Warren Buffet’s $200 billion blunder

It is a pretty well know fact that Warren Buffet’s “Berkshire Hathaway”  is one the world’s most successful and admired companies.  Berkshire Hathaway is a conglomerate holding company that manages a number of subsidiary companies. The company has consistently averaged an annual growth of 20% for the last 44 years.

There is a story and a big investment mistake behind all this, as admitted by Warren Buffet. Warren Buffet disclosed to CNBC that his 1964 decision  to buy “Berkshire Hathaway”  – a textile company was a spiteful urge. He just wanted to get back at that textile company CEO for not keeping up with his promise.

So, What is the story?

Berkshire Hathaway was a textile company going downhill in mid 1960s. The textile company management was closing  mills and using the proceeds to buy back company stock. So Warren Buffet sensed an opportunity here and also started buying stock in this textile company.

The idea was to tender that same stock back to the management  at a higher price and make a small profit. Warren Buffet cut a deal with the textile company owners to sell shares back to company management at $11.50. Later Mr. Stanton (Berkshire owner) refused to honor the $11.50 deal,  and instead wanted the tender at $11.375. This was .0125 lesser that the original agreement.  This got Warren Buffet mad and eventually made him buy controlling stake (more stock)  in Berkshire and fire Mr. Stanton.

Buffet’s Berkshire later went on to become the holding company for all his future investments currently worth $200 billion.

What was the blunder?

So what was the investment mistake that Warren Buffet made? Warren Buffet says that investing so much money in a failing company like Berkshire (textile company) was a mistake. If that same money was invested instead in an insurance business, his company would be worth about $200 billion more !!  Holding on to Berkshire for years together when it was earning nothing was a big mistake

What to learn from this?

More than the opportunity cost, I appreciate the humility of  a legend in Warren Buffet to recognize and accept his mistakes. Would love to hear from our readers. Comment on..