Case study: Buffett's purchase of General Foods in 1979

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In 1979, Warren Buffett purchased 4 million shares of General Foods for an average price of $37/share.

Here is a list of price ranges and earnings of General Foods from 1979 to 1984*:

1979, $28 ~ $37 (earning $5.12/share)
1980, $24 ~ $35 ($5.14)
1981, $28 ~ $35 ($4.47)
1982, $29 ~ $48 ($5.73)
1983, $37 ~ $54 ($6.10)
1984, $45 ~ $60 ($6.96)

From the data we know that Buffett lost money in 1980 and 1981. For two years (or more) the investment of General Foods looked bad for Warren. But he stuck with his conviction and did not sell.

In 1983, General Foods was doing better. Warren's purchase finally started to see a positive return. In 1984, General Foods was doing much better. The market finally gave it a better valuation because of good earning growth.

Now, let's see what happened in 1985. In that year, Philip Morris bought General Foods for $120 a share!

What can we learn from Warren in this case study?

* Data from "Buffettology," 1997 edition, page 81.