Berkshire Hathaway--"the dumbest stock", Buffett

[netnet]

Interestingly, Warren Buffett calls his purchase of a controlling interest in Berkshire Hathaway as his "dumbest" stock purchase.  He had originally bought the stock in an arbitrage play and had an agreement from the president of the company to tender at 11.50 and the president offered at 11.375.  Buffett was incensed enough to accumulate a controlling interest and fire the guy.  Had he not purchased BRK, he says that he and his investors would have been 200 billion dollars richer!!  Talk about an little arbitrage position that goes bad.

 

You have to love it. 

 

http://www.cnbc.com/id/39710609

 

(By the way, way back when I was able to ask Munger about buying BRK.  I said I had looked at Berk and analyzed it and it seemed to me that buying it was a mistake.  He looked at me as if I was a simpleton. Said yep and asked for the next question!)

 

Netnet

[jjsto]

Yeah, this quote falls under the general category of what would have happened had Buffett started from the beginning buying great businesses at reasonable prices instead of all this "net-net", cigar-butt stuff.  Or, I always wonder what would have happened  had he focused on insurance from the beginning.  By 1967 he probably understood the insurance industry better than almost anyone in America, he had the capital, and he obviously had a long-term competitive advantage on the re-investment of float side.  Not to mention the fact he is an unbelievably disciplined underwriter.  In hindsight it would have made much more sense to have purchased an insurance company and used that as the vehicle for expansion instead of a dying textile mill.  Unlike Bill Gates, or someone like Zuckerberg, it is very easy to envision a scenario where changing a little here or there, and Buffett would be way richer the second time around, whereas most people had a healthy dose of luck (being in the right place at the right time,) and would probably be significantly poorer.

[Guest Bronco]

Jjsto - I myself have written in the past the ... what if scenario.

 

Not trying to pump Biglari - but it makes me wonder if he can get this FMMH deal done - how successful will BH be trying to follow (maybe loosely) the ordiginal BH (Berkshire) model.  The SNS business is a nice cash flow generator and it is tough to lose money running a hedge fund.  Maybe he would bomb on either the insurance 1) float management side or 2) underwriting side, but intriguing nevertheless.

 

IMO it is tough to quantify how Buffett would have done had he "started" with a profitable business, but to me it just makes his stature in the business community all the more impressive.  Its like Michael Jordan challenging someone to a game of 1 on 1, and winning with one hand tie behand his back.  A perfect illustration of how capital allocation is so important. 

 

 

[Parsad]

I understand what Buffett was trying to stay, but the argument is a moot point.  It would be like saying what if Prem never bought TIG?  Or what if Mohnish never bought DFC?  The record IS what it is.  

 

None of us have the luxury to turn back time.  What if Sam Walton didn't die and turn over his money to his children?   ;D  Cheers!

[alwaysinvert]

Yeah, this quote falls under the general category of what would have happened had Buffett started from the beginning buying great businesses at reasonable prices instead of all this "net-net", cigar-butt stuff.  Or, I always wonder what would have happened  had he focused on insurance from the beginning.  By 1967 he probably understood the insurance industry better than almost anyone in America, he had the capital, and he obviously had a long-term competitive advantage on the re-investment of float side.  Not to mention the fact he is an unbelievably disciplined underwriter.  In hindsight it would have made much more sense to have purchased an insurance company and used that as the vehicle for expansion instead of a dying textile mill.  Unlike Bill Gates, or someone like Zuckerberg, it is very easy to envision a scenario where changing a little here or there, and Buffett would be way richer the second time around, whereas most people had a healthy dose of luck (being in the right place at the right time,) and would probably be significantly poorer.

It's easy enough to imagine a poorer Buffett too. Buffalo news and Salomon come to mind.

[beerbaron]

I think he was making a point about the quality of an asset. In another Q&A in a university speech he was saying that it's biggest mistake was US Airways preferred.

 

BeerBaron

[Myth465]

Lol very funny story. Egos are very interesting.

[ragnarisapirate]

Question:

 

What did the numbers of Berkshire look like when Buffett bought it?

[shalab]

This means that BRK can be a 400 billion company in another 8 years at 10% compounding.

 

 

 

 

[Uccmal]

IMO, Warren uses BRK as an example as an investment mistake when it was more of a very valuable learning experience.  There is no way he would have been as successful without these type of experiences.  One cant understate the value of an education borne out of experience. 

 

If Prem hadn't made those US purchases he wouldn't have learned what he needed to know to move forward today.  If I hadn't owned FFH from 1999-2004 I wouldn't have learned what I needed to learn to get the success I have had since 2005.

 

 

[Myth465]

Agreed Ucc. I think he has reflected on this quite a bit and honestly believes this was his worst investment (from a time and money standpoint). I think he learned a valuable lesson though about ROIC and that has made him quite a bit of money. I also believe that this may have pushed him more towards Fisher.

[twacowfca]

IMO, Warren uses BRK as an example as an investment mistake when it was more of a very valuable learning experience.  There is no way he would have been as successful without these type of experiences.  One cant understate the value of an education borne out of experience. 

 

If Prem hadn't made those US purchases he wouldn't have learned what he needed to know to move forward today.  If I hadn't owned FFH from 1999-2004 I wouldn't have learned what I needed to learn to get the success I have had since 2005.

 

 

 

Right on Uccmal.  Failure is an amazingly powerful success force.  :)

[dowfin1]

In the interview Buffet said that $20m of capital was stuck in the textile business earning no return for many years.  Assuming he took that capital and compounded at BRK's historical 20.3% since 1965, only gives us an additional BRK book value of $82B not $200B.  Where did he get this figure?

[dcollon]

dowfin,

I think his suggestion is that Berkshire was destroying capital and if instead he would have started immediately with an insurance company they would have been growing capital/float while also compounding the capital they had.  It would essentially serve as a multiplier to the number you highlight.

 

Maybe others feel differently.

 

 

[biaggio]

Agree with all re importance of learning from investment mistake.

 

It s a good thing he did not make his biggest mistake at the end of his career. Learning from your mistakes, and having the courage to make mistakes when you re younger, helps to minimize the chances of a bad decision and outcome.

 

Definitely applies to other parts of our lives. How many people do we know that do not take responsibility for their mistakes (blaming other s etc), or never take a chance. These are probably the same who go on to underachieve.

[Hershey]

While WEB states BRK may have been his dumbest stock pick, I wonder what he thinks his biggest business mistake was.  My guess is that it was exposing the insurance companies to coverage for WMD attacks.  Even though it did not bring down the company, it could have. 

[Parsad]

Could be.  Or it could be that he didn't buy all of GEICO earlier.  I think his best investment idea was hiring Ajit Jain.  Cheers!

[stahleyp]

Could be.  Or it could be that he didn't buy all of GEICO earlier.  I think his best investment idea was hiring Ajit Jain.  Cheers!

 

Didn't he say one time that his best investment was the taking the Dale Carnegie course? :P

[twacowfca]

Could be.  Or it could be that he didn't buy all of GEICO earlier.  I think his best investment idea was hiring Ajit Jain.  Cheers!

 

Didn't he say one time that his best investment was the taking the Dale Carnegie course? :P

 

 

Yup!  :)  Taking the course sure helped me get out of myself and showed me the importance of finding out whats important to others and how to communicate with them based on their interests.  :)

[beerbaron]

While WEB states BRK may have been his dumbest stock pick, I wonder what he thinks his biggest business mistake was.  My guess is that it was exposing the insurance companies to coverage for WMD attacks.  Even though it did not bring down the company, it could have. 

 

He did not expose it's insurance to WMD, it came with National Indemnity's, he actually yelled at the executives to get rid of the terrorist coverage on the twin tower 6 months before the 9/11. Said it was not a risk he was paid for...

 

BeerBaron