Buffett #1: Commonwealth Trust Co. of Union City, New Jersey

An investment that made a 50% annualized return.

Warren Buffett’s early partnership letters are a treasure trove for value investors. They don’t just show what he invested in—they reveal how he thought, what he looked for, how patient he was willing to be, and how he sized his bets. One of the first companies he discussed in those letters is Commonwealth Trust Co. of Union City, New Jersey.

This was not a household name. It was a small, almost forgotten bank with very limited trading volume. It averaged just two trades per month.

Here, we’ll break down the investment exactly as Buffett might have thought about it: from valuation and market expectations to business dynamics, special situations, and opportunity cost. We’ll also look at why this investment likely made sense only for someone with Buffett’s unique blend of patience, skill, and temperament.

Let’s dive in.

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Sizing up Commonwealth

At first glance, Commonwealth Trust looked like just another sleepy local bank. Adjusted for inflation, its balance sheet would equate to around $550 million in assets today—a modest size even now.

Although the exact equity of Commonwealth Trust Co. isn’t disclosed, we can reasonably estimate it by looking at typical bank leverage ratios of the era. In the late 1950s, banks generally operated with leverage ratios—defined as total assets divided by equity—ranging from 10:1 to about 15:1. This implies that equity made up approximately 6.5% to 10% of total assets.

We can use this range to estimate Commonwealth’s book value . With $50 million in total assets, a 6.5% to 10% equity ratio suggests book value of about $3.25 million to $5.00 million—roughly $36 million to $55 million when adjusted for inflation to 2024 dollars.

Using book value as a rough proxy for intrinsic value (a common approach with well-run banks), we arrive at an estimate: intrinsic value around $45M, and a market cap closer to $18M—a margin of safety of 60%.

This aligns closely with Buffett’s own valuation: he estimated intrinsic value at $125 per share while the stock was trading at just $50—again, a 60% discount. Both approaches point to the same conclusion: a deeply undervalued bank with a wide margin of safety.

Moreover, the bank was earning $10 per share, implying a price-to-earnings (P/E) ratio of just 5—or an earnings yield of 20%.

Buffett, however, considered a fair P/E multiple to be 12.5, corresponding to an 8% earnings yield. When you compare that to the 3.3% yield on 10-year U.S. Treasury bonds at the time, it becomes clear that Buffett was using a highly conservative benchmark. He was essentially pricing in a 5% equity risk premium over Treasuries for a small, growing bank—a reflection of both his prudence and his expectations for long-term compounding.

Let’s summarize what we have so far (numbers adjusted for inflation):

• Assets: $550 Million

• Equity: $45 Million

• Earnings: $3.6 Million

• Estimated market cap: ~$18 Million

• Buffet’s Estimated intrinsic value: ~$45 Million

• Margin of safety: ~60%

• P/E ratio: 5

• Buffett’s fair value P/E: 12.5

• Buffett’s fair value earnings yield: 8%

• 10-Year U.S. Treasury yield (1958): 3.3%

Modeling the Payoff

Liquidity was low—averaging just two trades per month. But Buffett was patient. Over the course of a year, he acquired 12% of the company. This tells us something critical: Buffett was willing to tie up 10–20% of his total capital in a thinly traded stock. He clearly believed the margin of safety and return potential justified the lack of liquidity.

This was not just a deep value stock. It had a catalyst: management had long wanted a merger, which had been blocked for personal reasons. Buffett likely saw this as a temporarily frozen situation with latent value. Once resolved, the bank would be bought—or at least re-rated.

Buffett built in a wide range of outcomes. Even if it took 10 years, he expected the business to compound at ~7%, taking intrinsic value to $250. This conservative, probabilistic thinking—accounting for time, uncertainty, and compounding—is central to Buffett’s investing style.

You can play with this yourself here: Commonwealth Spreadsheet

The spreadsheet models scenarios for different holding periods and sale prices. Even under conservative assumptions, annualized returns look strong. At 66% of intrinsic value in just one year, returns could reach 77%. Over 10 years, assuming full realization of value, the annualized return would still exceed 15%.

The real-world outcome? Buffett exited at $80—still well below full value but enough for a 50% annualized return. That’s what makes this example so instructive: he didn’t wait for perfection. He took extraordinary returns when they were available and moved on.

Buffet’s Hurdle Rate?

At $65, Buffett was neither buyer nor seller. Plugging this into the spreadsheet yields a 10 year annualized return of exactly 15%. We could interpret this as him saying that he either

• won’t buy if his annualized return is not expected to be 15% over 10 years OR

• he had other opportunities available that he expected could make him 15% over 10 years.

This tells us a lot about Buffett’s hurdle rate and opportunity cost thinking. At $65, the margin of safety was diminished. He demanded at least 15% annualized returns over a decade and was willing to pass when the expected return fell below that threshold.

Takeaways

• The company was tiny. In 2024 terms, it had a market cap of about $18 Million. It took Buffett a year to build a stake.

• He put 10-20% into this opportunity.

• The valuation at an 8% earnings yield was very conservative considering the 10-year treasury yield of 3.3% back then.

• He seems to have wanted to make more than 15% annualized over a timeframe of 10 years.

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