Ormco

Ormco is the name of an orthodontic supply company that represents a classic, early-career investment by Warren Buffett. While not a household name like Coca-Cola or Apple, the Ormco story is a masterclass in the principles of value investing, particularly for those interested in finding hidden gems. In the early 1960s, Buffett discovered this small, California-based company that dominated a niche market for high-quality orthodontic wires and brackets. It was a simple, understandable business with fantastic profit margins and a strong competitive position. Because of its small size, it flew completely under the radar of Wall Street analysts and large institutional funds, allowing Buffett to accumulate a significant stake at a very attractive price. The investment proved immensely successful and serves as a powerful illustration of how deep research into small, “boring” companies can lead to extraordinary returns.

The story of Ormco is pure investment folklore. It wasn't found on a stock screener or in a glossy analyst report. Instead, Buffett learned about it through his “network.” A friend mentioned this tiny company that dentists loved for its superior products. Intrigued, Buffett deployed his famous scuttlebutt method—he started digging. He didn't just read the financial reports; he likely talked to dentists and distributors to understand why they preferred Ormco's products. He discovered a business with a fanatical customer base, pricing power, and a virtual monopoly on its best-selling items. At the time, the Buffett Partnership was small enough to make a meaningful investment in such a tiny company, an advantage that larger funds simply didn't have. This was a classic “special situation” where a wonderful business was available at a cheap price simply due to neglect.

Ormco checked all the boxes for a deep value, high-quality investment. Its success wasn't an accident; it was a result of fundamental business strengths that any investor can learn to spot.

• A Powerful Economic Moat: Ormco didn't just sell dental supplies; it sold the best dental supplies, specifically a type of stainless steel archwire that was considered top-of-the-line. Dentists are creatures of habit and are famously unwilling to switch to an inferior product to save a few dollars, especially when dealing with a patient's teeth. This brand loyalty and product superiority created a formidable competitive advantage, or moat.
• Fantastic Economics: The business was a cash-generating machine. It enjoyed incredibly high profit margins and an excellent return on equity (ROE). It required very little capital to grow, meaning most of the profits could be returned to shareholders or reinvested at high rates of return. This is the hallmark of a truly wonderful business.
• Inside the Circle of Competence: The business was simple. You didn't need a PhD in physics to understand what Ormco did. It made and sold high-quality metal parts for braces. This simplicity allowed Buffett to confidently assess its long-term prospects and competitive position without having to guess about technological disruption.
• Market Inefficiency: The biggest gift was the company's obscurity. Because Ormco was a micro-cap stock, institutional investors couldn't buy it in meaningful quantities, so they didn't even bother to analyze it. This lack of attention created a huge pricing inefficiency, allowing Buffett to buy a wonderful business for far less than it was worth, securing a massive margin of safety.

While you probably won't find the next Ormco by copying Buffett's 1960s portfolio, the principles behind the investment are timeless.

1. Think Small: Don't just focus on the giant companies in the S&P 500. Incredible opportunities often hide in smaller, lesser-known corners of the market that are neglected by the big players.
2. Embrace “Boring”: A company that makes orthodontic wire is boring. But boring can be beautiful and, more importantly, profitable. Exciting narratives often come with sky-high valuations, while boring businesses are frequently overlooked and undervalued.
3. Do Real Homework: Go beyond the numbers. Talk to customers, employees, or industry experts if you can. Understand why a company is successful. This is the art of scuttlebutt, and it can give you an edge that no financial model can replicate.
4. Quality is Key: A cheap price is great, but a cheap price for an excellent business is the holy grail. Focus on finding companies with durable competitive advantages and strong financials, and then wait for an opportunity to buy them at a fair price. The Ormco story reminds us that the best investments are often found where no one else is looking.