How Diversification Saved Berkshire Hathaway
Most of us have heard the stories of investing and finance legend, Warren Buffett. You know, the fact that he’s lived in the same simple 5 bedroom, 2.5 bathroom Omaha house that he bought in 1958, or that he used a flip phone until 2020…but many people may not have heard the story about how he became the majority owner of Berkshire Hathaway. And it’s definitely not the story that I expected!
Warren Buffett is known for his investment record, with the best history of beating the stock market… with that information I think most of us would argue that he has a lot of business acumen. However, his decision to take majority ownership in Berkshire Hathaway was a decision made out of anger...not skill.
But let’s talk about the company for a moment! You probably know one...if not all of the companies Berkshire Hathaway has ownership in - GEICO, Duracell, Dairy Queen, Fruit of the Loom, Helzberg Diamonds...just to name a few (list of Berkshire Hathaway companies). But the company’s beginnings in 1839 looked a lot different than it does today.
Started as a textile company in Rhode Island, the flourishing organization merged in 1929 with a cotton manufacturing company, and then again in 1955 with a manufacturing company that made its money in whaling and the China Trade. After surviving World War 1 and the Great Depression, these investment decisions paid off, and business boomed. However, by the end of the ’50s, Berkshire Hathaway was forced to close 7 of its 15 plants and laid off a large number of workers.
In 1962, Warren Buffet noticed a pattern in stock prices whenever a mill was closed and began buying Berkshire Hathaway stock. Eventually, he came to the conclusion that the textile industry was in a decline and that the company’s financial situation was not going to improve. So in 1964 when the then CEO of Berkshire Hathaway offered to buy back Buffet’s stake in the company for $11 ½ per share, Buffet agreed. However, when he received the offer in writing, it was only for $11 ⅜ — Buffet was furious over the attempt to undercut him, and instead of selling his shares, decided to buy more stock and take control of the company.
Well...that might not be the best way to decide to take over a company...especially one that he’s already decided was in a nose dive.
Now, Buffet was a majority owner in a failing textile business. So, what’s next? Although he made this deal in anger, he couldn’t just let the business fail. He put his business acumen and brain to work on how he could save the company… and he settled on diversification!
In 1967, he ventured into the insurance industry. In 1985, the company made the decision to close its last textile operation, but Berkshire Hathaway continued to expand into other industries, and continued to grow in the insurance industry. Today the expansion trend continues, and Berkshire Hathaway is regarded as one of the US’s most respected companies...all thanks to $0.125/share.
What unique ways can you find to continue to grow?