Of course, here is a lengthy post on the topic of how Warren Buffett started Berkshire Hathaway, written in a step-by-step guide format.
The Unconventional Origin Story: How Warren Buffett Transformed a Dying Textile Mill into a Global Powerhouse
Hello there! Ever wondered how a man known for his folksy wisdom and incredible investing prowess took a failing textile company and built it into one of the world's most valuable conglomerates? It's a story that defies traditional business school teachings and is a testament to long-term vision, patience, and a bit of a grudge. Let's embark on this fascinating journey together, tracing the steps from a dusty mill floor to the pinnacle of corporate America.
Step 1: The First Encounter - A Value Investor's Search for a Bargain
Our story doesn't begin with a grand vision for a conglomerate; it starts with a classic value investing play. In the early 1960s, Warren Buffett was running his investment partnership, Buffett Partnership, Ltd. He was on the hunt for undervalued companies, and his attention was drawn to a company called Berkshire Hathaway.
What was Berkshire Hathaway? It was a textile manufacturing company, a relic of a bygone era in New England. It had been founded in 1839 and was struggling. The textile industry in the U.S. was facing immense pressure from foreign competition, and mills were closing down left and right. The business was in decline, but there was one thing that caught Buffett's eye: its stock price was incredibly low compared to its assets, particularly its cash and working capital. It was a classic 'cigar butt' investment, as Buffett would later call it—a stock that had one last puff left in it before it was extinguished.
The Initial Purchase: Buffett started buying shares in 1962, seeing it as a cheap liquidation play. He wasn't interested in the textile business itself; he was interested in buying the company's assets for less than they were worth on the open market. He was hoping to profit from the eventual liquidation of the company's assets.
Step 2: The Grudge Purchase - The Betrayal and the Takeover
This is where the story takes a dramatic and personal turn. The CEO of Berkshire Hathaway at the time was Seabury Stanton. In 1964, Berkshire Hathaway announced a tender offer to buy back its own shares at $11.50 per share. This was a common practice for companies with excess cash, and it often benefited shareholders.
The Broken Promise: Buffett, holding a significant stake, agreed to sell his shares at that price. However, a handshake deal was broken. When the formal offer came, it was for $11.375, a paltry 12.5 cents less per share. This was a small amount of money, even back then, but for Buffett, it was a matter of principle and integrity. He felt cheated.
The Change of Plans: The broken promise infuriated Buffett. Instead of selling his shares, he decided to do something completely different: he would buy more. He began accumulating shares aggressively. He wasn't just interested in a quick profit anymore; he was going for control of the company.
The Takeover: In 1965, Buffett's partnership, Buffett Partnership, Ltd., had accumulated enough shares to take control of the company. On May 10, 1965, he became the chairman of Berkshire Hathaway. This was the moment the failing textile company changed its destiny forever.
Step 3: From Textile Mill to Investment Vehicle - The Pivot
Now, Buffett was in charge of a business that was, by all accounts, a dying enterprise. The textile operations were a cash drain, and the business was facing intense competition. Buffett's immediate challenge was to figure out what to do with the company.
Sub-heading: The Inevitable Decline of the Textile Business
Buffett tried to make the textile business profitable for years. He invested in new machinery and tried to improve efficiency, but it was a losing battle. The economics of the industry were simply against them. He often talks about this experience as a great lesson in capital allocation: putting money into a bad business is like "throwing money into a black hole."
The Decision to Diversify: Rather than sinking more money into the textile operations, Buffett started using the cash flow generated by the business to acquire other companies. He began using Berkshire Hathaway as a holding company and an investment vehicle. He saw the company not as a textile manufacturer but as a platform to allocate capital into other, more profitable businesses.
Sub-heading: The First Acquisitions and the Birth of a Conglomerate
The first major non-textile acquisition was National Indemnity Company, an insurance company, in 1967. This was a brilliant move. Insurance companies generate a massive amount of cash in the form of premiums from policyholders. This money, known as the float, is held by the insurer until claims are paid. Buffett realized he could use this float—this free, interest-free money—to make investments in other businesses.
A snowball effect began: The cash from the textile business and the insurance float were used to buy more companies.
1972: See's Candies was acquired. This was a landmark acquisition that taught Buffett the value of a strong brand and pricing power. It was a business that could raise prices without losing customers.
1973: The Washington Post Company (now part of Graham Holdings Company) was acquired. This was another iconic investment that showed Buffett's focus on businesses with strong competitive advantages.
Step 4: The Final Act - Shutting Down the Textile Operations
For nearly two decades, Buffett ran the textile business in parallel with his growing investment portfolio. The textile operations were a constant reminder of his initial mistake—buying a bad business. In 1985, after years of struggling and losing money, the last of the Berkshire Hathaway textile mills was closed.
The Legacy: While the textile business itself failed, it was the seed from which the empire grew. The cash flow from those early years, and the grudge that led to the takeover, set the stage for one of the greatest business stories ever told.
Today, Berkshire Hathaway is a massive conglomerate with a diverse portfolio of companies, including GEICO, BNSF Railway, and a large stake in companies like Apple and Coca-Cola. The name, "Berkshire Hathaway," is a constant reminder of its humble and unconventional beginnings.
10 Related FAQ Questions
How to buy shares of Berkshire Hathaway?
You can buy shares of Berkshire Hathaway (BRK.A and BRK.B) through any brokerage account. BRK.A is the more expensive Class A share, while BRK.B is the more affordable Class B share, making it accessible to a wider range of investors.
How to invest like Warren Buffett?
To invest like Warren Buffett, focus on value investing: buy companies with strong, durable competitive advantages, a history of profitability, and a good management team. Aim to hold them for the long term and don't get caught up in short-term market fluctuations.
How to understand Berkshire Hathaway's business model?
Understand that Berkshire Hathaway is a conglomerate and holding company. Its business model is based on acquiring and holding a diverse portfolio of wholly-owned businesses (like GEICO and See's Candies) and a portfolio of publicly traded stocks (like Apple and Coca-Cola). The key is using the cash flow from these businesses, especially the "float" from its insurance companies, to fund further acquisitions and investments.
How to read Warren Buffett's annual letter to shareholders?
Start by reading the most recent letter and then work your way backward. The letters are known for their clarity, humor, and valuable business insights. They often discuss the performance of Berkshire's various businesses, his thoughts on the economy, and his investment philosophy.
How to find companies with a 'moat' like Warren Buffett?
A 'moat' is a sustainable competitive advantage. To find companies with a moat, look for businesses with strong brand recognition (like Coca-Cola), high switching costs (like software platforms), network effects (like credit card companies), or a cost advantage (like a low-cost producer).
How to calculate a company's intrinsic value?
Calculating a company's intrinsic value is a complex process. One common method is discounted cash flow (DCF) analysis, which involves projecting a company's future cash flows and then discounting them back to their present value. Buffett prefers simpler methods and focuses more on the quality of the business.
How to start a business like Berkshire Hathaway?
Starting a conglomerate like Berkshire Hathaway would be extremely difficult. However, you can start a holding company by acquiring a small business and using its cash flow to acquire others over time. The key is to find a profitable business with a reliable cash flow.
How to get a job at Berkshire Hathaway?
Berkshire Hathaway is a decentralized organization, meaning each of its subsidiaries handles its own hiring. To get a job, you would need to apply directly to one of the dozens of companies owned by Berkshire Hathaway, such as GEICO, BNSF Railway, or See's Candies.
How to attend the Berkshire Hathaway annual meeting?
The annual shareholder meeting is held in Omaha, Nebraska, and is a major event. To attend, you need to be a shareholder. You can purchase one share of either BRK.A or BRK.B to gain access.
How to follow Warren Buffett's investment news?
Follow news from reputable financial news sources like The Wall Street Journal, Bloomberg, and Reuters. The most important updates come from Berkshire Hathaway's annual report and quarterly filings with the SEC.
