Warren Buffett, one of the most successful investors the world has ever seen, and the CEO and Chairman of Berkshire Hathaway, once said that Berkshire Hathaway was the dumbest stock he ever bought.
After buying his first shares of Berkshire in 1962, he took control of the firm in 1965, when it was a struggling textile company.
At this year’s annual meeting in May, Buffett announced that he wanted to step down as CEO of the more than $1 trillion company at the end of the year. Greg Abel has been designated as his successor.
Berkshire was the “dumbest stock” I bought, says Buffett
In 2010, Buffett sat for a conversation with CNBC’s Becky Quick, in which he revealed that “the dumbest stock I ever bought was Berkshire Hathaway.”
But why? Because Buffett ended up investing a large amount of money in a business that was collapsing.
Buffett explained that the Berkshire stock was cheap in early 1962. This textile company had been under stress for years. It was closing one mill after another and would use the proceeds from selling mills to buy back their stock. Buffett thought of buying the stock at a lower price, selling it back to the company through a tender offer and making a small profit.
Buffett further explained that in 1964, he had quite a bit of Berkshire stock, and that was when the company’s management said that they had sold some mills and were going to have a tender offer. They promised they would offer Buffett a price of 11.50 per share, but actually offered him a lower price than promised. This made Buffett angry, and he decided to buy more shares and take control of the company.
That emotional decision made him the owner of a declining textile business with no visible future growth.
As Berkshire was a textile firm, the textile operations acted like an anchor. Buffett said for nearly 20 years, he kept trying to fix the textile business, which dragged down Berkshire’s overall performance.
Buffett said that if he had used the same money to build an insurance company, Berkshire would have been worth far more.
In hindsight, Buffett’s mistake was not buying Berkshire itself, but staying invested in a poor business for too long.
Buffett’s investing style
Buffett is known for his long-term value investing focused on high-quality businesses. In simple words, his investment philosophy is centred around buying cheap stocks to buying great companies at fair prices.
While value investing is at the core of Buffett’s investing philosophy, he has often emphasised buying great businesses and not just cheap stocks.
Buffett says investors should buy stocks with strong fundamentals and management quality and invest only in businesses they completely understand.
Disclaimer: This story is for educational purposes only and is based on a CNBC video. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
