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Dec 4, 2008 | Comments

I’m reading Warren Buffet’s “The Essays of Warren Buffet” (if you do not know who Warren Buffet is, he’s arguably the most successful investor of our time and was the richest man in the world in Q1/Q2 of 2008).

This is a fascinating book, and it includes an interesting story about Buffet’s first major investment: a textile company called Berkshire Hathaway. Berkshire, in its original form, isn’t around anymore–that’s because Buffet decided to liquidate the company in 1985. This is Buffet’s biggest failure and the only time that he has given up on an acquisition. What happened? (clue: it sounds a lot like GM/Ford/Chrysler’s problems).

1965

Buffet bought a controlling interest in Berkshire Hathaway, a textile company. He thought this was a great investment idea. Berkshire had reasonably high sales, but always failed to turn a profit. Buffet felt that he could fix the business by installing competent managers.

1965-1978: was Buffet’s investment a success?

The textile industry and Berkshire Hathaway continued to perform horribly. The business could not turn a profit, even when the industry was in an upswing. They invested in product lines, machinery, and distribution. Buffet even made another acquisition to achieve “synergies.” Nothing worked.

Why did it fail? US Textile Industry=Sucks

The textile industry is a commodity business. Everyone in the world is competing against each other, and foreign countries could pay workers a fraction of the US minimum wage. Further, every cost-saving investment was matched by Berkshire’s competitors, both domestic and foreign. “Viewed individually, each investment appeared cost-effective and rational; viewed collectively, the decisions neutralized each other and were irrational.”

1985

By 1980, over 250 textile companies closed in the US. Buffet had ignored all of the indicators that business was failing. He did not want to close the company. He felt an obligation to the employees and community. Closing the factories would result in layoffs and local devastation.

Finally, in 1985, he came to his senses, realizing that there was nothing he could do to save the company. The textile industry forces were against him. This is, “what can happen when much brain power and energy are applied to a faulty premise.”

Buffet’s 20 year “Lesson Learned?” (i.e., advice for Detroit)

“A Good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row. Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

Amen.

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