Buffett’s Berkshire Hathaway Buy: The Inside Story

Why Did Buffett Buy Berkshire Hathaway? Warren Buffett’s net worth hit $100 billion in March 2021 and has continued to increase ever since. Today, his wealth is estimated at roughly $105 billion, and his biggest asset is Berkshire Hathaway stock.

By any measure, Warren Buffett is one of the greatest investors of all time – a fact that naturally places him in the spotlight. Everyone wants to know Buffett’s secret to success, so they examine his history, advice, and trades to better understand how he built his fortune.

Any Buffett-related research ties back to Berkshire Hathaway, a holding company with a market cap that exceeds $665 billion. Buffett has been CEO and Chairman of Berkshire Hathaway since 1970, and he owns more than a third of the voting shares.

As researchers become familiar with Warren Buffett’s history and the evolution of Berkshire Hathaway, they are often surprised to discover how Berkshire Hathaway began. Buffett didn’t start the business, and its original products bear no resemblance to the Berkshire Hathaway of today.

What industry was Berkshire Hathaway in before Warren Buffett? How and why did Warren Buffett buy Berkshire Hathaway? Most important of all – is Berkshire Hathaway still a good investment?

How Did Berkshire Hathaway Start?

The 21st-century Berkshire Hathaway is known for its extensive financial service and insurance holdings. In addition to owning Bank of America, Visa, and American Express stock, the company has a variety of subsidiaries, including insurers Geico, Gen Re, NRG, and Berkshire Hathaway Assurance.

Aside from the financial sector, Berkshire Hathaway has a significant position in Apple and owns a collection of consumer staples, transportation, real estate, and energy companies. Dairy Queen is a Berkshire Hathaway subsidiary, as are Duracell, Helzberg Diamonds, Jordan’s Furniture, and See’s Candies. In other words, Berkshire Hathaway has a strong presence in multiple industries. Notably absent is anything related to textile manufacturing.

The fact that Berkshire Hathaway has nothing to do with textiles is only surprising because of its roots. The entity that became Warren Buffett’s biggest success started out as a small mill in Valley Falls, Rhode Island.

The tiny state was home to the nation’s first lucrative textile mill, which was founded in 1793 by Samuel Slater. One of Slater’s employees, Oliver Chace, decided to strike out on his own. He founded the Valley Falls Company, another textile mill, in 1839.

Nearly a century later, the Valley Falls Company and the Berkshire Cotton Manufacturing Company (founded in 1889) joined forces to become Berkshire Fine Spinning Associates. Meanwhile, in New Bedford, Massachusetts, Horatio Hathaway launched the Hathaway Manufacturing Company in 1888.

Both companies felt the pressure of a declining textile industry after World War I, and after World War II, it was clear that changes were needed if they were to stay afloat. The Berkshire Cotton Manufacturing Company and the Hathaway Manufacturing Company merged in 1955 to become Berkshire Hathaway. However, despite leadership’s best efforts, nearly half of the combined company’s manufacturing facilities had to be closed by 1960 due to financial pressure.

Why Did Warren Buffett Buy Berkshire Hathaway?

Berkshire Hathaway didn’t close its mills all at once. The closures occurred one by one over several years.

Warren Buffett, always on the lookout for opportunity, noticed an interesting phenomenon. Each time a facility closed, Berkshire Hathaway’s stock price moved. In 1962, Buffett decided to buy Berkshire Hathaway stock to take advantage of this pattern, but it wasn’t long before he realized the trade was a mistake.

At the time, Seabury Stanton was in charge of Berkshire Hathaway, and he wanted to repurchase the stock. Stanton asked Buffett for a verbal commitment to sell the stock at $11.50 per share, and Buffett agreed – but when the formal tender offer arrived in the mail, the price was down to $11 ⅜ths.

Buffett was furious over the perceived slight. Instead of selling his shares back to Stanton, he went on a Berkshire Hathaway buying spree. In a 2010 interview with Becky Quick of CNBC’s Squawk Box, Buffett said:

He chiseled me for an eighth. And if that letter had come through with 11 and a half, I would have tendered my stock. But this made me mad. So I went out and started buying the stock, and I bought control of the company and fired Mr. Stanton.

It was for this reason and no other that Buffett bought Berkshire Hathaway. As he told Quick during the same interview:

The dumbest stock I ever bought was – drum roll here – Berkshire Hathaway.

Why Was Berkshire Hathaway A Bad Investment?

Warren Buffett didn’t buy Berkshire Hathaway stock because he thought he could turn the company around. He knew the textile industry was struggling, and he was acutely aware that Berkshire Hathaway was rapidly losing ground. However, after taking control of the company, he felt obligated to make a go of it.

Buffett put an exceptional manager in charge of the textile portion of the business, and he started expanding into other industries to boost Berkshire Hathaway’s revenue. Insurance was the first – Berkshire Hathaway acquired the National Indemnity company in 1967.

Much later, Buffett admitted that trying to prop Berkshire Hathaway’s textile business up was a mistake that ultimately cost shareholders hundreds of billions in missed opportunities. In retrospect, Buffett said he should have started a new company to house the acquisitions.

The textile operation limped along for another 20 years. Buffett finally threw in the towel and closed down the remnants of the textile business in 1985. By then, Berkshire Hathaway had grown into a large conglomerate, though its 1985 market cap pales compared to today’s value.

The moral of the story, according to Buffett, is this:

If you get into a lousy business, get out of it. I mean, it was a terrible mistake, just because I drifted into it, in a sense. And I’ve always said that if you want to be known as a good manager, buy a good business.

Is Berkshire Hathaway A Buy?

New investors can take comfort in the fact that even Warren Buffett has made mistakes – they aren’t alone in that. More importantly, Buffett learned from his Berkshire Hathaway blunder and has achieved extraordinary success by not repeating the same error in judgment.

Warren Buffett’s investment strategy is simple: Buy companies with a long history of success through ups and downs in the market. Choose those with a wide moat that can withstand pressure from competitors and never, under any circumstances, pay more than a company is worth.

Based on that criteria, nearly all of Berkshire Hathaway’s holdings are established businesses rather than growth stocks, and Buffett rarely participates in IPOs. He tends to stay away from overvalued tech companies, though he is a big fan of Apple. According to one biographer, Buffett realized that people consider their Apple devices – the iPhone in particular – indispensable. Specifically, “The iPhone wasn’t tech, it was a modern-day Kraft Macaroni & Cheese.”

Berkshire Hathaway’s stock portfolio is nearly 40 percent Apple – its largest holding by far. Other examples of Berkshire Hathaway stocks include Coca-Cola, Chevron, Kraft Heinz, and Occidental Petroleum. Clearly, Warren Buffett’s methods are working. Berkshire Hathaway stock has returned 60,000 percent since inception and more than 50 percent in the past five years. In short, Berkshire Hathaway stock is still a smart buy.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.