Warren Buffett and The 800 Billion Dollar Misunderstanding
“So I went out and started buying the stock, and got control of Berkshire Hathaway, and fired the CEO.”
The letter began, “Dear Warren.” It didn’t take long for the joyful face to become suddenly distorted. He was a man who could break out into “Hi ho, hi ho, it’s off to work I go,” on any given morning, but as Warren Buffett delved deeper into the document, a wave of profound disillusionment set in and the robust jaw began to quiver. It was a telltale mark of irritation. Now, the clutching of an elbow. Then, both elbows.
A profound look of resignation, worse than that of a child dropping an ice cream cone, settled across the handsome features. He put the letter down. He perched his glasses atop a fine brow. Then, he shot a piercing gaze at the signature on the letter, a textile mill CEO who had no idea he was soon to be banished from his kingdom known as Berkshire Hathaway. To outmaneuver Buffett was folly. To try to hoodwink him was absolute madness.
Long before he was destined to become the world’s most admired investor philanthropist, Buffett put his faith into people without qualms until a con artist, a boardroom grifter, a guy from the right side of the street who was born in the first class seats, lied to him for twelve cents a share. That would not play in Omaha, not by a long shot, not ever, and especially not in business.
In a chat with CNBC, Buffett later confessed, “The dumbest thing I ever did was — drum roll here — Berkshire Hathaway. It was early in — 1962, and I was running a small partnership, about seven million. They’d call it a hedge fund now. And here was this cheap stock — in a textile company going downhill for years. So it was a huge company originally, and they kept closing one mill after another. And every time they would close a mill, they would — take the proceeds and they would buy in their stock.
So I started buying the stock. And in 1964, I went back and visited the CEO, Seabury Stanton. And he looked at me and he said, ‘Mr. Buffett. We’ve just sold some mills. We got some excess money. We’re going to have a tender offer. And at what price will you tender your stock?’
And I said, ‘11.50.’ And he said, ‘Do you promise me that you’ll tender at 11.50?’ And I said, ‘Mr. Stanton, you have my word that if you do it here in the near future, I will sell my stock to — at 11.50.’
I went back to Omaha. And a few weeks later, I opened the mail — and here it is, a tender offer from Berkshire Hathaway from 1964. And if you look carefully, you’ll see the price is 11 and three-eighths. He chiseled me for an eighth. And if that letter had come through with 11 and a half, I would have tendered my stock. But this made me mad. So I went out and started buying the stock, got control of the company, and fired Mr. Stanton.
And we went on from there.
There is a trophy room filled with hucksters who tried to slip one past Warren Buffett at the betting parlor called the stock market. It has always been a fool’s sport for the overly confident and boastful. But Buffett isn’t just any kind of financier. He is Omaha-bred and bound. That means when he wants to, he can be cornhusker tough. If you are an honest broker, he goes to any length to make things work, but if you do him dirty as Stanton did, it will be to your everlasting regret.
No two men were more unalike than Buffett and Mr. Seabury Stanton. Buffett was a University of Nebraska grad, a Harvard reject, and Stanton was a Harvard legacy. Buffett was 100% pure Omaha beef, and Stanton’s ancestors were Yankee whaling captains. It was how he started his career at the top, as treasurer of the Hathaway Company, which merged with Berkshire Fine Spinning in 1955, becoming the largest textile mill in New England.
In 1962, Buffett began buying company shares after noticing that the stock price shot up whenever the company closed a mill. By 1964, Buffett acknowledged that the textile business was waning and the company was not going to improve, and he decided he’d had enough fun and would like to sell his shares.
Stanton made a verbal tender offer of $11 & 1⁄2 per share for the company. Buffett agreed. A few weeks later, Buffett received the tender offer in writing, but it was for only $11 & 3⁄8. Buffett later admitted that this made him rather angry. Then came the pivot of a lifetime of pivots.
Buffett had a choice, or most investors would have considered it an option. But rather than take a loss and dump the stock at a lower price than agreed, the young fund manager began to buy up a controlling interest. Buffett gained control when Stanton’s sibling rallied a group of investors and sold out to Buffett at a meeting at New Bedford’s prestigious Wamsutta Club. Call it regicide by fratricide.
His next move was to take over the board and fire the CEO. As he would later admit, it was a startling act of psychological revenge — and financial foolishness. Except that it worked out beyond his wildest dreams.
By 1969, an insurance franchise had been added, and his former private fund miraculously turned into a public holding company with thousands of shareholders. The track record is among the best if not the best, investment history.
An initial investment of $100 would be valued today at a staggering $4 million, and the total market value as of this writing is over $800 billion, a three-iron away from one trillion dollars.
But as Buffett also learned, according to German Field Marshal Von Moltke, “no battle plan ever survives the first encounter with the enemy.” Berkshire was never going to be an easy fix. There would be problems, some monumental and some dangerous to his well-being.
But one thing was for sure. Owning Berkshire Hathaway made Buffett very happy, and now that he was happy again, everyone was about to make a whole lot of money.
