Buffett: This Mistake Cost $200 Billion in Compounded Capital
Prior to running Berkshire Hathaway, Warren Buffett ran a number of different investment partnerships, one of which was called Buffett Partnership Ltd. ("BPL").
In 1962, Buffett started accumulating shares of Berkshire Hathaway on behalf of BPL. Buffett was fairly nonplussed with Berkshire Hathaway's business though felt that the company was undervalued when accounting for its working capital and book value. Buffett has likened his initial purchase of Berkshire Hathaway to picking up a cigar butt that has one puff left in it.
In May of 1964, Berkshire Hathaway offered to buy 225,000 shares of its stock back. Berkshire Hathaway, which was run by Seabury Stanton at the time, reportedly came to an agreement to buy BPL's stake back for $11.50 per share. According to Buffett himself, the two men (Stanton and Buffett) came to a verbal agreement on the price.
According to Buffett, a letter arrived shortly after from Berkshire Hathaway outlining the terms of the offer. The problem? The offer had been cut slightly to $11.375 per share. For Buffett, this action was a slight and unacceptable.
Instead of accepting the deal, Buffett ignored the offer and started aggressively buying more shares of Berkshire Hathaway. BPL took control of Berkshire Hathaway at a shareholder's meeting and Stanton was fired. Buffett had gotten his revenge.
Buffett would later describe his actions following the receipt of Stanton's offer as "monumentally stupid".
Buffett described the textile business as "terrible". Eventually Berkshire Hathaway would pivot into the insurance industry, though the company kept throwing good money after bad at the textile business for another two decades before eventually "throwing in the towel".
According to Buffett, all of the capital that was invested in keeping the textile business afloat could have been put to much better use in other businesses, namely insurance.
This blunder, which all stemmed from Buffett's "childish behavior" after being screwed out of 1/8th of a point, would end up costing Buffett and his partnerships an estimated $200 billion in compounded capital.
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