What does Warren Buffett say was his worst investment of all time?
Berkshire Hathaway...
You heard that right. He bought it (yes, he's not the founder), and claims that doing so cost him $200 billion dollars 🤯
Let’s dive in 👇
Berkshire Hathaway...
You heard that right. He bought it (yes, he's not the founder), and claims that doing so cost him $200 billion dollars 🤯
Let’s dive in 👇
Last time we learned about Warren’s early years.
At this time in the 60s, he’s still looking for cigar butts: bad companies with assets worth more than their market cap.
This approach gave him the idea to buy a failing textile manufacturer in New England.
At this time in the 60s, he’s still looking for cigar butts: bad companies with assets worth more than their market cap.
This approach gave him the idea to buy a failing textile manufacturer in New England.
https://twitter.com/AcquiredFM/status/1395748732222775297
The stock was selling for less than the book value of its assets.
The value of all the property, plant, equipment and cash on hand at this company is $20 a share, and the stock is trading at $7.50.
What is the company we're talking about?
The one and only Berkshire Hathaway.
The value of all the property, plant, equipment and cash on hand at this company is $20 a share, and the stock is trading at $7.50.
What is the company we're talking about?
The one and only Berkshire Hathaway.
Started in 1839, Berkshire Hathaway has its roots in the textile manufacturing industry, importing cotton from the South and producing textile in New England.
Over time various mills merged to form the textile conglomerate Berkshire Hathaway.
Over time various mills merged to form the textile conglomerate Berkshire Hathaway.
The industry as a whole declined after WWI. Due to the capital requirements of their products and domestic as well as foreign competition, the margins were razor-thin.
In fact, their net profit margins on the whole business in 1955 were less than half a percent! 😳
In fact, their net profit margins on the whole business in 1955 were less than half a percent! 😳
By this time in the 1960s, it's run by Seabury Stanton.
Stanton is like the Don Quixote figure of the New England's textile business industry.
He sees himself preserving the legacy, this wonderful institution of once-great textile manufacturing.
Stanton is like the Don Quixote figure of the New England's textile business industry.
He sees himself preserving the legacy, this wonderful institution of once-great textile manufacturing.
He tries to do everything he can to protect and bring the industry back to its glory days.
He's spending millions of dollars every year, outfitting all the mills with the latest technology.
Their biggest product line at this point was the linings that go inside of suit jackets.
He's spending millions of dollars every year, outfitting all the mills with the latest technology.
Their biggest product line at this point was the linings that go inside of suit jackets.
Warren hears about all of this and he thinks it’s going to be amazing.
He’s going to make so much money here extracting one last puff out of this cigar butt.
He’s going to make so much money here extracting one last puff out of this cigar butt.
Seabury, once he finds out that Buffett is buying the stock, starts buying the stock himself.
He doesn’t want anybody taking the company away from him, let alone these guys that are known as corporate raiders.
He doesn’t want anybody taking the company away from him, let alone these guys that are known as corporate raiders.
At first, Buffett is happy because it's driving the price of his shares up, and once it gets to a good price, he plans to sell.
Stanton wants to buy back Warren’s shares, so they reach a verbal deal at $11.50 a share. He returns to Omaha, gets a letter … and the offer: $11.375.
Stanton wants to buy back Warren’s shares, so they reach a verbal deal at $11.50 a share. He returns to Omaha, gets a letter … and the offer: $11.375.
It would have been completely understandable to say, fine, whatever. I'll sell my stock at $11.375, get out, be done with it and still make a lot of money.
Or just hold the shares and say I like the stock. I ain’t selling.
But Warren's PISSED. That's not what they agreed to! 🤬
Or just hold the shares and say I like the stock. I ain’t selling.
But Warren's PISSED. That's not what they agreed to! 🤬
Instead, Warren is like screw you. I'm going to launch my own tender offer and buy all the outstanding shares at a higher price.
He tries to get anybody to sell him shares.
He’s a man on a mission to get control of Berkshire Hathaway and kick Stanton out of his own company.
He tries to get anybody to sell him shares.
He’s a man on a mission to get control of Berkshire Hathaway and kick Stanton out of his own company.
He cares a lot about money, but it's not in his personality to get worked up about things or to get emotional.
But here he goes off the deep end.
One explanation might be that his father Howard sadly passed away right around this time, which likely affected Warren.
But here he goes off the deep end.
One explanation might be that his father Howard sadly passed away right around this time, which likely affected Warren.
By April 1965, Warren gets enough shares to get himself elected to the board.
The next month, he stages a boardroom coup and essentially forces Stanton out and installs himself as chairman.
He’s won! ... and his prize is ... a dying business.
The next month, he stages a boardroom coup and essentially forces Stanton out and installs himself as chairman.
He’s won! ... and his prize is ... a dying business.
It's a terrible asset. If he could've liquidated it for book value like he planned, then awesome.
However, he can't do this for two reasons.
1⃣ Buffett cares too much about his reputation. He doesn't want to be seen as this raider who comes in and destroys the local economy.
However, he can't do this for two reasons.
1⃣ Buffett cares too much about his reputation. He doesn't want to be seen as this raider who comes in and destroys the local economy.
2⃣it turns out that there aren't a whole lot of buyers for textile manufacturing equipment anymore!
Even though the company was carrying the value of all of those machines at a reasonable value, Warren couldn't have fetched that price selling them on the open market.
Even though the company was carrying the value of all of those machines at a reasonable value, Warren couldn't have fetched that price selling them on the open market.
He would say this to Alice Schroeder in "The Snowball" about Berkshire:
Warren claims that purchasing Berkshire the worst biggest mistake of his investing career.
If he invested the money into an insurance company instead, he would have made about $200 billion due to the opportunity cost of the cash that he used to buy Berkshire...
If he invested the money into an insurance company instead, he would have made about $200 billion due to the opportunity cost of the cash that he used to buy Berkshire...
In conclusion,
1️⃣ Sometimes you can't actually sell things for as much as you think you can.
2️⃣ It is not wise to walk back on a deal you agreed on, especially for a mere 13 cents a share!
1️⃣ Sometimes you can't actually sell things for as much as you think you can.
2️⃣ It is not wise to walk back on a deal you agreed on, especially for a mere 13 cents a share!
3️⃣ You can really get yourself in trouble making an emotional decision in a fit of rage when you feel you've been wronged. And make a $200B mistake :)
All that said, it seemed like things worked out okay for old Warren and his investors!
All that said, it seemed like things worked out okay for old Warren and his investors!
Around the same time, the partnership has $37M in AUM in 1965 after a fantastic return on AmEx. Buffett's net worth is ~$7M.
That year, Warren outperforms the Dow +47% to +14%. Not only beating the Dow but being positive every year of its existence so far.
That year, Warren outperforms the Dow +47% to +14%. Not only beating the Dow but being positive every year of its existence so far.
https://twitter.com/AcquiredFM/status/1395754293848772611
All this success is building up in, and weighing on Warren.
At the end of 1965, his investors put in another $6.8 million in the partnership.
For the first time, Warren doesn't know what to do with all the money.
At the end of 1965, his investors put in another $6.8 million in the partnership.
For the first time, Warren doesn't know what to do with all the money.
He starts setting aside some cash reserves.
He's never done this before. He's always been 100% invested.
He starts to worry that he might not be able to find enough good investments for all the capital he now needs to play as he is cautioning in his letters every year.
He's never done this before. He's always been 100% invested.
He starts to worry that he might not be able to find enough good investments for all the capital he now needs to play as he is cautioning in his letters every year.
He closes the partnership to new capital at that point.
He doesn’t want to take any more capital because he’s afraid of getting too big and not being able to perform in the same way.
He doesn’t want to take any more capital because he’s afraid of getting too big and not being able to perform in the same way.
In 1967, he writes to his partners saying that he's introducing a new ground rule to the partnership, a foreshadowing of one of his greatest missed investments of all time.
What was this missed investment opportunity?
Intel 🤯
That's right. Warren had the chance to put money into Intel as one of its first investors... so, what's the backstory?
Intel 🤯
That's right. Warren had the chance to put money into Intel as one of its first investors... so, what's the backstory?
Susie became an incredible civil rights activist and Martin Luther King spoke at Grinnell College six months before he was killed.
Susie brings Warren to the college to listen to King speak, and Warren is genuinely moved by him. So, he decides to join their board as a trustee.
Susie brings Warren to the college to listen to King speak, and Warren is genuinely moved by him. So, he decides to join their board as a trustee.
Who else was on the board, one of the College's most famous alumni?
Robert Noyce.
Inventor of the integrated circuit, part of the traitorous 8, who left Shockley Semiconductor to start Fairchild and then co-founded Intel... who happens to be on Grinnell's board with Warren.
Robert Noyce.
Inventor of the integrated circuit, part of the traitorous 8, who left Shockley Semiconductor to start Fairchild and then co-founded Intel... who happens to be on Grinnell's board with Warren.
Not only that, but Warren sat on the endowment investment committee at Grinnell!
When Noyce leaves to start Intel and Arthur Rock is putting the deal together to finance Intel, Noyce brings it to Grinell's investment committee to evaluate the company for investment.
When Noyce leaves to start Intel and Arthur Rock is putting the deal together to finance Intel, Noyce brings it to Grinell's investment committee to evaluate the company for investment.
Warren approves the investment and Grinnell does invest $100,000 in Intel’s “seed round”. But Warren never goes near it for the partnership, for himself.
In fact he would never invest in technology companies… until decades later.
In fact he would never invest in technology companies… until decades later.
Talk about a sin of omission.
This is a time before venture capital really started. Even before Sequoia!
In an alternate universe, Buffett could have been Berkshire Hathaway... plus one of the most successful VCs in the world.
This is a time before venture capital really started. Even before Sequoia!
In an alternate universe, Buffett could have been Berkshire Hathaway... plus one of the most successful VCs in the world.
Warren always justifies not investing in tech companies by his circle of competence concept, which really is a Charlie Munger idea that Warren adopted.
Essentially, he stays within his circle of competence and knows the boundaries of his capabilities.
Essentially, he stays within his circle of competence and knows the boundaries of his capabilities.
Warren's excellent returns continue through... 1967 and 1968.
The Dow returns +19% in 1967 and +7.7% in 1968.
Across those years, Warren did 36% in the Buffett Partnerships in 1967, then had its best year ever with a 59% return in 1968 🚀
He's untouchable.
The Dow returns +19% in 1967 and +7.7% in 1968.
Across those years, Warren did 36% in the Buffett Partnerships in 1967, then had its best year ever with a 59% return in 1968 🚀
He's untouchable.
If we look all the way from 1957 through 1969, the compounded results of the Dow were 153%. The compounded results of the partnership were 2795%.
It’s a 28X that Warren did over the 12 years of the Buffett Partnership.
Unbelievable. One of the greatest returns of a fund, ever.
It’s a 28X that Warren did over the 12 years of the Buffett Partnership.
Unbelievable. One of the greatest returns of a fund, ever.
He's now getting seriously worried that he can't invest all the capital he has under management.
On top of that, stock prices are reaching crazy new heights, so he closes the partnership to new capital. Hence, in 1967, he writes a letter to the partners saying,
On top of that, stock prices are reaching crazy new heights, so he closes the partnership to new capital. Hence, in 1967, he writes a letter to the partners saying,
He’s mentally struggling here. Times have never been better but he's never been more worried.
His rule #1: don't lose money 💵.
His rule #2: never forget rule #1.
Even though everything's going up, he doesn’t like it because he can't find anything attractive to buy.
His rule #1: don't lose money 💵.
His rule #2: never forget rule #1.
Even though everything's going up, he doesn’t like it because he can't find anything attractive to buy.
His mood is very much the inverse of the market. He's in such a bad place that in 1968, he tries to unload Berkshire.
He tries to wholesale sell it to Munger and David Gottesman, who is an investor in the partnership.
He tries to wholesale sell it to Munger and David Gottesman, who is an investor in the partnership.
Fortunately for Warren, they're either too smart or too dumb to take him up on it.
In typical Charlie fashion, he’s like “you're telling me you want me to buy it, knowing that you want to sell. Why on earth would I buy something knowing that you want to sell?”
In typical Charlie fashion, he’s like “you're telling me you want me to buy it, knowing that you want to sell. Why on earth would I buy something knowing that you want to sell?”
By mid-1969, Warren is done.
He starts making plans to wind down the partnership.
He's going to hang up his spurs after his most successful year ever. He's still kind of an unknown person. Wall Street doesn't yet know the name Buffett the way they would in the coming decades.
He starts making plans to wind down the partnership.
He's going to hang up his spurs after his most successful year ever. He's still kind of an unknown person. Wall Street doesn't yet know the name Buffett the way they would in the coming decades.
On Memorial Day, 1969, he writes a letter to the partners, and says,
Then he gives notice of his formal retirement at the end of the year. He's going to wind down the partnership, distribute out all the securities to the partners in 1970.
That's it. He's done.
He's walking away like Jordan in the last dance.
That's it. He's done.
He's walking away like Jordan in the last dance.
In 1970, he liquidates all public securities and unwinds the partnership.
He owns 18% of Berkshire as he rides into the sunset.
But of course we all know that's not the end of Warren's story.
Tune in for our next thread on how Buffett comes roaring back in fantastic fashion 🕺
He owns 18% of Berkshire as he rides into the sunset.
But of course we all know that's not the end of Warren's story.
Tune in for our next thread on how Buffett comes roaring back in fantastic fashion 🕺
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