Investing Guidelines: Business Tenets 67In 1969, Buffett bought his f irst major newspaper, the Omaha Sun,
along with a group of weekly papers; from them he learned the business
dynamics of a newspaper. He had four years of hands-on experience run-
ning a newspaper before he bought his f irst share of the Washington Post.
Wells Fargo
Buffett understands the banking business very well. In 1969, Berkshire
bought 98 percent of the Illinois National Bank and Trust Company
and held it until 1979, when the Bank Holding Act required Berkshire
to divest its interest. During that ten-year period, the bank took its
place beside Berkshire’s other controlled holdings and Buffett reported
its sales and earnings each year in Berkshire’s annual reports.
Just as Jack Ringwalt helped Buffett understand the intricacy of the
insurance business (see Chapter 3), Gene Abegg, who was chairman of
Illinois National Bank, taught Buffett about the banking business. He
learned that banks are prof itable businesses as long as loans are issued re-
sponsibly and costs are curtailed. A well-managed bank could not only
grow its earnings but also earn a handsome return on equity.
The key is “well managed.” The long-term value of a bank, as
Buffett learned, is determined by the actions of its managers, because
they control the two critical variables: costs and loans. Bad managers
have a way of running up the costs of operations while making foolish
loans; good managers are always looking for ways to cut costs and rarely
make risky loans. Carl Reichardt, then chairman of Wells Fargo, had
run the bank since 1983, with impressive results. Under his leadership,
growth in earnings and return on equity were both above average and
operating eff iciencies were among the highest in the country. Reichardt
had also built a solid loan portfolio.
CONSISTENCY
Warren Buffett cares very little for stocks that are “hot” at any given
moment. He is far more interested in buying into companies that he be-
lieves will be successful and prof itable for the long term. And while
predicting future success is certainly not foolproof, a steady track record
is a relatively reliable indicator. When a company has demonstrated