Buffett's Borsheims case study

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I’m going to draw some key lessons for today’s investors from the experience of Warren Buffett’s purchase of (most of) the shares in a jewelry retailer with only one shop.  The case study reinforces the point that to be a good investor you need first to be able to understand the drivers behind a business – an analyst of shares is an analyst of businesses.

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Lessons:

  1. Seeing a strong economic franchise

Over many decades Borsheims nurtured a reputation for selling quality jewelry at remarkably low prices.  Costs were kept to a minimum by only operating from one store, buying in volume (and often with cash) thereby gaining discounts and passing on the low costs to customers; this led to very high volumes for a one-store business, which fed back into the cycle of low operating costs low unit buying costs.  They also gained a good name for fair dealing.  The organisation was lead by a family with competence and integrity in abundance.

2. Recognising the potential benefits of business combination

Borsheims has been boosted by the extra attention it receives by being part of the Berkshire family, not least the loyalty of the BH shareholders. Also, Borsheims’ buying power is enhanced by Berkshire’s credit standing and deep pockets.

3. Finding a valuable deep culture

If a culture has been so developed as to have deep roots throughout the organisation then the loss of a founder/key person will not be too detrimental to the business. When Buffett lost Ike Friedman (his key person when he bought) the cohesive collegial culture at Borsheims quickly found a knowledgeable and experienced replacement in Donald Yale.

4. Judging if the managers are smart enough not to over-exploit a virtuous circle.

Borsheims’ low prices and costs, buying power and large range attract customers from far and wide, which enables high volume, which, in turn, leads to low prices and costs, greater buying power and range. The benefits of this virtuous circle must, for the greater part, be passed onto customers. If Borsheims becomes greedy on operating margin then competitors will grab customers.

Borsheims is part of the Berkshire magic

One of the great joys of being a Berkshire Hathaway shareholder is that you can revel in a whole weekend of events centred around the annual general meeting in early May. A fixture in the diaries shareholders is a visit to the Borsheims store for the Cocktail Reception on Friday evening before the AGM.

This evening, Friday 3 May 2019, about 10,000 – 20,000 Berkshire Hathaway shareholders will converge on Borsheims in Omaha.  They’ll have a great time (but it does getting a little crowded).  People from all over the world mingle, express their wonder at the Berkshire phenomenon and look at the jewelry and watches on display.

Hundreds of thousands, if not millions, of dollars are taken by Borsheims on that evening alone – the anticipation and the party atmosphere seem to loosen the purse strings. But, so what? Spending at Borsheims is all part of the feeling of being a member of the Berkshire family, just as much as thinking through the rationale for the latest acquisition, or eating Sees Candy and drinking Coca-Cola during Buffett and Munger’s 6-hour Q&A.

The Berkshire connection has been a boon for Borsheims for over three decades.  Even though it operates only one store it sells to people – shareholders or not – from every corner of the globe.

Buffett and Munger are great salesmen, rarely missing a chance to tell anyone who’ll listen about the terrific range, the low prices and the trustworthiness of the people. When four-fifths of the shares in a company with a mere 20,000 sqft of sales floor were acquired by Berkshire in the Spring of 1989 it was already an Omaha landmark, with both a dominant market share and enviable reputation.

Immediately after buying, the Buffett marketing machine got to work. He helped organise buses for shareholders, immediately after the AGM, to journey the mile or so to spend the evening looking around Borsheims.  This Saturday eve

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