Blue Chip Stamps started years ago as a loyalty program. Consumer’s would make a purchase at a grocery store or pharmacy and they would receive Blue Chip Stamps back from the cashier along with their purchase as an incentive program. Once the consumer acquired enough Blue Chip Stamps they could redeem the stamps for merchandise. It’s much like the point systems offered up today by credit card companies, and some grocery chain’s customer retention programs.

Because the stamps could be turned in for merchandise the stamps had value. One of the common traits of the Blue Chip Stamps was that many of the consumers that got stamps would put them in drawers, loose them, or throw them away and the stamps ended up never getting redeemed. This non use causes what is referred to as a float of money not getting redeemed on the books. This float of funds attracted Warren Buffett and Charlie Munger to Blue Chip Stamps.

Buffett and Munger both realized they could use this float to make other investments. As more Blue Chip Stamps were given out the bigger the float would grow. The retailers would buy the Blue Chip Stamps up front to give out to their consumers, and Blue Chip Stamps would put away the funds needed for redemptions, and use the float to make other investments.

Blue Chip Stamps 1st Venture

Blue Chip Stamps is one of Warren Buffett’s and Charlie Munger’s first ventures together. See’s Candies was their next venture together. Buffett and Munger purchased See’s Candies for $25 million dollars in 1972. Today, Warren Buffett has stated that See’s Candies has generated over $2 billion dollars of revenue. It is estimated that Buffett and Munger only invested a total of $40 million into the See’s Candies acquisition and funding. Their return on this investment is estimated well over 8000%.

The team of Buffett and Munger (or Berkshire Hathaway) is considered one of the greatest of all time investment stories. The element within this story that is a game changer is that they had a cash machine in Blue Chip Stamps that generated monies for them to invest. This is super important because it puts them in a spot to take advantage of irrational actions, and able to take advantage of those actions without having to divest themselves or sell off other investments in order to act upon an opportunity unlike the average investor.

Berkshire Hathaway tends to have a common theme of owning a business that accumulates a lot of excess cash. Insurance companies operate in this manner by taking in premiums and paying out only when needed. Berkshire operates very cautiously by not taking on risky policies or chasing low premiums in order to compete, and they seem to always be in a place to capitalize upon timed opportunities.

It has always been said that acting as a market timer is not a good investment idea. Buffett and Munger seem to disprove this theory as they sit on cash often and wait for opportunities to put their cash to use successfully. In a sense Buffett and Munger are probably the two best market timers of all time. Combined with their ability to leverage cash generating businesses they become a difficult duo to measure up to.