In the previous article, we learned about the most significant turning point in Warren Buffett's investment strategy, influenced by his crucial partner, Munger. 

Let's continue learning about the investment tactics of Blue Chip Stamps in this article.

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Back in the late 1960s, Buffett and Munger teamed up for their investment adventures, and let me tell you, one of their most intriguing battles was with none other than the Blue Chip Stamp Company. But to get where this all began, we've got to rewind the clock to the colorful times of the 1950s and 1960s.

During that time, retailers would distribute green, blue gold, and blue chip stamps to consumers as rewards for their purchases. Retailers would exchange cash for these stamps, and the company would use the funds for operations and buy goods that could be redeemed with the stamps. 

Consumers would receive stamps for each purchase over a certain amount, which they would then stick into booklets and exchange for items like toys, toasters, bowls, and watches. Since this process required collecting and accumulating stamps, some consumers would forget to redeem them, and the company's stored funds rapidly increased. 

In the early 1970s, Blue Chip Stamps had astonishing annual sales of $120 million (equivalent to $500-600 million today), with stored funds amounting to $100 million.

This stamp-based system gained popularity among housewives and retailers. Housewives were motivated to purchase more to earn stamps, and retailers enjoyed increased sales and profits. S&H Green Stamps was one of the pioneering companies in this field. 

However, according to the company's rules, only one retailer per region could offer a particular type of stamp. Nine retailers, including some major chains like Chevron and certain large supermarkets, hoped to gain a similar competitive advantage and founded Blue Chip Stamps in 1956. 

These founding retailers held operational control, and other shareholders had the right to provide stamps but not to interfere with the company's operations or enjoy profits. Consequently, Blue Chip Stamps became California's largest stamp redemption company.

But here's where things get interesting. Those smaller retailers had a bone to pick with the whole monopoly setup. They felt like the founding big shots weren't playing fair, not giving them the rights, they deserved. And let me tell you; they saw this as a full-blown violation of those antitrust rules.

Munger, at that time, noticed this news. He knew Blue Chip Stamps had a substantial reserve fund to cover future stamp redemption costs. The company employed an approach similar to an insurance company's reserve account to cover potential losses, and they invested this money for returns.

Because the yearly redemptions were fixed and known, even if the account balance dropped, they could issue more stamps to make up for it. Munger wondered how fast Blue Chip Stamps' funds would go up or down in different situations. When Buffett saw the big potential in Blue Chip Stamps' reserve fund, he got Munger and his buddy Rick Guerin on board to start buying shares.

Fast forward to 1963, and the Department of Justice wasn't too pleased with Blue Chip Stamps and its gang of nine retailers. They slapped them with an antitrust lawsuit. 

By 1967, an agreement came into play, forcing the company to do a major makeover to crush that founder's monopoly vibe. They even gave Blue Chip Stamps a linguistic makeover, changing the name to "Blue Chip Stamps" in the plural form.

The court ruled that Blue Chip Stamps must allocate 620,000 common shares to small retailers who had used the stamps but were not shareholders. The distribution ratio depended on the number of stamps each non-shareholding retailer had submitted over a certain period. Each distribution unit included three common shares and a $100 face value credit bond payable at $101 in cash.

Out of those 620,000 common shares, the ones that smaller retailers didn't snatch up were up for grabs on the over-the-counter market. And guess what, according to Buffett, 'Thousands of small retailers ended up owning Blue Chip Stamps' shares. A market formed around this stock, which we considered very cheap, so Munger, Guerin, and I bought a significant portion and gained control of Blue Chip Stamps!'

In the next article, let's continue to explore the developments of Blue Chip Stamps under Buffett and Munger's leadership. In this article, we've learned about the potential of Blue Chip Stamps. Stay tuned for the exciting continuation!

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