Berkshire Hathaway's First Investment: When And What?

Berkshire Hathaway's first investment was in 1967, two years after Warren Buffett gained control of the company. The investment was in the National Indemnity Company, an insurance business based in Omaha, Nebraska. Buffett paid $8.6 million for the company, which was the first of many insurance company acquisitions.

Berkshire Hathaway's origins as a textile manufacturer

Berkshire Hathaway's origins lie in the textile industry, specifically in the merger of two textile firms: Hathaway Manufacturing Company and Berkshire Fine Spinning Associates. The new company, Berkshire Hathaway, was formed in 1955 and had 15 plants, 12,000 workers, and over $120 million in revenue. However, by the end of the 1950s, seven of those locations had closed, accompanied by large layoffs.

In 1962, Warren Buffett, a young investor, began buying Berkshire Hathaway stock through his investment firm, Buffett Partnership Limited (BPL). Attracted by the cheap share price, which was trading at $7.50 per share, Buffett saw an opportunity to make a profit. By 1965, Buffett had accumulated enough shares to take control of the company, paying an average of $14.86 per share. This acquisition marked the beginning of Berkshire Hathaway's transition from a textile manufacturer to a diversified holding company.

Despite initially maintaining the legacy textile business, Buffett soon began pivoting the company towards the insurance industry. In 1967, Berkshire acquired National Indemnity Company, marking its first acquisition under Buffett's control and its entrance into the insurance business. This shift away from textiles and towards insurance proved to be a pivotal move in Buffett's strategy to transform Berkshire Hathaway into a conglomerate.

Buffett's success with Berkshire Hathaway can be attributed to his investment strategy, which involves buying undervalued businesses and turning them around. By acquiring struggling companies and investing in their potential, Buffett built Berkshire Hathaway into the massive holdings company it is today.

Warren Buffett's acquisition of the company

Warren Buffett's acquisition of Berkshire Hathaway began in 1962 when his investment firm, Buffett Partnership Ltd., started buying shares in the company at $7.50 per share. By 1965, Buffett had bought enough shares to gain control of Berkshire Hathaway, and he became chairman and CEO. Buffett distanced Berkshire from its legacy business of textiles, moving the company into the insurance sector.

Buffett's strategy was to buy up troubled businesses and turn them around. Berkshire Hathaway's first acquisition under Buffett's control was National Indemnity Company in 1967. Buffett described purchasing the Berkshire Hathaway textile company as the biggest investment mistake he had ever made, denying him compounded investment returns of about $200 billion over 45 years. However, his strategy of buying undervalued businesses and turning them around proved successful, and Berkshire Hathaway became a powerhouse with familiar brand names like GEICO, Duracell, and Fruit of the Loom under its belt.

Buffett's investment philosophy is rooted in the concept of value investing, which he moulded his approach around while studying at Columbia Business School. This strategy involves identifying companies whose share prices are undervalued compared with their intrinsic value. He also sought to reinvest dividends instead of paying them out to Berkshire Hathaway investors.

Buffett's success with Berkshire Hathaway has made him one of the best-known investors in the world, and he is often referred to as the "Oracle" or "Sage" of Omaha. As of October 2024, he had a net worth of $147 billion, making him the eighth-richest person globally.

Buffett's transition of the company into a holding company

Warren Buffett's transition of Berkshire Hathaway into a holding company began in 1965 when he took control of the company. Originally a textile manufacturer, Buffett moved the business into the insurance sector.

Buffett distanced Berkshire Hathaway from the textile industry by liquidating those assets completely. In 1966, he closed the partnership to new money and claimed that the textile business had been his worst trade. In 1985, the last of the textile mills that had been the core business of Berkshire Hathaway was sold.

Buffett's first acquisition under his control was National Indemnity Company, which he bought in 1967 for $8.6 million. This was the company's entrance into the insurance business.

Buffett's strategy was to buy troubled companies, buy up their stock, and turn them around. He often looked for undervalued businesses and used the technique of buying and turning them around to build Berkshire Hathaway's fortune.

Buffett's transition of Berkshire Hathaway into a holding company was complete by the end of the 1960s. The company expanded its holdings to include companies in the financial, clothing, entertainment, food and beverage, utilities, furniture, household products, media, and materials and construction industries.

Buffett's investment strategy and philosophy

Warren Buffett's investment strategy and philosophy have been widely followed around the globe. He is a value investor, subscribing to the Benjamin Graham school of value investing, which looks for securities with prices that are unjustifiably low based on their intrinsic worth.

Buffett's focus is on the company as a whole, rather than the intricacies of the stock market. He looks at company performance, debt, and profit margins. He also considers whether companies are public, how reliant they are on commodities, and how cheap they are.

Buffett's investment tips include:

• Wait...Then Pounce: Buffett advises investors to wait for a reasonable valuation before buying and to resist panic-selling when stocks falter.
• Pick Businesses, Not Stocks: Focus on businesses you understand and have knowledge of, which will help assess where a company is going, not just where it has been.
• Plan to own a stock for at least 10 years: Buffett advises investors to plan for the long term, giving businesses time to evolve.
• Company Performance: Buffett looks at return on equity (ROE) and compares it to other companies in the same industry. He also considers the debt-to-equity (D/E) ratio, preferring less debt and earnings growth generated from shareholders' equity.
• Is the Company Public?: Buffett typically considers companies that have been around for at least 10 years.
• Commodity Reliance: Buffett tends to avoid companies whose products are indistinguishable from competitors or those that rely solely on commodities. He looks for companies with a "protective moat," or a competitive advantage that is hard to replicate.
• Focus on Return on Equity, Not Earnings per Share: Earnings per share is an inaccurate metric, as it can be distorted by retained earnings from previous years.
• Calculate "Owner Earnings": Buffett developed a method for evaluating a company's shares, taking into account depreciation, amortization, and other non-cash charges.
• Look for Companies with High Profit Margins: A high profit margin is a company's margin of safety, allowing it to absorb cost increases without immediately passing them on to customers.
• Retain Profit for Market Value: A company should only retain profit if every dollar of profit retained directly translates to at least a dollar increase in market value.
• What is the Value of the Business?: Buffett calculates the value of a business by treating future dividends and growth in value as coupons, providing another metric to compare to the share price.
• Can the Business Be Purchased at a Significant Discount?: Buffett believes that "value investing is buying a dollar for 40 cents," and he is willing to wait and research for such opportunities.

Buffett's investment philosophy also includes the concept of "float," which refers to the money taken in as insurance premiums that have yet to be used to cover claims. This money is available for investment and allows Berkshire Hathaway to purchase temporarily wounded companies and turn them around.

Buffett's investment strategy has been successful, with Berkshire Hathaway becoming one of the most coveted stocks in the world, and Buffett himself becoming one of the world's richest people.

Berkshire Hathaway's current portfolio and performance

Berkshire Hathaway's portfolio is diverse, spanning energy, utilities, transportation, manufacturing, retail, and insurance. Its most significant holdings include Apple, Bank of America, American Express, Chevron, Kraft Heinz, and Coca-Cola.

In the third quarter of 2024, Berkshire Hathaway's cash reserves reached a record $325.2 billion, with over 88% of this sum invested in U.S. Treasurys. The company has since deployed some of this cash, investing in stocks such as Ulta Beauty, Domino's Pizza, Heico Corp., and Pool Corp.

Berkshire Hathaway has also scaled back its positions in several companies, including Apple, Bank of America, Capital One Financial, Charter Communications, Chevron, and Snowflake. Notably, the company sold its entire stake in Paramount Global, resulting in a substantial loss.

As of the second quarter of 2024, Berkshire Hathaway's stock portfolio was worth about $310 billion, comprising 47 positions. Its top six holdings, including Apple, Chevron, and Occidental Petroleum, made up 71% of the portfolio.

Berkshire Hathaway's long-term performance has been impressive. From 1965 to 2023, its shareholder returns amounted to a compound annual growth rate (CAGR) of 19.8%, compared to 10.2% for the S&P 500. This performance has made it one of the most coveted stocks globally, with its Class A shares reaching a price of over $700,000 in August 2024.

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