Berkshire Hathaway – holding company of billionaire investor Warren Buffett – currently has 56 majority-owned businesses in their portfolio. Some of these are quite new, like the 2010 Lubrizol acquisition.
On the other hand, they’ve had some for quite a while. They’ve had the National Indemnity Company on the books since 1967. They’ve bought scores of other businesses in between these purchases, and the acquisitions span decades starting in the 1960s all away up until today.
Even though Buffett is certainly regarded as the greatest buy-and-hold investor, he simply refuses to shutdown or sell companies for reasons other than the bottom line.
It’s Not All about Money
Warren Buffett acquired Berkshire Hathaway – a barely known textile mill – back in 1964. The company was relatively profitable, and its cash pile was growing, which made it an attractive purchase.
Back in 1964, textiles were much better of a business than it is today. Relatively shortly after Buffett purchased these mills, textile businesses began moving their operations overseas. The prices were dropping, and American produced textiles were incapable of competing with low-cost international manufacturers. They had lower labor costs and lower production costs.
Buffett recognized the problem that he faced. He was losing money in his Massachusetts mills. But Berkshire Hathaway didn’t stop producing textiles until 1985, which is 21 years after he purchased the business.
He had the following to say, based upon his policy to keep businesses operational for as long as possible:
“[W]e closed our textile business in the mid-1980’s after 20 years of struggling with it, but only because we felt it was doomed to run never-ending operating losses. We have not, however, given thought to selling operations that would command very fancy prices nor have we dumped our laggards, though we focus hard on curing the problems that cause them to lag.”
Warren Buffett’s Key Component to Success
Buffett’s detractors often believe that his results are not repeatable by the average person because he acquires these so-called “sweetheart” deals – meaning he gets higher interest rates and better prices for businesses than anyone else.
While this is certainly true, it misses the point. He doesn’t get these incredible deals because of where he was born, or because his name is Warren Buffett. He gets these great deals because he has an impeccable reputation, and his reputation sprung from his investing genius.
At the Berkshire Hathaway shareholders meeting in 2009, Buffett was asked the question if he would ever think about spinning off any of the Berkshire Hathaway businesses. He said that he would never do so, and stated:
“When we buy companies from people, we buy them for keeps. People can trust us to keep our word on this.”
Later on during 2013, Buffett offered at different analogy for the difficult situation business owners find themselves in when selling a business. Sure, they can sell to the highest bidder, and this business will do whatever they need to make their purchase profitable. On the other hand, they might sell to a lower bidder, like Berkshire Hathaway, and realize that their business is in good hands.
“You can sell it to Berkshire, and we’ll put it in the Metropolitan Museum; it’ll have a wing all by itself; it’ll be there forever. Or you can sell it to some porn shop operator, and he’ll take the painting and he’ll make the boobs a little bigger and he’ll stick it up in the window, and some other guy will come along in a raincoat, and he’ll buy it.”
Here’s the point…
Buffett would rather lose money – or make little – from a business that he owns than miss out on the next deal. Closing up shop or selling a business might make things look better today, but do so at quite a high cost – like the future of Berkshire Hathaway.