📈 How did Berkshire Hathaway start
The investment power duo
Hi, I’m Anthony! 👋 Every Week, I look at the 10% of startups that did not end up in the startup graveyard. Most analyses are done on mature companies which is not actionable for budding entrepreneurs. I want to understand what the founders did at the very beginning? What did they do before their startup became a household name?
If you haven’t subscribed yet, join the other folks interested in starting your own company by subscribing here:
Actionable Insights
This week's newsletter will be a different one. Instead of talking about tech startups, let's talk about a financial company that is renowned, Berkshire Hathaway. Here are key takeaways I have learned from the decisions that Berkshire Hathaway has made at the beginning of its journey.
🤝 Partnership is Key: The success story of Warren Buffett and Charlie Munger at Berkshire Hathaway highlights the strength of synergistic partnerships. Their blend of skills and perspectives can lead to outstanding business achievements. This partnership underscores the value of aligning with individuals who complement and enhance your strengths
🔄 Embrace Change: Berkshire Hathaway's transition from a faltering textile business to an investment giant showcases the importance of evolving business strategies. The company's shift to focus on high-quality companies at fair prices exemplifies the power of adaptability and strategic evolution in business
🌱 Prioritize Long-Term Value: Berkshire Hathaway's approach of focusing on long-term value rather than short-term gains offers a key lesson in business longevityBackground of Berkshire Hathaway
Berkshire Hathaway, shaped by Warren Buffett and Charlie Munger, symbolizes smart investing. Their strategy, focusing on long-term value, has consistently outperformed the market.
Each year, their "Woodstock for Capitalists", an annual meeting at Omaha, buzzes with wisdom, drawing crowds worldwide. This duo's simple, yet profound investment philosophy has inspired a dedicated following. In Berkshire Hathaway's story, Buffett and Munger have not just built a company; they've crafted a legacy of intelligent, ethical investing.
But it turns out that Berkshire Hathaway, as we know it today, is one of Warren Buffett's "dumbest" stock purchases ever.
Berkshire Hathaway is a publicly traded textile company way that began way back in the 1800s. By the 1960s, it was struggling against competition and had lost all but 2 of its mills and 80% of its employees. Things were not looking good.
Maybe because of its gloomy prospects, its publicly traded stock was severely underperforming, so much that it was trading at a wide discount to the underlying assets that the company owned.
In other words, the company is worth much more than the stock price is implying.
Enter Warren Buffett
And that was the exact kind of company that Buffett cut his teeth on.
Warren Buffett's investment strategy in his early years was simple, to buy heavily discounted stocks with the hope of making one last sum of profits. In this aspect, Berkshire Hathaway was a real bargain.
By 1964, Buffett bought over a controlling interest in the company, and Berkshire Hathaway as we know it was born.
The company continued to be hammered by low-cost competition rising from not just the US but globally too. And there was nothing that Buffett could do to stop that. There was very little hope that the business would ever be consistently profitable. While the inventory was worth more than what Buffett paid for, it was the last puff of the cigarette with no real lasting value. In other words, a classic "cigar-butt" investment.
Buffett “fought” the failing textile business for 20 years before finally giving up, calling this a massive failure that might have cost him a compounded return of $200 billion in opportunity cost.
The Pivot
Instead of selling the company and giving up, Buffett pivoted the Berkshire Hathaway business into his area of expertise, the stock market. Capital was reallocated from buying textiles to buying other cheap stocks in the stock market. The proceeds from those winners to buy even more.
“I’d rather have a $10 million business making 15% than a $100 million business making 5%. I have other places I can put the money.”
—Warren Buffett
The cash-making Berkshire Hathaway machine is now slowly emerging from the ashes of a failed textile business.
Enter Charlie Munger
Berkshire Hathaway was on the brink of transformative growth when Charlie Munger, a long-time friend of Warren Buffett, joined the fold in 1978. This pivotal addition marked a significant shift in the company's trajectory.
The Meeting That Changed Everything
Munger was introduced to Buffett by a business friend (perhaps the most profitable introduction in history). In 1959, during a visit to Omaha, they first crossed paths and the chemistry between them was instant and undeniable. They soon found calling each other frequently to share investment insights and often ended up investing in the same companies.
Throughout the 1960s and '70s, their collaboration intensified. They became the largest shareholders in the Blue Chip Stamp Co., a shared investment venture that led to acquisitions such as See’s Candy, the Buffalo News, and Wesco.
Munger's Influence on Buffett: A Shift in Strategy
Munger was instrumental in changing Buffett’s investment philosophy from value to quality.
Buffett, initially trained in Ben Graham's school of thought, focused on undervalued stocks. To buy heavily discounted stocks with the hope of making one last puff of profit. Berkshire Hathaway was an example.
Munger, however, encouraged him to seek out high-quality companies at fair prices. That is to buy wonderful companies at fair prices, rather than fair companies at wonderful prices.
This marked the end of Berkshire's "cigar-butt" investing style and a shift to a quality-based investing approach.
"Charlie shoved me in the direction of not just buying bargains, as Ben Graham had taught me. It was the power of Charlie's mind. He expanded my horizons."
—Warren Buffett
See’s Candies: A Testament to the Power of Brand and Pricing
The acquisition of See's Candies in 1972 marked a significant departure from Buffett's traditional investment strategy. Until then, influenced by his mentor Ben Graham, Buffett had focused on buying undervalued stocks, seeking short-term profits from distressed companies. However, See's Candies was different. The company was not a bargain in the traditional sense; it was priced higher than what Buffett would have typically considered a good deal.
Munger recognized the intrinsic value in See’s Candies that went beyond mere numbers. He saw the strength of its brand and its fiercely loyal customer base. This allowed for a strategic increase in prices over time without losing customers, thereby improving profitability. Munger's vision was that a strong brand could command customer loyalty and pricing power, key factors for long-term business success.
Buffett, though initially hesitant, was eventually convinced by Munger. The acquisition of See’s Candies turned out to be a masterstroke, yielding high returns consistently. It exemplified the shift from seeking short-term gains in undervalued stocks to investing in businesses with strong brand equity and the potential for long-term growth.
Berkshire Hathaway made more than 8,000% (80 times) since investing in the company, with its stake now worth over $2 billion from a $25 million investment in 1972.Complementary Yet Similar
Munger's legal acumen and expertise in taxes and business operations complemented Buffett's financial prowess.
While Buffett was known for his desire to be liked and be in the spotlight, Munger was recognized for his wisdom and indifference to public opinion and the man in the background. Again, complementary traits.
Their shared humility and relentless pursuit of knowledge, along with being a soundboard for each other, further solidified their partnership. In their 56 years together, they never argued, a testament to their mutual respect and understanding.
Buffett himself acknowledged that Berkshire Hathaway's success was inextricably linked to Munger's inspiration, wisdom, and involvement. This partnership not only reshaped Berkshire Hathaway but also left an indelible mark on the world of investment.
Leaving you with some nugget of wisdom from Charlie Munger himself.
“I have a friend who says the first rule of fishing is to fish where the fish are. The second rule of fishing is to never forget the first rule. We’ve gotten good at fishing where the fish are,”
"All I want to know is where I'm going to die so that I never go there."