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CNBC Transcript: Warren Buffett's Worst Trade, October 2010

CNBC Transcript: Warren Buffett's Worst Trade, October 2010

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Published by CNBC
(Source: CNBC) In an interview with CNBC's Becky Quick, Warren Buffett explains why his 1964 decision to buy Berkshire Hathaway was a $200 billion mistake and his worst stock purchase ever.
(Source: CNBC) In an interview with CNBC's Becky Quick, Warren Buffett explains why his 1964 decision to buy Berkshire Hathaway was a $200 billion mistake and his worst stock purchase ever.

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Published by: CNBC on Oct 20, 2010
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Warren Buffett tells CNBC that his 1964decision to buy Berkshire Hathaway,then a fading Massachusetts textilecompany, was a $200 billion blunder.He talked about that mistake, and thelesson he learned from it, in a tapedinterview with CNBC's
for aseries of TV segments this week on
in whichsome of the world's best-known investors discuss the worst trade they've made. An
aired this morning on Squawk.Here is the complete interview, in video and transcript form, including portionsthat did not appear on television.
 All right. Warren, thank you very much for joining us today.
My pleasure.
What we're trying to get to the bottom of is what was the worst tradeyou ever made and what'd you learn from it?
The dumbest thing I ever did? (LAUGHTER)
Yeah, the dumbest thing you ever did.
The— the dumbest stock I ever bought— was— drum roll here— Berkshire Hathaway. And— that may require a bit of explanation. It was earlyin— 1962, and I was running a small partnership, about seven million. They’dcall it a hedge fund now.
 And here was this cheap stock, cheap by working capital standards or so. But itwas a stock in a— in a textile company that had been going downhill for years.So it was a huge company originally, and they kept closing one mill after another. And every time they would close a mill, they would— take the proceedsand they would buy in their stock. And I figured they were gonna close, they onlyhad a few mills left, but that they would close another one. I'd buy the stock. I'dtender it to them and make a small profit.So I started buying the stock. And in 1964, we had quite a bit of stock. And Iwent back and visited the management, Mr. (Seabury) Stanton. And he lookedat me and he said, ‘Mr. Buffett. We've just sold some mills. We got some excessmoney. We're gonna have a tender offer. And at what price will you tender your stock?’ And I said, ‘11.50.’ And he said, ‘Do you promise me that you'll tender at11.50?’ And I said, ‘Mr. Stanton, you have my word that if you do it here in thenear future, that I will sell my stock to— at 11.50.’ I went back to Omaha. And afew weeks later, I opened the mail— 
Oh, you have this?
 And here it is: a tender offer from Berkshire Hathaway— that's from1964. And if you look carefully, you'll see the price is— 
11 and— 
 —11 and three-eighths. He chiseled me for an eighth. And if thatletter had come through with 11 and a half, I would have tendered my stock. Butthis made me mad. So I went out and started buying the stock, and I boughtcontrol of the company, and fired Mr. Stanton. (LAUGHTER) And we went onfrom there.
Now, that sounds like a great little morality table— tale at this point. But the truthis I had now committed a major amount of money to a terrible business. AndBerkshire Hathaway became the base for everything pretty much that I've donesince. So in 1967, when a good insurance company came along, I bought it for Berkshire Hathaway. I really should— should have bought it for a new entity.Because Berkshire Hathaway was carrying this anchor, all these textile assets.So initially, it was all textile assets that weren't any good. And then, gradually,we built more things on to it. But always, we were carrying this anchor. And for 20 years, I fought the textile business before I gave up. As instead of putting thatmoney into the textile business originally, we just started out with the insurancecompany, Berkshire would be worth twice as much as it is now. So— 
Twice as much?
Yeah. This is $200 billion. You can— you can figure that— comesabout. Because the genius here thought he could run a textile business.(LAUGHTER)
Why $200 billion?
Well, because if you look at taking that same money that I put intothe textile business and just putting it into the insurance business, and startingfrom there, we would have had a company that— because all of this money wasa drag. I mean, we had to— a net worth of $20 million. And Berkshire Hathawaywas earning nothing, year after year after year after year. And— so there youhave it, the story of— a $200 billion— incidentally, if you come back in ten years,I may have one that's even worse. (LAUGHTER)
If you— if you had to look at a moral for that story, though, is it don't cutoff your nose to spite your face?

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Warren Buffet made a trade that cost him $200 billion?! And to think that we get excited by finding a $2 bill.
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