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How Did Warren Buffett Acquire Berkshire Hathaway?

29-Sep-2012 | Wentzville, Missouri | General Article (Non-News)

If you are anxious to learn how to invest like the multimillionaire Warren Buffett, it is important to first flick through some investments made by the man, in his beginning years of investment. After a thorough review, your information on the subject will then be sound enough to buy stocks like Warren Buffett.

One of the earliest and most talked about investment made by him was in the company named Berkshire Hathaway that is situated in Omaha, Nebraska in the U.S.A. The company is involved in the business of cotton mill and cotton spinning. In May 2012, the class A shares of Berkshire became the highest priced shares in the New York Stock Exchange.

This company is a gigantic merger of two companies namely Hathaway Manufacturing Company and Berkshire Fine Spinning Associates Inc. that took place in the 1950s. The reason for this merger was a depression in the textile business after the World War I. The investor Seabury Stanton of Hathaway contributed some more money to help it out of the hard time. As a result, soon the company came into its boom period, where he decided to shake hands with Berkshire Fine Spinning Associates Inc.

Warren Buffett made his appearance in the early 1960s, by buying the stocks of the much bigger Berkshire Hathaway. Although, when Warren looks back to what he has earned in the last almost half the century of his investment, he calls it a poor investment decision as he could have earned multiple folds of returns if he would have invested the same in an insurance company.

However, he learned a lot about investing after he acquired Berkshire Hathaway. He started by buying stocks of the company in 1962. Here, the reason of investment was Warren Buffett's intrinsic value concept. He believed that the sale price of the stock was lower than its intrinsic value. Moreover, he had followed a trend in the share prices of the business after every shutdown of the mill of the company.

Within a year, he and his associate investors became the largest shareholder of the company. As a result, Warren showed more interest in the company and continued to buy its stocks. However, it soon came to notice that the textile business was losing its charm in the market. Therefore, Jack Stanton, who took the leadership from his father, offered to verbally buy the stocks held by Warren Buffett at a low price of $11 ½. Warren agreed to the offer, but when the written agreement was sent, it quoted the share price at $11 3/8. This made Warren angry, after that, he decided to purchase more of the company's shares to become a holding owner. Therefore, he bought 49% of the shares, fired Stanton with the power of his vote, became the Chairman, and introduced Ken Chace as its President.

The scenario had worsened as he was holding a company that was near to close down. However, Warren handed the spinning business operations to Chace and focused upon improving the financial structure of the company.

The reason behind such a decision was that Warren had estimated that the intrinsic value of shares had fallen below the share price, and the profitability was reduced to the minimum point. He could have saved the mills from closing down by opting for the debts, but he opposed taking debt for running a business. Conclusively, just two mills were left running with 2300 employees working for the company. Both the experts managed to stabilize the company at this point, and the share price elevated by $ 3 since Warren had bought its shares.

Berkshire survived many ups and downs during its running. But Warren Buffett's intrinsic value principle aided to recover from its worst time and begin to generate good revenues later on. Warren initiated to step ahead in diversifying this business, and he opted for the insurance business. Berkshire bought equity stakes of the Government Employees Insurance Company, in the 1970s. This investment became the source of financing for Berkshire in the form of great returns over the amount capitalized.

This made Berkshire the investment vehicle for Warren, as he started making investments in other businesses. The textile business aspect was soon understood to be endangered by the foreign market competition and huge costs it will have to bear to improve the structure. Hence, in 1985, the last textile mill operations also were shut down.

The unprofitable business was put to an end, because Warren had foreseen that textile business was in loss and that Berkshire does not stand a chance in the future. This was the reason why he introduced Berkshire Hathaway into the insurance market. The insurance business has a great deal of profits as there are huge premiums charged against a situation that might or might not take place. Hence, the company became an investment legend thereon.

At present, Berkshire Hathaway Inc. is controlling many subsidiary companies. It has shown a growth rate of 20.3% in its last 44 years. Warren Buffett is its Chairman and CEO. In the span of ten years from 2000-2010, the company's stocks gave a return of 76% to its investors. It is quoted to be the eighth largest public company in the globe.

If you would like to learn more about who is Warren Buffett? Be sure to click on this link because it provides a bio of his personal achievements.

Also, if you would like to learn how to invest like Warren Buffett by reading Warren Warren Buffett Book, this link takes you to a comprehensive site that teaches his investing approach through 10 hours of free YouTube videos. All the videos are in a systematic order so it makes the learning easy for a beginning investor.

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Acknowledge By Daryn Weatherman

Daryn Weatherman is the president of St Charles Glass and Glazing Based in Wentzville Missouri.

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