Step 1: The First Encounter - A Deep Dive into a Faltering Business
The year was 1962, and a young, but already highly successful, Warren Buffett was running a limited partnership, Buffett Partnership, Ltd. He was a keen observer of the stock market, always on the hunt for undervalued companies.
His attention was drawn to Berkshire Hathaway, a textile manufacturing company based in New Bedford, Massachusetts. At first glance, it wasn't a very attractive business. The American textile industry was in a steep decline, unable to compete with lower-cost manufacturers from abroad. Berkshire's mills were aging, and its profits were shrinking.
So, why the interest?
QuickTip: Pause before scrolling further.
The allure of an "undervalued" asset: Buffett, a disciple of the legendary Benjamin Graham, was a "value investor." He believed in buying a dollar's worth of assets for 50 cents. He didn't care much for the business's prospects if the price was right. He looked at Berkshire Hathaway's balance sheet and saw that the company was selling for less than its working capital, meaning he could buy the stock, liquidate the company's assets (cash, inventory, machinery), and make a profit.
The stock buyback signals: In 1962, the company's management announced a stock buyback program. This was a clear signal to Buffett. The company's stock was trading at $7.50 a share, and the management offered to buy back shares at $11.50. This, in Buffett's mind, was a fantastic opportunity.
 |
| How Warren Buffett Bought Berkshire Hathaway |
Step 2: The Initial Investment - A Calculated Bet
Buffett started to buy shares of Berkshire Hathaway in late 1962. He was essentially a shareholder who was just looking for a quick profit from the stock buyback. His plan was simple: buy shares below the buyback price, tender them to the company, and walk away with a tidy sum.
QuickTip: Treat each section as a mini-guide.
The stock buyback offer: The management of Berkshire Hathaway was led by Seabury Stanton. They had announced that they would buy back shares at a specific price. Buffett, seeing the opportunity, began accumulating a significant position in the company.
A growing stake: By 1964, Buffett's partnership had become Berkshire Hathaway's largest shareholder. He had purchased shares at prices between $7.60 and $11.40. His investment was a pure arbitrage play, betting on the stock buyback.
Step 3: The Broken Promise - The Infamous Grudge
This is where the story takes a dramatic turn. In 1964, Seabury Stanton approached Buffett to negotiate a deal for Buffett's shares.
QuickTip: Slow scrolling helps comprehension.
The handshake deal: They shook hands on a price of $11.50 per share. Buffett agreed to sell his shares and move on.
The double-cross: A few weeks later, Buffett received the formal tender offer from Berkshire Hathaway. To his shock and fury, the tender price was not $11.50, but $11.375 per share. Stanton had shaved off 12.5 cents per share. This was a significant amount to a value investor like Buffett, but more importantly, it was a breach of a verbal agreement.
Step 4: The Vengeance - Shifting from Arbitrage to Acquisition
This slight, this broken promise, ignited a fire in Buffett. He was a man of his word, and he expected others to be as well. The 12.5 cents per share was no longer about the money; it was about principle.
QuickTip: Don’t rush through examples.
A change of plan: Instead of selling his shares, Buffett decided to do the unthinkable: he would buy more. His goal was no longer to make a quick profit from a stock buyback. His new goal was to gain control of the company and fire Seabury Stanton.
The buying spree: Over the next several months, Buffett went on a buying spree. He bought every share he could get his hands on, eventually accumulating a massive stake.
The ultimate takeover: By May 1965, Buffett's partnership had accumulated enough shares to take control of Berkshire Hathaway. At the shareholder meeting, he and his allies voted to remove Stanton and install new management. Buffett was now the chairman of Berkshire Hathaway.
Step 5: The Transformation - From Textile Mill to a Global Conglomerate
This is the most incredible part of the story. Buffett had acquired a failing textile company. He could have liquidated it and made a profit, which was his original plan. But he saw something more.
A new vision: Instead of selling off the assets, Buffett began to use the cash flow from the textile business to acquire other, more profitable businesses. He started with insurance companies, a business he understood deeply.
The capital allocation machine: The textile mills were like a "cash-generating engine" for Buffett's acquisitions. He would take the profits from the declining textile business and invest them in a growing insurance business, which in turn generated more capital for more acquisitions.
The end of an era: The textile business continued to decline over the years, and Buffett eventually shut down the last textile mill in 1985. But by then, the name "Berkshire Hathaway" was no longer synonymous with textiles. It was synonymous with a vast and diversified holding company that owned everything from insurance companies (GEICO) to candy companies (See's Candies) and railroads (BNSF).
FAQ - How to…
How to buy Berkshire Hathaway stock today? You can buy Berkshire Hathaway stock (BRK.A and BRK.B) through any brokerage firm.
How to understand Warren Buffett's investment philosophy? Buffett's philosophy is rooted in value investing: buying high-quality, well-run businesses at a fair price and holding them for the long term.
How to read a company's balance sheet like Warren Buffett? Focus on key metrics like cash, inventory, and debt. Look for companies with strong balance sheets and low debt.
How to find undervalued stocks? Look for companies that are trading at a price significantly below their intrinsic value, often due to temporary bad news or market inefficiency.
How to invest in the stock market with a long-term perspective? Buy stocks of good businesses and hold them for years, ignoring short-term market fluctuations.
How to learn from Warren Buffett's letters to shareholders? Read his annual letters to shareholders. They are a masterclass in business, investing, and common sense.
How to start a business with the mindset of a value investor? Focus on creating a strong, sustainable business with a competitive advantage, rather than just chasing short-term profits.
How to find a business with a "moat"? Look for companies with a durable competitive advantage, such as a strong brand, a patent, or a network effect.
How to calculate a stock's intrinsic value? Use financial models like discounted cash flow (DCF) analysis to estimate the present value of a company's future earnings.
How to avoid common investing mistakes? Avoid emotional decision-making, chasing fads, and investing in businesses you don't understand.
 |
