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We Study Billionaires - The Investor’s Podcast Network
TIP573: Berkshire's Beginnings w/ Jacob McDonough
Sep 1, 2023
01:16:23
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Jacob McDonough, author of the book Capital Allocation and host of the 10-K podcast, joins Clay Finck to discuss Berkshire's beginnings, Warren Buffett's turnaround, and its rise to a $800B valuation by 2023. They explore Buffett's worst investment decision, the steps taken to cut costs and improve Berkshire's business in the 1960s, the pivotal moment in 1967, the advantages gained from entering the insurance industry, and the story of one of Berkshire's best investments, Sees Candy.
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Quick takeaways
- Warren Buffett's purchase of Berkshire Hathaway as a struggling textile mill in 1962 was one of his worst investment decisions.
- Buffett's focus on undervalued stocks and capital allocation decisions led to solid profits in the early years of Berkshire.
Deep dives
Berkshire's beginnings: A cheap stock purchase and Buffett's worst decision
In this podcast episode, the hosts discuss Warren Buffett's purchase of Berkshire Hathaway in 1962, a struggling textile mill. Despite buying it as a cheap stock and hoping for a profit turnaround, Buffett later admitted it was one of his worst decisions. Berkshire's valuation was low, selling for a third of book value and below net current assets. Buffett's strategy of investing in undervalued stocks led to solid profits in his early years. He took full control of the business in 1965 and transformed it by making capital allocation decisions, such as temporarily investing cash profits into a stock portfolio. He later acquired National Indemnity, an insurance company, which allowed for more profitable underwriting and interest income opportunities. The acquisition of National Indemnity marked a pivotal moment for Buffett, leveraging the advantages of the insurance industry and float. During this expansion phase, Berkshire entered the reinsurance and home state insurance segments, as well as acquired an urban auto business. Buffett also adopted an unconventional use of debt, valuing liquidity and flexibility in the long term. This period of expansion paved the way for Berkshire's growth and success in subsequent decades.
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Discover
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