Written by Hurricane Blog 

“When control of a company is obtained, obviously what then becomes all-important is the value of assets, not the market quotation for a piece of paper (stock certificate).” —Warren Buffett

In this post I lay out my answers to the questions posted at CSInvesting.org as part of the DEEP VALUE course and the case study on Dempster Mill Manufacturing Company. Feel free to comment and share your own views, reflections and take-aways.

Q: How did Buffett find this investment and what ways did he reach an intrinsic value?

Buffett found Dempster as the “figures were extremely attractive.” In other words, a low price compared to book value.

Q: How much margin of safety did he have?

When Buffett first acquired stock in Dempster, the most important margin of safety was most likely in the great discount between price and book value.

Later on when Buffett realized that current management wasn’t capable, he had Harry Bottle to take over as CEO. This provided a sort of second margin of safety – a great manager or management team is never a negative. And in Harry Bottle, Buffett found himself a great CEO able to run the business in a way Buffett himself thought was most likely to create the most value. I put Harry as second, because I think that he was more important than any potential future improvement in earnings power. The earnings power was more likely to be an outcome of great operating management.

Third, possible improvement in earning power.

Q: What type of investment is this? Earnings power below Asset Value?

The investment in Dempster started out as a net asset value investment due to the great discount between price and book value. Buffett also wrote that “the figures were extremely attractive.” It wasn’t the qualitative aspects of Dempster for why Buffett started acquiring stock. It was all based on a big discount to book value per share.