Excellent read: www.berkshirehathaway.com/letters/2014ltr.pdf
In the Beginning
On May 6, 1964, Berkshire Hathaway, then run by a man named Seabury Stanton, sent a letter to its
shareholders offering to buy 225,000 shares of its stock for $11.375 per share. I had expected the letter; I was
surprised by the price.
Berkshire then had 1,583,680 shares outstanding. About 7% of these were owned by Buffett Partnership
Ltd. (“BPL”), an investing entity that I managed and in which I had virtually all of my net worth. Shortly before the
tender offer was mailed, Stanton had asked me at what price BPL would sell its holdings. I answered $11.50, and he
said, “Fine, we have a deal.” Then came Berkshire’s letter, offering an eighth of a point less. I bristled at Stanton’s
behavior and didn’t tender.
That was a monumentally stupid decision.
Berkshire was then a northern textile manufacturer mired in a terrible business. The industry in which it
operated was heading south, both metaphorically and physically. And Berkshire, for a variety of reasons, was unable
to change course.
That was true even though the industry’s problems had long been widely understood. Berkshire’s own
Board minutes of July 29, 1954, laid out the grim facts: “The textile industry in New England started going out of
business forty years ago. During the war years this trend was stopped. The trend must continue until supply and
demand have been balanced.”
About a year after that board meeting, Berkshire Fine Spinning Associates and Hathaway Manufacturing –
both with roots in the 19th Century – joined forces, taking the name we bear today. With its fourteen plants and
10,000 employees, the merged company became the giant of New England textiles. What the two managements
viewed as a merger agreement, however, soon morphed into a suicide pact. During the seven years following the
consolidation, Berkshire operated at an overall loss, and its net worth shrunk by 37%.
Meanwhile, the company closed nine plants, sometimes using the liquidation proceeds to repurchase
shares. And that pattern caught my attention.
I purchased BPL’s first shares of Berkshire in December 1962, anticipating more closings and more
repurchases. The stock was then selling for $7.50, a wide discount from per-share working capital of $10.25 and
book value of $20.20. Buying the stock at that price was like picking up a discarded cigar butt that had one puff
remaining in it. Though the stub might be ugly and soggy, the puff would be free. Once that momentary pleasure
was enjoyed, however, no more could be expected.
Berkshire thereafter stuck to the script: It soon closed another two plants, and in that May 1964 move, set
out to repurchase shares with the shutdown proceeds. The price that Stanton offered was 50% above the cost of our
original purchases. There it was – my free puff, just waiting for me, after which I could look elsewhere for other
Instead, irritated by Stanton’s chiseling, I ignored his offer and began to aggressively buy more Berkshire
24By April 1965, BPL owned 392,633 shares (out of 1,017,547 then outstanding) and at an early-May board
meeting we formally took control of the company. Through Seabury’s and my childish behavior – after all, what
was an eighth of a point to either of us? – he lost his job, and I found myself with more than 25% of BPL’s capital
invested in a terrible business about which I knew very little. I became the dog who caught the car.
Because of Berkshire’s operating losses and share repurchases, its net worth at the end of fiscal 1964 had
fallen to $22 million from $55 million at the time of the 1955 merger. The full $22 million was required by the
textile operation: The company had no excess cash and owed its bank $2.5 million. (Berkshire’s 1964 annual report
is reproduced on pages 130-142.)
For a time I got lucky: Berkshire immediately enjoyed two years of good operating conditions. Better yet,
its earnings in those years were free of income tax because it possessed a large loss carry-forward that had arisen
from the disastrous results in earlier years.
Then the honeymoon ended. During the 18 years following 1966, we struggled unremittingly with the
textile business, all to no avail. But stubbornness – stupidity? – has its limits. In 1985, I finally threw in the towel
and closed the operation.
Undeterred by my first mistake of committing much of BPL’s resources to a dying business, I quickly
compounded the error. Indeed, my second blunder was far more serious than the first, eventually becoming the most
costly in my career.
Early in 1967, I had Berkshire pay $8.6 million to buy National Indemnity Company (“NICO”), a small but
promising Omaha-based insurer. (A tiny sister company was also included in the deal.) Insurance was in my sweet
spot: I understood and liked the industry.
Jack Ringwalt, the owner of NICO, was a long-time friend who wanted to sell to me – me, personally. In
no way was his offer intended for Berkshire. So why did I purchase NICO for Berkshire rather than for BPL? I’ve
had 48 years to think about that question, and I’ve yet to come up with a good answer. I simply made a colossal
If BPL had been the purchaser, my partners and I would have owned 100% of a fine business, destined to
form the base for building the company Berkshire has become. Moreover, our growth would not have been impeded
for nearly two decades by the unproductive funds imprisoned in the textile operation. Finally, our subsequent
acquisitions would have been owned in their entirety by my partners and me rather than being 39%-owned by the
legacy shareholders of Berkshire, to whom we had no obligation. Despite these facts staring me in the face, I opted
to marry 100% of an excellent business (NICO) to a 61%-owned terrible business (Berkshire Hathaway), a decision
that eventually diverted $100 billion or so from BPL partners to a collection of strangers.