Berkshire Hathaway 2000 Annual Meeting Audience Question # 37

The original purchase of Berkshire was “a terrible mistake”

Warren Buffett:

What was the second part again?

Audience Member:

I just asked you if you could maybe comment on why you bought the original…

Warren Buffett:

Oh.

Audience Member:

…Berkshire textile mill.

Warren Buffett:

That’s why I didn’t remember.

Audience Member:

If I could say…

Warren Buffett:

It was…

Audience Member:

…one of the things, someone tapped me on the shoulder and asked me for you not to forget to give the current year’s recommended books.

Warren Buffett:

It’s… I’ve got to recommend the book on Charlie. But I’ll let Charlie recommend one, too.

The original purchase of Berkshire was a terrible mistake and my mistake. No one pushed me into it.

It was… I bought it, because it was what we used to call the cigar…

It was a cigar butt approach to investing, where we would look around for something with a free puff left in it. You know, it was soggy and kind of disgusting and everything. But it was free.

And Berkshire was selling below working capital, had a history of repurchasing shares periodically on tender offers. And it was selling, the first purchase was, I think, at $7 1/2 a share. In fact, I’ve got the broker’s ticket up in the office, 2,000 shares.

And they… it looked to me like they were going to have a tender offer periodically. And it would probably be at some figure closer to working… net working capital… which might’ve been 11 or $12 a share, some such number.

And we would sell on the tender. And that was… we had other securities we owned that way. And we bought some that way.

And then, actually, I met Seabury Stanton one time, who was running Berkshire. And he told me and made me an insider, so I couldn’t do anything, but he said he was thinking of having a tender. And he wondered what price we’d tender at.

And I… as I remember, I may be wrong on this, I could look back on it, but I think I said, “11 3/8.” And he said again to me, “Well, if we have a tender at 11 3/8, will you tender?” And I said, “Yes, I will.”

And then I was frozen out, obviously, of doing anything with the stock for a little while. But then he came along with the tender offer.

And as I remember, I opened the envelope, and it was 11 1/4. I may be wrong. It may have been 11 1/2, 11 3/8. But it was 1/8 below what he had said to me and what I had agreed to.

So I found that kind of irritating. And I didn’t tender. And then I bought a lot of stock.

Kim Chace was a director. His father had some members of the family, not his direct family, but related family, that wanted to sell a block. And we bought several blocks. And before long, we controlled the company.

So at an eighth of a point difference, we wouldn’t have bought it, the company, if they’d actually tendered at that price.

We had a somewhat similar thing happen with Blue Chip, actually, later on, too.

We would’ve been much better off, if we hadn’t bought it. Because then things like National Indemnity and all of that, instead of buying it into a public company with a great many other shareholders, we would’ve bought it privately in the partnership. And our partners would’ve had a greater interest.

So Berkshire was exactly the wrong vehicle to use for buying a bunch of wonderful companies over time. But I sort of stumbled into it. And we kept moving along.

And when I disbanded the partnership, I distributed out to Berkshire. Because it seemed like the easiest and best thing to do. And I followed through. And I enjoyed it enormously. I’m glad it all worked out this way.

It did not work out the best way, economically, in all probability. It was the wrong base to use to build an enterprise around. But maybe, in a way, that’s made it more fun.

Charlie, do you have anything to add on that? You can tell them about the Blue Chip story.

Charlie Munger:

No, one such story is enough.

But it is interesting that a wrong decision has been made to work out so well.

We’ve done a lot of that, scrambled out of wrong decisions. I’d argue that’s a big part of having a reasonable record in life.

You can’t avoid the wrong decisions. But if you recognize them promptly and do something about them, you can frequently turn the lemon into lemonade, which is what happened here.

Warren twisted a lot of capital out of the textile business and invested it wisely. And that’s why we’re all here.

Warren Buffett:

But Berkshire comes from three companies that came together: Diversified Retailing, Blue Chip Stamps, and Berkshire. Those were the three base companies.

And Diversified started when we bought a company called Hochschild Kohn in Baltimore in 1966, a department store. And that company disappeared over time.

Fortunately, in 19… I think… 70, we sold it to Supermarkets General. Blue Chip, we’ve told you about the record of that.

So, we started out with three disasters, and put them all together.

And it’s worked out pretty well.

But it was a mistake to be working from that kind of a base. Don’t follow our example in that respect. Start out with a good business and then keep adding on good businesses.

Charlie Munger:

But the example of quickly identifying the mistakes and taking action, there, our example is a good one.

Warren Buffett:

Yeah.

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