From Paperboy to Oracle

In the crisp autumn of 1972, Warren Buffett stood at a crossroads. Before him lay an opportunity that would challenge his investment philosophy and test his instincts. See's Candies, a regional chocolate maker based in California, was up for sale. At 42, Buffett had already made a name for himself as a savvy investor, but this potential acquisition was different from anything he'd done before.

As Buffett pored over the financials, his mind raced. See's was profitable, generating about $4 million pre-tax annually on $8 million of net tangible assets. But the asking price of $30 million gave him pause. It was significantly higher than the book value, a metric Buffett typically relied on in his value investing approach.

"I can't do it," Buffett told his partner, Charlie Munger. "The price is too steep."

But Munger saw something Buffett didn't - yet. "Warren," he said, "it's a quality business. It's the kind of company that can raise prices."

This simple observation would prove transformative. It forced Buffett to reconsider his approach, to look beyond the numbers and see the intangible value of a strong brand and customer loyalty.

Buffett's mind wandered back to his childhood in Omaha. He remembered the joy of unwrapping a chocolate bar, the loyalty people felt to their favorite brands. Could See's evoke similar feelings in its customers? If so, what was that worth?

As he grappled with the decision, Buffett realized he was standing at the threshold of a new understanding of value. It wasn't just about assets and earnings; it was about the power of a brand to command premium pricing and customer loyalty.

Still, the price gnawed at him. In a bold move, Buffett countered with $25 million. To his surprise, the owners accepted. Little did he know that this moment of hesitation, followed by decisive action, would lead to one of the most profitable investments of his career.

The years that followed were a testament to the power of patience and the value of strong management. Under the leadership of Chuck Huggins, whom Buffett installed as CEO, See's flourished. The company expanded cautiously, never compromising on quality, and consistently raised prices to reflect its premium positioning.

Buffett watched with growing appreciation as See's demonstrated its pricing power year after year. In 1972, See's sold 16 million pounds of candy at $1.95 per pound. By 2007, it was selling 31 million pounds at $16.80 per pound. The ability to raise prices without losing customers was a revelation to Buffett.

"I learned that the taste of a product matters, not the production cost," Buffett later reflected. "We could raise prices 10% next year and we wouldn't lose a dime of business."

This lesson profoundly impacted Buffett's investment philosophy. He began to seek out companies with strong brands and loyal customer bases, businesses that could thrive in inflationary environments by raising prices without losing sales.

See's success also taught Buffett the value of businesses that require minimal additional capital to grow. Between 1972 and 2007, See's needed only $32 million in additional capital to increase its earnings from $4 million to $82 million. This "capital-light" model allowed See's to funnel most of its profits back to Berkshire Hathaway, providing fuel for other investments.

As the decades passed, See's continued to outperform Buffett's wildest expectations. By 2019, the $25 million investment had generated over $2 billion in profits for Berkshire Hathaway. But the true value of the See's acquisition went beyond the financial returns.

It changed the way Buffett thought about investing. It opened his eyes to the power of intangible assets like brand value and customer loyalty. This new perspective would guide him towards other successful investments in companies like Coca-Cola and Gillette.

The See's story also reinforced Buffett's belief in the importance of strong management. Chuck Huggins' leadership had been instrumental in See's success, teaching Buffett to value not just the business model, but the people behind it.

Looking back, Buffett often cites the See's acquisition as a turning point in his career. "It was the first time I stepped up for quality," he said. "And I was right."

The See's Candies story is more than just a tale of a successful investment. It's a narrative of personal growth, of challenging one's assumptions, and of the profound impact that a single decision can have on a career. For Buffett, it was the $25 million gamble that sweetened his investment philosophy and paved the way for decades of success.

In the end, See's Candies proved to be not just a good investment, but a transformative one. It showed that sometimes, the best opportunities come wrapped in unexpected packages - much like a box of chocolates.