The Master: Warren Buffett 3

The start of Berkshire Hathaway

Buffett spied a faltering Massachusetts textile company known as Berkshire Hathaway. He saw potential value in a very depressed stock and began buying shares cheaply for his partnership. These shares traded at less than half of working capital (remember Ben Graham's net current asset value model). If the stock price would just grow to reflect the balance sheet value, a 100 percent gain was in store, at the very least. Buffett continued to accumulate shares until the partnership owned 49 percent of the company by 1965. He effectively controlled the company.

Originally, Buffett planned to righ some of the wrongs and capture quick gains by selling or merging the company. But he saw a tempting opportunity to use Berkshire as an investment conduit to build worth by buying other businesses. The opportunity owes its origin to favourable tax treatments for companies owning other companies. The ability to defer taxes is very important in value investing as a way to keep capital deployed and continuously earning returns.

When Buffett distributed the partnership in 1969, he offered a choice of cash or Bershire shares as part of the distribution. For his portion, Buffett took shares. He offered to buy the shares of other partners for himself.

Suppose you had invested with Buffett. Your modest investment in the partnership resulted in getting offered 200 shares of Berkshire Hathaway or $8,400 cash (equivalent to two new cars, or maybe a third of a new house in 1969). What would you have done? We all know the answer NOW: At a current share price of $111,600, your investment would be worth over $22 million! A small group of wealthy folks made the choice to stick with Buffett. Many of them still make the annual pilgrimage to Omaha to enjoy those juicy steaks and count their blessings.


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