(This is the Warren Buffett Watch newsletter, news and analysis about Warren Buffett and Berkshire Hathaway. Sign up here to receive it in your inbox every Friday night.)
Warren Buffett enters final week as CEO Berkshire Hathawaya vehicle he has used over the past 60 years to create incredible wealth for himself and the company’s long-time loyal shareholders.
Since taking over the reins in 1965, Buffett has built a struggling textile company into a massive conglomerate worth more than $1 trillion.
Almost all of his $151 billion net worth is made up of Class A stocks, ranking him 10th on the Bloomberg Billionaires Index.
If he owns the hundreds of thousands of Berkshire B shares (currently worth $208 billion) that he has given away since 2006, he would be No. 22 on the list and expect to receive even more donations.
Given his past successes with the company, it may be surprising to hear him call Berkshire “the stupidest stock I ever bought”…a failure that cost him hundreds of billions of dollars.
From deep within CNBC’s Warren Buffett archives, here are rare clips of Buffett from 2010. Becky Quick details why she shouldn’t have bought Berkshire Hathaway and the important lessons he learned from his costly mistake.
Becky Quick: Okay. Mr. Warren, thank you very much for joining us today.
Warren Buffett: I’m happy.
Becky Quick: What we’re trying to get to the bottom of is what was the worst deal you ever made and what did you learn from it?
Warren Buffett: What’s the stupidest thing I’ve ever done? (Laughter)
Becky Quick: Yeah, the stupidest thing you’ve ever done.
Warren Buffett: The stupidest stock I ever bought was, drumroll here, Berkshire Hathaway. And that may require a little explanation. In early 1962, I was running a small partnership worth about $7 million. Nowadays they would be called hedge funds.
And here we have this cheap stock that was cheap on a working capital basis or so. But it was a stock in a textile company that had been going downhill for years. It was originally a large company, but it closed down its factories one after another. And every time you close a factory, you take the proceeds and buy stock in your company. And I thought they were going to close. Only a few factories remained, but others were expected to close. I’ll buy the stock. I would bid it to them and make a small profit.
So I started buying stocks. And in 1964 there was quite a bit of inventory. Then I went back and visited Mr. (Seabury) Stanton, the proprietor. And he looked at me and said, Mr. Buffett. We just sold some factories. I got extra money. We plan to make a tender offer for our shares. So, how much would you bid for your stock? ”
And I said, “11:50.” And he said, “Can you promise to bid at 11:50?” And I said: Stanton, I promise to sell my stock at 11:50 if you do it here in the near future. ” I returned to Omaha. A few weeks later, I opened the email.
Becky Quick: Oh, do you have this?
Warren Buffett: And this is the tender offer from Berkshire Hathaway — it’s from 1964. And if you look carefully, you’ll see that the price is —.
Becky Quick: 11 and —
Warren Buffett: — 11 and three-eighths. He shaved me off by an eighth. If that letter had arrived in 11 and a half days, I would have applied for my shares. But this made me angry. So I went out and started buying stock, bought control of the company, and fired Mr. Stanton. (laughs)
And we moved on from there.
Now, this sounds like a nice little morality chart, but only at this point. But the truth is, I ended up putting a lot of money into a terrible business. And Berkshire Hathaway became the foundation for almost everything I’ve done since then.
So in 1967 a good insurance company came along and I bought it for Berkshire Hathaway. Really, I should have bought it for a new entity.
Because Berkshire Hathaway was carrying this anchor, all these textile assets. So, initially, it was just textile assets that weren’t very useful. And gradually we built more and more on top of that. But we always carried this anchor.
For 20 years, I continued to fight the textile business until I gave up. Berkshire would be worth twice as much as it is now, since it just started as an insurance company rather than investing that money in the textile business. So –
Becky Quick: Double?
Warren Buffett: Yeah. This is $200 billion. You can do it, you can understand it, it will happen. Because the genius here thought he could run a textile business. (laughs)
Becky Quick: Why $200 billion?
Warren Buffett: Well, because if I had just put the same money that I invested in the textile business into the insurance business and started from there, this is what the company would have become. Because all this money was holding me back. This meant that his net worth had to be $20 million. And Berkshire Hathaway wasn’t making any profits at all, year after year after year.
And now you know the $200 billion story.
By the way, if you come back in 10 years, you might have something even worse. (laughs)
Becky Quick: But if you had to think about the moral of the story, would you cut off your nose to disfigure your face?
Warren Buffett: What I’m saying is that if you’re in a bad business, whether you cut off your nose to disfigure your face or not, get out of it. So, it was, it was, in a way, I just drifted into it and it was a terrible mistake.
And I’ve always said, if you want to be known as a good manager, buy good businesses. (laughs)
That’s the way it is. And everyone will think you are smart.
And when I’m in a good business, people think, “That person is smart.” And when I’m in a stupid business like textiles and I don’t know what I’m doing, or shoes after that, or whatever it is, or whatever it is — if you think you’re a management genius, try yourself in a no-good business.
Becky Quick: Is that a lesson you learned from that?
Warren Buffett: Of course.
Becky Quick: But is that something you actually put into practice?
Warren Buffett: I actually put a line in my annual report decades late, and it was after I did this. And I said, “When a manager with a reputation for excellence meets a company with a reputation for bad economic conditions, that company’s reputation remains intact.”
Becky Quick: (Laughs) Is that a lesson you learned? Yet it is what it is – you are reminded every day. Berkshire Hathaway.
Warren Buffett: Yeah. And sometimes we are tempted. Because I started dating Ben Graham in about 1950. And his idea was to buy something cheap.
You don’t want to buy cheap things. You want to buy something good, right? It is much better to buy something good at a fair price than to buy something cheap at a bargain price.
And I didn’t — I didn’t start out that way. I was taught a different system.
But, but, if I don’t learn from Berkshire Hathaway, I never will. (laughs)
Becky Quick: How long did it take you to understand this lesson? You said it was—
Warren Buffett: Well, it took me 20 years to give up on the textile business. I was — after Seabury Stanton — a fellow named Ken Chase ran it, and then a great guy ran it. And he was great. Honest, competent and hardworking. And he couldn’t go through with it.
But we just kept trying and bought another textile company called Waumbeck Mills in Manchester, New Hampshire. Another mistake.
If you’re going to excel at bad business, shouldn’t you also excel at good business?
Becky Quick: But actually, how did it take you 20 years to finally give it up? When was the last time you thought, “Oh, this isn’t going to work”? Was it really 20 years or did you just kind of know —
Warren Buffett: Well, it wasn’t. I came up with it fairly quickly. But I kept thinking that I wasn’t going to give up on this. By the way, our workforce has been great. I mean, it was. We were losing to nothing but competitive dynamics. And I said things like, “Look at the synergies of all these things,” either by buying new equipment or relocating or adding this factory in Manchester. nothing works.
Me — I actually used to have a desk in a drawer. And they kept sending me messages saying that if I buy this machine, 14 people will be saved. If you buy this machine, 12 people will be saved. I kept putting it in a drawer. With all these machines, we will save more manpower than we started with. They were probably operating with zero staff. But it doesn’t work.
Becky Quick: Have you ever had a business where you thought, “Wait a minute, I’ve been down this road before” and couldn’t get into it? Where have you been tempted and backed away?
Warren Buffett: I get phone calls every day. I get calls, but not every day. I mean, that’s an exaggeration. But we often get calls about business that are just too tough. And people say, why don’t you work on it? You know, we’ve got all these resources and great managers.
But the interesting thing about business is that it’s not like the Olympics. In the Olympics, there’s a certain element of difficulty where you’re doing four or five twists on a high board (laughter) and you’re jumping in the middle, or you’re getting into the water a little bit wrong. That means you’ll probably get more points than someone who just dives in head first and a little bit perfectly.
Therefore, difficulty is important in the Olympics. Doesn’t count in business. Now, you don’t get extra points for the fact that something is extremely difficult. So instead of trying to jump over a 7-foot bar, you might as well just step over a 1-foot bar.
Becky Quick: People would say, well, wait a minute. You are involved in some businesses that some people consider to be defunct: the newspaper business. How is it different?
Warren Buffett: That’s right. (Laughter) But, but, we bought it (Buffalo Evening News) in 1977. And we’ve done very well over the years. At first, things didn’t go very well. But after that it went very well.
But I think the newspaper industry in 2010 is different than the newspaper industry in 1977. I mean, it’s completely different. (Berkshire sold the newspaper in 2020.)
And it’s true that we run Berkshire in a way that we don’t teach in business schools, and we document it in our annual report. That’s because in business school, they say you sell a decent number of businesses and keep buying new businesses. I call it Gin Rummy Management.
And if I had 50 kids and one of them wasn’t doing as well as the others, I wouldn’t put him up for adoption. We keep businesses that are not as good as others unless they are going to lose us money forever or they have serious labor issues.
If you’re going to follow that philosophy, you better be very careful about what you buy, right?
Becky Quick: That’s right. What about your business partner Charlie Munger? What does he say is your biggest mistake?
Warren Buffett: Well, he’ll probably repeat this. And I would like to say that I learned a lot about what I talked about. I learned a lot from Charlie.
Charlie has been telling me this since I first met him in 1959. He said – that’s exactly what he said – I could have – if I had listened to him, I could have saved myself a lot of trouble. But what did Charlie know? (laughs)
Becky Quick: Okay. Warren, thank you very much. Thank you very much.
Warren Buffett: Thank you. Thank you for having me.
