This Warren Buffett Company Is One That You Do Not Want To Invest In

This year, 2015, marks the 50th anniversary of Warren Buffett’s leadership of the Omaha, Nebraska-based conglomerate Berkshire Hathaway.

Through astute long-term investments made in the stock market and clever acquisitions of private companies, Buffett has helped grow Berkshire’s per-share book value (a good proxy for the firm’s true economic worth) by 751,113% in total since 1965. As a result of that incredible track record, the conglomerate’s shares have also logged an even more stunning 1,826,163% gain from 1965 to end-2014.

With such returns, I don’t think it’s a stretch to say that it’d be a dream come true for any investor to have the ability to invest in Berkshire back in the 1960s.

But here’s something that may not be well-known about the company: Buffett has called his investment in Berkshire (he gained control of the company in 1965 after buying up a big chunk of shares), which was then a struggling textile mill, one of his worst mistakes ever.

And as you can see in the table below, which shows Berkshire’s financials in 1955 and 1964, Buffett wasn’t making a funny joke when he said buying Berkshire was an error.


Source: Berkshire Hathaway Inc; currency in U.S. dollars

Over the nine-year period from 1955 to 1964, Berkshire’s book value (another name for shareholder’s equity) had shrunk dramatically from US$51.4 million to US$22.1 million. In other words, the company had lost more than half of its shareholder’s capital when running its textile operations in those nine years.

Berkshire’s textile business is a classic example of a capital-intensive business with poor economics such that whatever capital that gets reinvested into the business can’t generate meaningful returns at all.

Here’s how you might imagine Berkshire’s textile business looks like: In each year, you’d have to upgrade your factory equipment just to stay competitive in the market. But, the newer equipment that you’ve spent precious capital to purchase does not lead to higher revenue or better profit margins – it merely keeps you from going out of business. You are in effect, running to a standstill or worse.

This is the primary reason why Buffett, after assuming leadership of Berkshire, took its profits and cashflows and reinvested them into other more attractive avenues – such as the shares of quality companies that were publicly-listed, or private companies with healthy business-economics – instead of in the legacy textile business.

Berkshire’s business results from 1955 to 1964 are a great example of how companies with bad economics rarely end up being a great investment for investors over the long-term. Do you know of any such companies listed here on the Singapore Exchange? Let me know in the comments section below!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns shares in Berkshire Hathaway.