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<ul><li><keyword id="6358963" type="DEFINITION" weightage="60" keywordseo="Warren-Buffett">Warren Buffett</keyword> took advantage of an <keyword id="154331" type="ENTERTAINMENT" weightage="60" keywordseo="Arbitrage">arbitrage</keyword> opportunity involving <keyword id="10498635" type="UNKNOWN" weightage="60" keywordseo="cocoa-beans">cocoa beans</keyword> in 1954.</li><li>Rockwood &amp; Company, a chocolate maker led by Jay <keyword id="1893417" type="PERSON" weightage="60" keywordseo="Pritzker">Pritzker</keyword>, was buying back its shares in exchange for cocoa beans, as it wanted to capitalize on sky-high cocoa prices without incurring a huge tax bill.</li><li>The future <keyword id="6362665" type="ORGANIZATION" weightage="60" keywordseo="berkshire-hathaway">Berkshire Hathaway</keyword> boss spent several weeks buying Rockwood shares, swapping them for cocoa beans, and selling the beans on a commodities exchange.</li><li>"The profits were good and my only expense was subway tokens," Buffett told shareholders.</li><li>Buffett and Pritzker crossed paths again when KKR acquired RJR Nabisco in the late 1980s, and Berkshire later bought Pritzker's holding company, Marmon.</li><li><a href="https://www.businessinsider.com/">Visit Business Insider's homepage for more stories</a>.</li></ul>Warren Buffett's greatest pleasures in life include chocolate and making money. The billionaire investor and Berkshire Hathaway CEO combined those two passions in 1954 - not by hoarding chocolate coins, but by taking advantage of an arbitrage opportunity involving cocoa beans.Buffett was 24 at the time and had recently joined Graham-Newman, a New York investment fund cofounded by his mentor, Benjamin Graham. His bosses got wind of Rockwood &amp; Company, a chocolate maker in Brooklyn, making an unusual offer to investors. They dispatched the young Buffett to Rockwood's shareholder meeting to learn more.Read More: <a href="https://www.businessinsider.com/investing-strategy-stock-market-barry-norris-tips-rolls-royce-argonaut-2020-12" target="_blank" rel="noopener noreferrer">Investing veteran Barry Norris is beating 95% of his peers by betting against the market's riskiest companies. He warns investors against the 'siren call' to own value stocks - and explains why he's now bearish on Rolls-Royce.</a>Jay Pritzker, a member of the powerful Pritzker family, was in charge of Rockwood. The price of cocoa beans had recently skyrocketed from 5 cents a pound to north of 60 cents, due to a temporary shortage, and Pritzker was eager to capitalize by selling Rockwood's excess inventory. However, a straightforward sale would incur an almost 50% tax on the proceeds, so the executive devised a clever way to escape the levy.Pritzker explained to Buffett at the meeting that an "arcane provision" in the 1954 Tax Code was key to his plan, the Berkshire chief relayed in his <a href="https://www.berkshirehathaway.com/letters/1988.html">1988</a> and <a href="https://www.berkshirehathaway.com/letters/2007ltr.pdf">2007</a> shareholder letters. The loophole allowed a company to avoid a tax hit if it distributed inventory among its shareholders as a result of narrowing the scope of its operations.Following that rule, Rockwood stopped selling cocoa butter and assigned 13 million pounds of its cocoa-bean inventory to the discontinued business. The confectioner then offered to buy back its stock from investors in return for cocoa beans, at an exchange rate of 80 pounds per share. The repurchase program allowed it to leverage the elevated price of cocoa, avoid hefty taxes, and reduce its outstanding shares in the process.Read More: <a href="https://www.businessinsider.com/stocks-to-buy-top-pick-in-each-sp500-sector-bofa-2020-12" target="_blank" rel="noopener noreferrer">Bank of America unveils its top stock pick in each of the 11 S&amp;P 500 sectors and explains why they're poised to dominate in the year ahead</a>However, Buffett realized that Rockwood was effectively selling its beans at a discount to the market price. He spent the next few weeks buying its shares, exchanging them for cocoa beans, and selling the beans on a commodities exchange."The profits were good and my only expense was subway tokens," Buffett said in his 1988 letter.<h2>Buffett and Pritzker</h2>Buffett was impressed by Pritzker's creative solution to Rockwood's problem, describing him as a "business genius" in his 2007 letter.The two men crossed paths again when private-equity titan KKR acquired snack giant RJR Nabisco in the late 1980s. Berkshire boosted its stake in Nabisco to about 4 million shares after the deal was announced, then sold 3 million of them to KKR and the rest on the market, netting $64 million in pre-tax profits. Meanwhile, Pritzker was among a group of investors who waded into the bidding war for Nabisco."To quote Yogi Berra, 'It was deja vu all over again,'" Buffett said in his 1988 letter.Read More: <a href="https://www.businessinsider.com/tesla-stock-advice-when-to-buy-index-funds-sp500-fernandez-2020-12" target="_blank" rel="noopener noreferrer">A chief market strategist at a $5 billion firm shares her recommendation on when to buy Tesla as it joins the S&amp;P 500 - and explains why the index funds snatching it up may not get a big boost from the electric-car maker's inclusion</a>Berkshire later acquired Marmon, an industrial holding company founded by Pritzker and his brother. Buffett signed off on the $4.8 billion takeover - his largest-ever cash purchase at the time - on Christmas Day, 2007. Berkshire initially bought 64% of the business, then grew its stake to 100% by the end of 2013."The original corporation that is Marmon, I'm quite sure, is Rockwood &amp; Company, which I did a cocoa arbitrage with back in 1955 or something, and that's where I met Jay Pritzker," Buffett said at Berkshire's shareholder meeting in 2014. "So these things wind their way along.""One thing you learn in life, but also learn particularly in business, is that you're going to meet a lot of people and entities and have experiences in the future that you may have thought were one-stop shops originally in your life," he added.When Buffett inquired about Pritzker's cocoa-for-stock program at Rockwood, he was only looking to make a quick buck. He could never have imagined that he was laying the groundwork for one of his future conglomerate's landmark deals.

Warren Buffett swapped stock for cocoa in the 1950s. Here's the story of the billionaire investor's chocolate arbitrage.

<ul class="summary-list"><li>Warren Buffett traded a chocolate company's shares for cocoa beans in an unusual arbitrage in 1954.</li><li>Hyatt Hotels' Thomas Pritzker is the son of Jay Pritzker, who designed the stock-for-beans program.</li></ul>Warren Buffett once swapped a chocolate company's shares for cocoa beans in a <a href="https://markets.businessinsider.com/news/stocks/warren-buffett-berkshire-hathaway-swapped-stock-cocoa-beans-1950s-arbitrage-2020-12-1029919723">strange but lucrative arbitrage</a>. Thomas Pritzker, <a href="https://markets.businessinsider.com/stocks/h-stock">Hyatt Hotels</a>' executive chairman and the billionaire son of the man who came up with the stock-for-beans offer, told his father's side of the story during a recent shareholder meeting.Jay Pritzker designed Rockwood &amp; Company's unusual buyback program to cash in on a spike in the price of cocoa beans, while also slashing its outstanding shares in a tax-efficient manner. He detailed his plan during Rockwood's shareholder meeting in 1954, and received a blunt piece of feedback from a member of the crowd."A 24-year-old kid comes up to them and says, 'I didn't understand anything you just described,'" Thomas Pritzker recalled. "Dad says, 'Great, let's go have a cup of coffee. It's a really cool deal. I'll describe it to you.' That 24-year-old was Warren Buffett."After Pritzker laid out the program to Buffett, the young investor spotted a way to make some money. He spent several weeks buying Rockwood shares, exchanging them for warehouse receipts for cocoa beans, then selling those at a commodities exchange for a nice return."The profits were good and my only expense was subway tokens," Buffett said in his <a href="https://www.berkshirehathaway.com/letters/1988.html" target="_blank" rel="noopener">1988 letter</a>.Buffett crossed paths with Jay Pritzker several more times during his career, most notably when Buffett's <a href="https://markets.businessinsider.com/stocks/brk-b-stock">Berkshire Hathaway</a> bought Marmon, the Pritzker family's industrial holding company. Berkshire purchased a majority stake in 2007 for $4.8 billion - then its biggest-ever cash purchase - and raised its ownership to 100% by the end of 2013.Thomas Pritzker touched on his father and uncle's rationale for selling to Buffett during the recent Hyatt meeting, according to a transcript provided by AlphaSense/Sentieo."The reason we did it with Warren is our colleagues were very important to us, and we wanted it to land in a home that was as similar to us as we could possibly find," he said. "So we didn't hold an auction. We didn't go through a normal process. We went directly to Warren. And basically, he made a decision in two and a half hours."Buffett probably signed off on the deal so quickly because he was confident in Marmon's management, and trusted the Pritzker family had built a high-quality operation, Thomas Pritzker said."Warren has watched us and we have watched Warren for many, many decades and have very similar views of life," he continued. The executive added that he hasn't spoken to Buffett about Hyatt, but he doubts the Berkshire chief is a fan of the asset-heavy hotel business.Read more: <a href="https://markets.businessinsider.com/news/stocks/warren-buffett-berkshire-hathaway-inflation-recession-rates-credit-business-economy-2023-5?utm_medium=ingest&amp;utm_source=markets" rel="">Warren Buffett's businesses are battling historic inflation, hefty interest rates, and tighter lending. 5 Berkshire Hathaway CEOs break down why they're thriving despite a brutal economic backdrop.</a>

Warren Buffett swapped shares for cocoa beans in a weird 1950s deal. Billionaire Thomas Pritzker just told his father's side of the story.

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Warren Buffett swapped stock for cocoa in the 1950s. Here's the story of the billionaire investor's chocolate arbitrage.

Theron Mohamed

Warren Buffett swapped shares for cocoa beans in a weird 1950s deal. Billionaire Thomas Pritzker just told his father's side of the story.

Theron Mohamed

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