Why buying Berkshire was Warren Buffett’s biggest mistake

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Warren Buffett enters his final week as CEO Berkshire HathawayIt’s the vehicle he’s used to create incredible wealth for himself and the company’s long-time loyal shareholders over the last six decades.

Since taking control in 1965, Buffett has transformed a struggling textile company into a massive conglomerate worth more than $1 trillion.

His Class A shares account for almost all of his estimated total net worth of $151 billion, placing him at No. 10 in the rankings. Bloomberg Billionaires Index.

If he had held on to the hundreds of thousands of Berkshire B shares he has distributed since 2006, now worth $208 billion, he would be No. 22 on this list, with about $359 billion, and more donations would follow.

Considering all the success he’s had with the company, it might be surprising to hear him call Berkshire “the stupidest stock I’ve ever bought”…a mistake that has cost him hundreds of billions of dollars.

From the deep recesses of CNBC Warren Buffett Archive, Here’s a rare clip of Buffett from 2010, giving Becky Quick an in-depth explanation of why she should never have bought Berkshire Hathaway and the important lesson he learned from his costly mistake.

BECKY Quickly: Certainly. Warren, thank you so much for joining us today.

Warren Buffett: Satisfaction.

BECKY Quickly: What we’re trying to get to the bottom of is what was the worst trade you ever made and what did you learn from it?

Warren Buffett: The stupidest thing I’ve ever done? (Laughter)

BECKY Quickly: Yes, it’s the stupidest thing you’ve ever done.

Warren Buffett: The stupidest stock I ever bought was Berkshire Hathaway. And this may require some explanation. It was early 1962 and I was managing a small partnership worth about seven million. They call it a hedge fund now.

And here was this cheap stock, cheap by working capital standards. But this was the stock of a textile company that had been in decline for years. So in the beginning it was a very large company and factories were closing one after another. And every time they closed a factory, they would take the proceeds and buy their own inventory. And I thought they would close; They only had a few mills left, but they were going to close another one. I would buy the stock. I would tender it to them and make a small profit.

So I started buying stocks. And by 1964 we had quite a lot of stock. So I went back and visited the management, Mr. (Seabury) Stanton. And he looked at me and said: ‘Mr. Buffett. We just sold a few mills. We have extra money. We will have a tender offer. So at what price will you tender your shares?’

And I said, ‘11.50.’ He said, ‘Do you promise that you will go out to tender at 11.50?’ he said. And I said, ‘Mr.’ Stanton, if you do this here in the near future, I promise you I’ll sell my shares for 11.50.’ I came back to Omaha. A few weeks later I opened the mail –

BECKY Quickly: Oh, do you have this?

Warren Buffett: And here it is: a tender offer from Berkshire Hathaway – this is from 1964. And if you look carefully you will see that the price is –

BECKY Quickly: 11 and —

Warren Buffett: — 11 and three-eighths. He whittled me for the eighth time. And if that letter had resulted in 11 and a half, I would have put my shares up for tender. But it drove me crazy. So I went out and started buying stock, bought control of the company, and fired Mr. Stanton. (Laughter)

And we continued from there.

Now, this sounds like a great little morality tale – a story at this point. But the truth was, I had invested a huge amount of money into a terrible business. And Berkshire Hathaway has been the foundation of almost everything I’ve done since.

In 1967, a good insurance company came along and I bought it for Berkshire Hathaway. I really should have bought this for a new asset.

Because Berkshire Hathaway was carrying this anchor, all these textile assets. So the only thing that wasn’t good in the beginning was the textile assets. Then we slowly built more on top of that. But we always carried this anchor.

And I struggled with the textile business for 20 years before giving up. Since we just started with the insurance company instead of investing that money in the textile business initially, Berkshire’s value would be twice what it is now. For this reason –

BECKY Quickly: Twice as much?

Warren Buffett: Yes. This is 200 billion dollars. You can – you can figure it out – it can come out. Because the genius here thought he could run a textile business. (Laughter)

BECKY Quickly: Why 200 billion dollars?

Warren Buffett: Because if you took the same money that I invested in the textile business and just put it in the insurance business and starting from there, we would have such a company – because all that money was a problem. I mean, we had to have a net worth of $20 million. And Berkshire Hathaway won nothing every year.

And – there you have it, the story of $200 billion –

By the way, if you come back in ten years, I may face an even worse situation. (Laughter)

BECKY Quickly: If there was a moral to this story, wouldn’t you cut off your nose to get angry at your face?

Warren Buffett: I would say this: Whether you cut off your nose to spite your face or something else, if you get involved in something terrible, get out of it. I mean, it was – it was a terrible mistake, because I just kind of drifted into it.

And – and I’ve always said, if you want to be known as a good manager, buy a good business. (Laughter)

This is the way to do it. And everyone will think you’re smart.

And when I work at a good job, as people think, ‘Boy, this guy is so smart.’ And when I’m in a stupid business like textiles and I don’t know what I’m doing, you know, then shoes or whatever, you know, everything else – if you think you’re a management genius, try yourself in a bad job.

BECKY Quickly: Is that the lesson you learned from this?

Warren Buffett: Certainly.

BECKY Quickly: But — and is this something you actually put into practice?

Warren Buffett: In fact, after I did this, decades ago, I put a line in my annual report. I said: ‘When a manager known for his intelligence meets a business known for its poor economy, the reputation of the business remains intact.’

BECKY Quickly: (Laughter) So is this a lesson you carry with you? And yet it’s something you’re reminded of every day. It was Berkshire Hathaway.

Warren Buffett: Yes. And every now and then I get tempted. Because I started with Ben Graham in the 1950s. And his whole idea was to buy cheap things.

You don’t want to buy things that are cheap. You want to buy good things. It is much better to buy something good at a good price than to buy something cheap at a good price.

And that’s not how I started. I – I was taught a different system.

But – but if I haven’t learned from Berkshire Hathaway, I’ll never learn. (Laughter)

BECKY Quickly: How long did it take you to understand this lesson? You said it was…

Warren Buffett: It took me 20 years to give up the textile business. After Seabury Stanton, it was run by a great guy named Ken Chase. And it was great. Honest and talented, hardworking. And he couldn’t do it.

But we kept working on it, we tried; We acquired another textile company called Waumbec Mills in Manchester, New Hampshire. Another mistake.

If you can be successful in a terrible job, why not be successful in a good job?

BECKY Quickly: But in reality, how – it took 20 years for you to finally give it up. When did you think it wasn’t working? Was it really 20 years? Or did you know?

Warren Buffett: Actually it was, no. I realized this very quickly. But I kept thinking I wasn’t going to give this up. And coincidentally, we had a terrific workforce. I mean, nothing had done it for us except the competitive dynamics. And I – we’d buy new equipment or we’d move – we’d add this factory in Manchester and say, ‘Look at these synergies’ and all that. Nothing works.

I… I actually had a desk in my drawer. And they would keep sending me these things saying if we bought this machine we would save 14 lives. If we buy this machine, we will save the lives of 12 people. I proceeded to put it in my drawer. With all these machines, we would save more people than we had in the beginning; We were supposedly working with zero people. But it doesn’t work that way.

BECKY Quickly: Is there a job you haven’t gotten into because you thought, wait a minute, I’ve been down this road before? Where were you seduced and kind of pulled back?

Warren Buffett: I look for them every day. You know, I get calls not every day. I mean, this is an exaggeration. However, I often get calls about very challenging jobs. And – and people say, why don’t you just get over it? Now I have all these resources and good managers.

However, the interesting thing about the business world is that it is not like the Olympics. In the Olympics, you know, there’s a degree of difficulty factor if you dive a little bit off a high board and do four or five turns down (LAUGHTER) and you get into the water a little bit badly. So you’ll get more points than a guy who dives perfectly headfirst.

Difficulty level is important in the Olympics. This does not count in business. You no longer get extra points for something being too difficult to do. So, instead of trying to jump over seven-meter bars, you can jump over one-meter bars.

BECKY Quickly: You know, people will say: Well, wait a second. You work in some jobs that some people ignore: newspaper work. How is this different?

Warren Buffett: You are right. (Laughter) But — but we bought this [The Buffalo Evening News] In 1977. And – and we’ve done very well over the years. We weren’t very good at first. But then we did very well.

But me, the newspaper business of 2010 is not the newspaper business of 1977. So it’s completely different. [Berkshire sold the newspaper in 2020.]

It’s true that we manage Berkshire in a way that’s not taught in business schools, and we put that in the annual report. Because in business schools they say sell your businesses and continue buying new businesses. I call it gin rummy management.

And if I had 50 children and one of them wasn’t as well off as the others, I wouldn’t give him up for adoption. We keep businesses that are not as good as others unless they are going to permanently lose us money or cause major business shortages.

So if I’m going to follow this philosophy, I better be very careful about what I buy, right?

BECKY Quickly: Definitely. What about your business partner, Charlie Munger? What would he say was the biggest mistake?

Warren Buffett: He would probably do this again. And I can say that I learned a lot about what I just talked about; I learned a lot from Charlie.

Charlie told me this from the first time I met him in 1959. He said – he said it exactly – I could – I could have saved myself a lot of trouble if I had listened to him. So what did Charlie know? (Laughter)

BECKY Quickly: OK. Warren, thank you very much. We really appreciate your time.

Warren Buffett: Thanks. Thank you for accepting me.