Buffett's Early Investments summary

In the 1900s, Greif Bros. called itself “The largest cooperage factory in the world.” What’s cooperage, you ask? It’s the manufacturing of wooden barrels. And if you’ve never heard of cooperage before, that’s not surprising: in the twenty-first century, the market for wooden barrels isn’t enormous. But even in 1951, when Warren Buffet pitched his father’s investment firm Buffet-Falk & Co. on buying up Greif Bros. stock, cooperage was an industry in decline.

So what did the 21-year-old Buffett see in this seemingly unexciting company? He saw a classic net-net opportunity.

A “net-net” investment occurs when a company trades below net current asset value – meaning the company’s current liquid assets minus liabilities. This approach identifies companies selling for less than their liquidation value. Buffet would later call these “cigar butt investments.” A cigar butt in the gutter might only have one puff left, but that puff is free.

Greif Bros. fit this profile perfectly. The company had a net current asset value of $20.47 per share – representing what would remain if the business paid off all debts using just current assets. The company’s tangible book value – the theoretical amount if all physical assets were sold and debts paid – stood at $39.60 per share. The market significantly undervalued these assets. Greif Bros. shares were priced at $18.25 – representing a slight discount to net current assets and a 54 percent discount to tangible book value.

What made Greif Bros. particularly interesting was its asset composition. The company owned 239 manufacturing plants and 11 divisional offices. Much of its inventory was wood, likely to hold value over time. What’s more, in the 1940s, Greif Bros. had switched to LIFO accounting, or Last-In, First-Out accounting. This assumes that the most recently added inventory items are the first ones sold. This approach typically understates inventory value, meaning Greif’s true asset value was likely even higher than the already attractive book value suggested.

To Buffet, this investment offered substantial downside protection: thanks to its asset value the company would likely fetch more in liquidation than its market price. But there’s an interesting postscript: unlike many net-net investments, Greif Inc. didn’t go under. The company is now a leader in industrial packaging solutions, with a $3.4 billion market capitalization as of 2023. Buffet’s early identification of value in Greif. Bros foreshadowed his eventual instinct for finding and investing in companies with adaptable business models and durable competitive advantages.