In Simply 10 Phrases, Warren Buffett Described His Single Greatest Mistake. This is What He Realized
Let’s talk about Warren Buffett, Berkshire Hathaway, and a huge bug.
It is a sequel that appears repeatedly in Buffett’s annual letters to shareholders and that I discuss in my free e-book. Warren Buffett predicts the futurewhich you can download here.
It’s also a big part of the genesis of Berkshire, which has its roots in a 19th-century textile mill that made Buffett famous in the 1960s – largely due to a perceived trifle of the then CEO, whom Buffett wanted to fire in retaliation.
Everything went well in the long run. The income from the textile business allowed Berkshire to buy into the insurance industry, which proved much more attractive. It’s now a half trillion dollar company with the highest price per share of any public stock.
Even so, Buffett was in charge of the old textile business for two decades – one in which he had neither expertise nor particular interest.
Even as investors and analysts pushed Berkshire to cut its losses, he stuck to it, citing several main reasons over the years:
- First, corporate citizenship: Berkshire’s textile mills were “some of the biggest employers in any city” in the 1970s and early 1980s. Meanwhile, their workforce was of “old average age” and had “relatively non-transferable skills”.
- Workers and unions “showed an unusual understanding” of the facts of business and worked with the company to keep costs down.
- “The management also tackled our textile problems energetically and in a straightforward manner.” (Buffett kept praising Ken Chace, who ran the textile business.
- “With hard work and a little imagination,” wrote Buffett, hoping for years, “it seems reasonable that at least modest profits can be made in the textile sector in the future.”
Unfortunately, as Buffett wrote 35 years ago when describing Berkshire’s final decision to close its textile business, “It turns out I was very wrong about (4).”
There weren’t any interested buyers, Buffett wrote, even with a large discount, adding, “The economics that I ultimately saw were clear to others, and interest was nil.”
When Berkshire tried to sell equipment for which it had paid $ 13 million over the past few years, the total proceeds came to $ 163,122. And textile looms, which Berkshire had paid $ 5,000 each for a few years earlier, were being sold for $ 26 each for scrap.
Now there is a legitimate debate about whether Berkshire could or should have tried to keep the business going a bit longer for the sake of the workers in Buffett’s first rationale above.
I grew up in New England in the 1980s, so I remember a bit about what that era was like for mill and factory workers, if not the specifics of Berkshire’s business.
Buffett elaborated on this question a little in his 1986 letter, finally saying that he would not close a company with not even modest profits because of its workers, but he also found it “inappropriate”, an indefinite subsidy to an unprofitable company maintain.
“Adam Smith would disagree with my first proposal and Karl Marx would disagree with my second. The middle ground is the only position that makes me comfortable,” he wrote.
However, when we look back on that decision after 35 years of looking back, I believe that three important lessons emerge – lessons that Buffett clearly took to heart.
The first is that corporate responsibility is important. Big or small, companies are stakeholders in the community and vice versa. This dynamic is not enough to sustain a business on its own, but it is important.
The second is that market forces play a role, perhaps more than anything. Buffett repeatedly emphasizes that a fantastic leader in bad business has far less chance of success than the average leader in a fantastic company:
“”It’s not like the Olympics. You don’t get extra points for the fact that something is very difficult to do. So you might as well step over 1-foot poles instead of trying to jump over 7-foot poles. “
After all, the final lesson is easy to take the long run whenever you can.
Berkshire itself has a 190-year history and Buffett has been in control of it for more than 50 years. And as endless as the two decades it was anchored in the textile business were probably back then, it is now 35 years in the past – old history, but still relevant in the history of a historically successful company.
(Don’t forget the free eBook: Warren Buffett predicts the future.)
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