Financial History Issue 125 (Spring 2018) | Page 25
Many other brilliant investments were
to follow, resulting in extraordinary
growth for Berkshire. Between 1965 and
1978, the annual compound rate of growth
of the S&P 500 was 4.63%. But for Berk-
shire, the compound rate of growth in
per share book value was 21%. It is not
until you see the effect of that differential
on final dollar amounts that you really
appreciate the truly stunning performance
of Buffett. Whereas the S&P 500 rate of
return resulted in a $1,000 investment in
1965 being turned into $1,885 by Decem-
ber 1978, in that same time a $1,000 invest-
ment in BH shares grew to be worth over
$14,000.
Berkshire Hathaway Annual
Percentage Increase (1979–2015)
Buffett’s Early Mistakes
All investors make mistakes. A key char-
acteristic of Buffett is that he continues to
learn from his investing mistakes. Some of
his early errors include:
GEICO Buffett invested about 65% of his
net worth ($10,282) in GEICO in 1951, and
he sold his shares in 1952 for $15,259. Not a
bad return, but consider this: if he had held
onto those shares for the next 20 years, he
could have sold them for $1.3 million in
the late 1960s. The painful lesson was in
the inadvisability of selling a stake in an
identifiably wonderful company.
Source: Letter from the Chairman of Berkshire Hathaway (2016)
he pitched the formal offer at only $11.375.
Buffett bristled at Stanton’s behavior and
chose not to sell.
Instead, Buffett made what he later
called “a monumentally stupid decision.”
It was plain to see that New England
textile mills were going out of business,
as they rarely made profits due to cheap
imports. BH itself had closed most of its
mills as it failed to compete. But Buffett
was upset, and so he began to aggressively
buy more shares (great investors are not
perfectly rational). By April 1965, BPL
held 39% of BH and formally took control
of the company, using one-quarter of the
funds under Buffett’s command to do so.
Buffett’s self-confessed “childish behav-
ior” resulted in him having to organize
“a terrible business.” As a result of losses
and share repurchases, Berkshire’s balance
sheet net worth was only $22 million. It
had no excess cash and $2.5 million of debt.
Buffett put strict limits on further invest-
ment in textile machinery and other assets.
He gradually moved the capital of the
original business to other areas. Because he
was a capital allocator with a knowledge of
many types of businesses, and not a textiles
man specifically, he was able to spot better
investment opportunities than those who
were focused on only the textile industry.
Transforming Berkshire
In 1967, Buffett made a great leap for BH
by getting it to buy the insurance company
National Indemnity in his home town of
Omaha for $8.6 million. For Buffett, one
of the attractions of insurance companies
was the pile of cash (the “float”) sitting
within the firm, created because policy-
holders pay up front, but claims occur
later. This float could be invested. Buffett
later bought many more insurance com-
panies and made very good use of their
floats too. The National Indemnity acqui-
sition was followed by another master-
stroke: the purchase of a chain of branded
candy stores in 1972 for $25 million. See’s
Candies has since generated more than $2
billion for BH to invest elsewhere, and it is
still pumping out money today.
Cleveland Worsted Mills Cleveland Wor-
sted Mills’ share price was less than half the
business’ net current asset value in 1951, so
market capitalization was under half the
amount tied up in the current assets after
deduction of all liabilities. And it paid a high
proportion of its earnings in dividends.
After buying in, Buffett discovered that the
company faced intense competition from
textile plants in the southern US states and
from synthetic fibers. It made lar ge losses,
cut its dividend and its share price dropped.
Buffett learned the importance of strategic
competitive positioning and pricing power.
The Gas Station Buffett bought an Omaha
gasoline station in partnership with a
friend. Unfortunately, it was sited opposite
a Texaco station which consistently outsold
them. Amazingly, Buffett even took up
physical work to help out — on weekends
he actually served customers. He learned
lessons in competitive advantage: the Tex-
aco station “was very well-established and
very well-liked…customer loyalty…a cli-
entele… Nothing we could do to change
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