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Berkshire Hathaway Is the 'Wrong Vehicle' For Buying Wonderful Companies

- By Rupert Hargreaves

Warren Buffett ( Trades , Portfolio) has said on several occasions the biggest mistake he made in his investment career was buying Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) in the first place.


At the 2000 annual meeting of shareholders, Buffett tried to explain why he decided to take action at the time, and the subsequent repercussions.

Buffett's Berkshire mistake

The Oracle of Omaha explained the reason he was first attracted to Berkshire was that "it was a cigar-butt approach to investing, where we would look around for something with a free puff left in it. You know, it was soggy and kind of disgusting and everything. But it was free."

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He went on to say the stock was selling below working capital and had a history of buying back shares, which made it look attractive from a cigar-butt perspective. The stock was trading around $7 at the time Buffett decided to buy.

He decided to buy because it looked as if the company was going to do another tender offer, around the same price as its working capital, which was around "$11 or $12 a share." Then Buffett met the CEO, Seabury Stanton.

"And he told me and made me an insider, so I couldn't do anything, but he said he was thinking of having a tender," Buffett said. "And he wondered what price we'd tender at."

Buffett told Stanton he'd tender at "11 3/8" and Stanton asked again, "if we have a tender at 11 3/8, will you tender?" Buffett says he agreed he would.

Unfortunately, Stanton didn't make good on this gentleman's agreement:


"And then I was frozen out, obviously, of doing anything with the stock for a little while. But then he came along with the tender offer.

And as I remember, I opened the envelope, and it was 11 1/4. I may be wrong. It may have been 11 1/2, 11 3/8. But it was 1/8 below what he had said to me and what I had agreed to.

So I found that kind of irritating. And I didn't tender. And then I bought a lot of stock."



Interestingly, Buffett then went on to say he remembers the same thing happened with Blue Chip Stamps, though he didn't go into detail.

Berkshire should be private

After glossing over the Blue Chip story, the chairman of Berkshire Hathaway declared, "we would have been much better off if we hadn't bought it."

Instead of building a conglomerate around Berkshire Hathaway, he would have invested in insurance and other highly profitable companies privately through his investment partnerships rather than bringing it into a public company. "So Berkshire was exactly the wrong vehicle to use for buying a bunch of wonderful companies over time. But I sort of stumbled into it. And we kept moving along."

He concluded his answer saying, "It did not work out the best way, economically, in all probability. It was the wrong base to use to build an enterprise around. But maybe, in a way, that's made it more fun."

So there we have it, Buffett regrets buying Berkshire Hathaway and regrets having to develop his conglomerate as a public enterprise.

According to these comments, it seems as if he would have much rather built the business privately rather than via the publicly traded Berkshire. Rather than giving up and trying something else, however, he persevered with the strategy and the rest, as they say, is history.

Disclosure: The author owns shares of Berkshire Hathaway.

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This article first appeared on GuruFocus.