In Warren Buffett's 2014 letter to Berkshire Hathaway shareholders, the Oracle of Omaha looks back at his 50 years at company.
He recalls an event that he characterized as "a monumentally stupid decision."
Believe it or not, it was the aggressive takeover of Berkshire Hathaway, a textile factory that was basically doomed to fail.
The "decision" occurred in 1964 when Buffett, then an owner of just 7% of Berkshire, had the opportunity to sell his stake in the company at a quick profit.
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.
Warren Buffett's entire legacy would've been quite different if he had swallowed that eighth of a point ($0.125) discount and just sold. The $11.275 Stanton was offering was a massive 50% return relative to the $7.50 he paid just two years before in December 1962.
Buffett describes how the New England textile industry was spiraling. His initial rationale for buying shares, however, was that it was selling at a steep discount to its working capital per share and book value per share.
Surprisingly, it seemed as though Buffett allowed his emotions to take over even as the value disappeared.
"Irritated by Stanton's chiseling, I ignored his offer and began to aggressively buy more Berkshire shares," Buffett said.
After 20 years of ups and downs, Buffett pulled the plug on Berkshire's textile business.
"But stubbornness – stupidity? – has its limits," he said. "In 1985, I finally threw in the towel and closed the operation."
And yet, Buffett keeps the name Berkshire. Perhaps it serves as a reminder of what not to do.
Click here for more highlights from the letter.
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