The Snowball_ Warren Buffett and the Business of Life - Alice Schroeder [187]
Because the Apparel and Box Loom divisions were not self-sustaining and it would take gobs of cash to keep them running, Buffett was now forced to act. Deploying capital with no hope of a return was a cardinal sin to him. He told Ken Chace what to do. Chace was upset, but, in typically stoic fashion, he followed orders and shut the two divisions down.13 Still, Buffett could not bring himself to put a spike through the whole thing and bury it.
What he was left with, therefore, was a partnership that owned two businesses, one thriving—National Indemnity—and one failing—Berkshire Hathaway—plus eighty percent of DRC, the retail holding company, and, of course, shares in a wide range of other companies. As 1968 waned, stocks on the fringes of the market began to slide; investors concentrated on the biggest, safest names. Indeed, Buffett himself started buying the blandest, most popular stocks that remained reasonably priced: $18 million of AT&T, $9.6 million of BF Goodrich, $8.4 million of AMK Corp. (later United Brands), $8.7 million of Jones & Laughlin Steel. But above all, he kept accumulating more Berkshire Hathaway—despite his restriction against buying any more bad businesses and even though the textile business was sinking into the mud. Only a short while ago, he had tried to sell it to Munger and Gottesman, but now that he could not sell it, he seemed to want as much of the stock as he could get.
He and Munger had also discovered another company they saw as promising and were buying as much stock of it as they could. This was Blue Chip Stamps, a trading-stamp company. They would buy it separately and together, and over the course of time Blue Chip would dramatically reshape the course of both men’s careers.
The trading stamp was a marketing giveaway. Retailers handed stamps to their customers with their change. Customers dumped them in a drawer, then pasted them into little booklets. When redeemed, enough of the booklets bought them anything from a toaster oven to a fishing rod or a tetherball set. The small thrill of saving stamps fit neatly into a disappearing world: a world of thrift, a world that feared debt, that viewed these “free gifts” as the reward for taking the trouble to collect and save those stamps and for never wasting anything.14
But the stamps were not really free.15 The stores paid for them and marked up the merchandise accordingly. The national leader in trading stamps was Sperry & Hutchinson, except in California. There, a group of chains had shut out the S&H Green Stamp by starting their own trading stamp, Blue Chip, and selling it to themselves at a discount.16 Blue Chip had a classic monopoly.
“When you had all the major oil companies and grocers giving out a single stamp, it became like money. People would leave their change behind and take the stamps. Morticians gave out stamps. Prostitutes gave them. I always thought the funniest thing would be if the madam would call in one of the girls and say, ‘From now on, I think you better double-stamp, honey.’ It was ubiquitous. Everybody had them. People even counterfeited them.”
In 1963, the Department of Justice had filed suit against Blue Chip for restraint of trade and monopolizing the trading-stamp business in California.17 S&H also sued it. With the stock in a slump, Rick Guerin, who had founded his own partnership, Pacific Partners, noticed Blue Chip and took it to Munger. Buffett had noticed it too. “Blue Chip did not have an immaculate conception,” Charlie Munger concedes, but they all decided to make a calculated bet that Blue Chip could work its way out of its woes—the S&H lawsuit being the most threatening.
They wanted it because Blue Chip had something called “float.” The stamps were paid for in advance; the prizes got redeemed later. In between, Blue Chip had use of the money, sometimes for years.