By Brett Gardner

“ Practically perfect people never permit sentiment to muddle their thinking.”

— Mary Poppins

Warren Buffett’ s purchase of 5 % of Disney’ s common stock is one of the most famous investments of his early career. Yet, at first glance, it was an abnormal investment for him to make at the time.

For one thing, the stock did not seem to offer investors much downside protection. Disney did not trade at a discount to tangible book; in fact, relative to its peers in the movie industry, it was actually quite expensive on this basis. The stock was selling for a cheap earnings multiple, but the movie industry was too unpredictable to rely on historical earnings. It takes a film studio two to three years to produce a film, completely uncertain of how it will ultimately fare at the box office. Disney’ s low price-earnings ratio in 1966 was based on the record profits of Mary Poppins, the fourth highest grossing film of all time at that point, so investors were justifiably concerned that Disney could not replicate its success. Finally, while Disney was more than just a studio— the company also owned Disneyland in California and was beginning to invest in the Florida park that would become Walt Disney World— these other assets were not simple to value either.

Aside from the risk that Disney’ s films would begin flopping at the box office, the company’ s corporate governance was the biggest concern for an investor. There were three concerns regarding how the company was managed. The most obvious was key man risk. Walt Disney himself, the company’ s founder and executive producer-in-charge of all production, was irreplaceable. While his brother Roy retained the titles of company president and chairman, Walt controlled the company. He was a creative genius; constantly pushing the boundaries of the entertainment industry, from producing Snow White to building the world’ s most incredible amusement park. Walt’ s loss would be debilitating.

The second corporate governance concern was that Walt would destroy capital in his risky endeavors. Walt cared about the creative aspect of his work much more than creating shareholder value, often confessing he did not care about profits. Historically, his ventures worked out stupendously for shareholders, but there was always the risk the next one would stumble.

Finally, there was a history of dubious self-dealing between Walt and Walt Disney Productions. Although Buffett has never spoken about this aspect of the investment publicly, a May 1966 article in Fortune detailed this risk at length, suggesting he was almost certainly aware of it. This conflict of interest arose in 1952, when Walt formed WED Enterprises to provide his family with income outside of the Disney corporation. Walt Disney Productions consummated a contract with WED Enterprises to license Walt’ s name and execute a personal services contract shortly after the creation of WED. The agreement was so contentious that three Disney board members resigned over it, fearful of shareholder lawsuits( which did, in fact, arrive).

In 1965, Walt Disney Productions paid $ 4 million to acquire WED Enterprises’ architectural, design and engineering department, along with the WED Enterprise name. So Walt changed the name of his personal company to Retlaw( or Walter spelled backwards). After Walt Disney Productions bought the design portion of the business, Retlaw was left with three sources of income.

First, Walt possessed the right to produce one movie a year outside of Walt Disney Productions, as well as the option to purchase up to a 25 % stake in Disney’ s feature-length live-action films. Walt frequently exercised this right— Retlaw, for example, brought in over $ 1 million of profit in 1965 on Mary Poppins alone.

The second revenue stream came from licensing Walt’ s name, earning the entity $ 292,349 in 1965. Walt Disney Productions had the right to use the Walt Disney name in its corporate title and on films and TV shows in which Walt personally participated. Otherwise, the name had to be licensed and Retlaw would have to be paid.

The third piece was ownership of a steam railroad and elevated monorail at Disneyland. This component grossed $ 2.5 million in 1965. Retlaw remitted 20 % of this to Walt Disney Productions as rent for the right-of-way, but kept the other 80 %.

Walt was charging the public company all sorts of fees, taking value for himself that should have accrued to Walt Disney Productions. It was hard for an outside shareholder to stop these shenanigans— though some tried— as Walt and his family owned nearly 40 % of the company, with Walt and his wife holding around 16.5 %. Walt justified the name agreement by saying it was a typical Hollywood arrangement and the company could count on having the rights to his name after he died; but this was a completely ridiculous

28 FINANCIAL HISTORY | Spring 2025 | www. MoAF. org