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Buffett's Restructuring of Dempster Mill

  • Investing
  • Buffett
  • Case Studies
  • Cigar-Butt Investing

Buffett bought Dempster Mill below his conservative asset valuation. After taking control, he brought in Harry Bottle to improve operations and convert inventory and other assets into cash, making the outcome dependent on management and disposal.

Source dates and applicability

The case covers purchases in the 1950s and control, restructuring and exit in 1961–1963. The principal letters were issued in 1962–1964 about the preceding years. As of October 2026, inventory discounts and operational changes remain useful concepts, but realizable value depends on price and disposal outcomes. The roughly $80 figure is historical realized value per share, without a test of present opportunities.

1. The Investment and Its Assets

Dempster was an ordinary business with declining core operations but fairly substantial assets on its books. To Buffett, companies like this could deteriorate only so fast, while their assets provided a cushion against losses.

2. What Was Going On at the Company?

Dempster originally made windmills, water pumps, and irrigation equipment. By the 1960s, the windmill industry was in decline because rural electrification had made electric pumps more convenient. But the company did not collapse immediately, for two reasons:

  1. Old equipment generated service and parts revenue: after a windmill was sold, it continued to bring in revenue from spare parts and repairs, so the decline was gradual.
  2. It began selling other farm machinery, such as seeders and fertilizer equipment. Competition was fiercer, but these at least gave it some room to develop new business.

3. Why Buffett Bought It

The key was valuation.

According to its 1961 balance sheet, the company had book net assets of about $4.6 million, or approximately $76.5 per share. Buffett applied steep discounts to these figures:

  1. Receivables were valued at 85%.
  2. Inventory was valued at 60%.
  3. Liabilities were counted at 100%.

Even under this conservative calculation, he put the company’s quick realizable value at roughly $35 per share. His average purchase price was about $28 per share, which meant:

  1. A discount of approximately 63% to book net assets.
  2. A price approximately 20% below his own conservative valuation.

In the terminology of his teacher Graham, this extreme discount made it a net-net: a stock trading below its net current asset value per share.

4. What Buffett Did

He made this a control investment. By the end of 1961, Buffett Partnership directly owned 70%, with affiliated parties indirectly holding another 10%, effectively giving him control of the company.

He then found that the existing management had limited operating ability and that there was considerable room for basic improvements:

  1. Spare parts and complete machines were not priced differently.
  2. Inventory management was poor.
  3. Cost control was poor.
  4. Unprofitable branches were not closed promptly.

Buffett later brought in Harry Bottle to take over management. Bottle took several key steps:

  1. Converted inventory into cash as quickly as possible.
  2. Sharply cut selling, general, and administrative (SG&A) expenses.
  3. Closed loss-making locations.
  4. Disposed of old inventory.
  5. Used the released funds to repay debt and buy securities.

Buffett’s average purchase cost was about $28 per share. After the operating-asset sale and securities gains in 1963, realized value was approximately $80 per share; this was not a quoted market price.

The turnaround consumed considerable effort and further prompted Buffett to consider whether he should continue with the cigar-butt approach to investing.

References

Valuation note: the third source’s approximately $80 per share is realized value from the asset sale and securities gains, rather than a quoted market price.