April 28, 2008
Chewing gum versus credit derivatives
If Warren Buffett does team up with Mars to buy Wrigley for more than $22bn, it will be not only a quintessential Buffett deal but a reminder of where value lies in a downturn.
Mr Buffett has a sweet tooth, not only personally (he is known for his devotion to Cherry Coke) but as an investor. Berkshire Hathaway’s 8 per cent stake in Coca-Cola is among his longstanding stakes in big consumer brands.
Famously, confectionery companies are often good investments during in recessions as people cut back on luxuries and comfort themselves with small indulgences such as chocolate bars.
They also meet the Buffett test, which he used recently to justify not taking a stake in Google, that he has to be able to grasp a company’s product and the sustainability of its competitive edge.
One might put chewing gum at the opposite end of the scale to Bear Stearns. Mr Buffett was said to have discussed taking a stake in the Wall Street firm last September but rejected the idea, which was a smart decision.
He has more faith in chewing gum than credit derivatives.
In accord with an apochryphal story that has been making the rounds, Wrigley’s prospective new owners intend to appoint Alan Greenspan to run the company. It must be said, a priori, that there is an air of plausibility to said story.
Posted by: ALEX PIENKNAGURA | April 28th, 2008 at 1:26 pm | Report this commentThough possible, it sounds dubious that Warren Buffett would now entertain and consummate an acquisition of Wm. Wrigley Jr. Co. (WWY) because that’s “where value lies in a downturn” and “confectionery companies are often good investments during in [sic] recessions”.
If one’s time-horizon is “forever”, as he claims, today’s or any other economic downturn is relevant only insofar as it coincides with lower share prices and turns up bargains; WWY is only 10% off it’s all-time high.
A number of reasons could have led to this deal; a glaring one is the fact that it’s trust-controlled and senior management, save the chairman, is up there in age.
Posted by: Paul | April 28th, 2008 at 1:38 pm | Report this commentPaul, good point on the price, you have a good idea of WB’s thought processes.
However, don’t criticise grammar if your knowledge of apostrophes is dodgy - ‘it’s’.
Posted by: Clive | April 28th, 2008 at 4:22 pm | Report this comment“Wrigley?s prospective new owners intend to appoint Alan Greenspan to run the company”
Alan Greenspan has shown himself quite capable on blowing up bubbles. Does Wrigley make bubble gum? If not, and the rumor is true, we should expect it!
See www.TakeBackTheFed.com
Posted by: sivere | April 29th, 2008 at 7:01 pm | Report this commentAnother idea- instead of baseball cards, each pack of Greenspan bubble gum can come with a siv tranche note, an MBS, a CDS certificate or some other relic of financial history!
Posted by: sivere | April 29th, 2008 at 7:03 pm | Report this commentIsn’t insurance a type of credit derivative?
Buffett uses the profits from monthly insurance checks to invest in securities such as Wrigleys.
Such insurance profits are based on seemingly strong paper credit from his customers.
In other words, the source of his profits in which he uses to invest are “credit derived”…
Posted by: Doug Wolkon - Author of The New Game | April 29th, 2008 at 8:05 pm | Report this comment