How grocery stamps gave Buffett and Munger millions to invest
It took time to fill a book, and many people never cashed in, leaving cash the owners could invest.
FINAiUS · Charlie Munger - The Man Who Built Berkshire Hathaway | A Documentary | FINAiUSOne customer recalled walking into the Blue Chip redemption center in California with 10 and two-thirds books of stamps saved for a blender, describing the confidence and the peace of mind that came with carrying so many books.
Blue Chip issued trading coupons built around that kind of saving. Shoppers collected stamps with everyday purchases, pasted them into books, and traded full books for household goods at a redemption center.
The waiting period left the company holding money it could put to work. Because filling a booklet was slow, and many savers never turned theirs in, the company had sold $100 million worth of stamps a year by the 1970s. Like an insurance company, it collected a lot of cash upfront and paid out later, so the money could be put to work in between.
That was exactly the kind of cash flow business that investor Warren Buffett and Charlie Munger, his longtime partner at Berkshire Hathaway, liked. Buffett realized he could use that money to buy other businesses.
The opening came in December 1963, when federal officials brought an antitrust case against Blue Chip Stamps and required it to sell additional stock to the public. Buffett and Munger accumulated a controlling position, with Buffett as the largest shareholder and Munger as the second largest.
After becoming board members, they took charge so they could direct the leftover stamp money toward buying more businesses. Each company they bought could then supply cash to take over other companies, starting a chain of takeovers built on stamp money.
Questions people ask
How did trading stamps actually work?
Trading stamps were small paper stamps that retailers gave shoppers along with groceries and gasoline in the 1960s and 1970s. Shoppers pasted them into booklets and exchanged full books for appliances, toys, and housewares at a redemption store.
What is float, and why do investors like it?
Float is money a company holds but will eventually owe to someone else. Insurance premiums, unredeemed gift cards, and prepaid subscriptions all create float, and a disciplined investor can put that cash to work until the bill comes due.
Why did an antitrust case help Buffett and Munger take over?
The government said Blue Chip had too tight a grip on the stamp business in California and forced it to dilute its ownership by selling stock to outsiders. That sale let Buffett and Munger buy large stakes they could not have assembled before.