Why Berkshire Hathaway Started as Warren Buffett's Worst Investment

Superinvestor Warren Buffett himself has called it his worst investment: believe it or not, his very own Berkshire Hathaway (BRK.A 0.72%) (BRK.B 0.51%). The company that started out as a textile producer has gone on to become his powerhouse investing conglomerate. In this episode of "The Rank" on Motley Fool Live, recorded on Feb. 28, Fool.com contributors Jason Hall and Travis Hoium discuss the circumstances of how Buffett got involved with it in the first place.

Jason Hall: He started in the early '60s under his partnership.

Travis Hoium: He was a hedge fund manager. That's where he really made his money.

Hall: Right, that's how we get started. Saw an opportunity to buy opportunistically basically to trade, Travis, to trade Berkshire Hathaway shares. Berkshire Hathaway was this New England textile company. It was the merger of a yarn manufacturer and a textile producer in Fall River and in New Bedford, Massachusetts, to get together, merge, and then the business just ran into all the things were going on in the textile industry at the time. And what he was looking to do was, he would buy when the stock went through one of its lull periods and then the company would report earnings and would actually generate some cash flow, and management would repurchase shares. Buffett was playing that cycle to make a decent little profit, and then one day, the deal that he thought he had with the CEO to buy back a certain number of shares at a certain price didn't happen. He got pissed, bought control of the company, and then managed Berkshire Hathaway over the next decade through money losses and exits of its core business before it started becoming the Berkshire Hathaway that we know and love today. The thing is Buffett's talked about, you take the millions of dollars that are lost over that period of time in 1965 through 1972 or three and it's tens or even hundreds of billions of dollars in lost opportunity today, because it was real money that could not be invested in the way that Buffett has learned to invest. Travis.

Hoium: Yes. It's an interesting history that he would buy what he called cigarette butt companies. That if you basically just took their balance sheet, what I think is important to remember is in the '50s and '60s when he got started, the information that we have today.

Hall: There was no online, right? You couldn't just go get the SEC file.

Hoium: Information was not nearly as available, so you would print out SEC filings and you could then literally just do the math of what is the intrinsic value of the business, literally the assets on the balance sheet, the book value of the business, and then look at what it's trading for in the stock market and try to buy discounts and then sell them when they go up in trade at or above their book value. He was effectively a day trader, it was probably more like week or month trader back then. But he was trading very actively in those days and doing these cigarette butt trades where he would try to find something that had, he says in one of his letters, that had one puff left [laughs], and then he would dump them and move on to the next one. Berkshire Hathaway happened to be the one that he just couldn't let it go at the loss because there was enough cash coming in that he figured out that, well, if I just take control of this company, I can actually earn money doing that rather than taking a loss on the investment. It's interesting to go through, I wrote in our Slack, he would've actually loved the GameStop trade [laughs] of 2020 because it was an intrinsic value trade originally.

Hall: Yeah, exactly. You go back to 2019, 2020, it was very much an intrinsic value opportunity. There was a deep value play there.

Hoium: It got out of control. But way back in those days, he would have jumped all over that, retail business generating cash, good balance sheet. Yeah, it's an interesting history to think about.