/Washington consensus model of Thatcher, Reagan and Hawke and Keating as there is a contradictory element of populism around protectionism and state direction that wasn’t there in the 1980s. But its still a big change that will potentially further boost US productivity growth. And it presents a big challenge to Australia – with eg, more companies potentially thinking of relocating to the US given the attraction of lower taxes and less regulation. Trump’s policy shift will mean pressure for Australia to respond with policies to boost the supply side of our economy – like tax reform and deregulation – and to curtail government spending. Amongst other things, this is what Australia needs to boost our own productivity growth.
- Secondly, if Trump is really going to usher in a “Golden Age of America”, some of this could be very positive for shares. And indeed, he will ultimately want to see shares go up as an affirmation that he and the US are “winning”.
- Thirdly, there will be lots of noise along the way as this is the way Trump does things. We were reminded again in the last week how Trump can whipsaw markets – with markets initially relieved that there were no Day One tariff details announced and that there would be a review of unfair practices with a due date of 1 April giving the impression that the focus would be on negotiation, but then Trump indicating 25% tariffs on Mexico and Canada and 10% on China were still on the table with a probable 1 February start date seeing markets then start to fret again. This whipsawing is likely to continue with the uncertainty being on purpose as part of Trump’s approach to negotiations. But as we saw in relation to tariffs in 2018 this can cause a big hit to markets before things settle.
- Fourthly, in terms of his policies there is a long way to go before we get much clarity – along with tariffs this includes his tax and spending cuts and whether the budget deficit will be blown out further which is largely up to Congress and what he does in relation to the Russia/Ukraine war and Iran’s nuclear capabilities.
- Finally, as with his first term there will be lots of crazy stuff along the way – with eg the Gulf of Mexico being renamed, the US retaking the Panama Canal (a bit like Russia retaking Crimea), loud public conflicts amongst his team (eg, Musk versus everyone else), a demand for an immediate cut in interest rates – we saw this in Trump 1.0 and the Fed will just ignore it - and his billions of paper profits on his freshly made up $Trump meme coin. In terms of the latter, Meme coins are literally just made up and have no intrinsic value and unlike Bitcoin or Ethereum have no hope of being of any value beyond pure speculation. But unfortunately, it just looks to many like the US President seeking to cash in on the crypto craze and in the process may do more harm for crypto than good.
- Ultimately our view remains that various constraints - Trump wanting shares to go up not down, his voters wanting a lower cost of living, bond vigilantes and fiscally conservative Republican politicians - will keep a lid on Trump’s populist inflation boosting tendencies, but this may not be clear for a while, and it will be a rough ride along the way.
So allowing for the negatives of rich valuations, uncertainties as to how much the Fed will cut rates, uncertainties around Trump and various geopolitical risks against the positives of global central banks still cutting rates, goldilocks economic conditions particularly in the US, optimism that Trump will reinvigorate the US economy and prospects for stronger profits ahead in Australia we remain of the view that this year will see a far more volatile and constrained, but still positive, ride for shares than what we saw in 2024.
Curated by James Gruber, Joseph Taylor, and Leisa Bell
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