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Warren Buffett tells CNBC that his 1964

decision to buy Berkshire Hathaway,


then a fading Massachusetts textile
company, was a $200 billion blunder.

He talked about that mistake, and the


lesson he learned from it, in a taped
interview with CNBC's Becky Quick for a
series of TV segments this week on Squawk Box and Power Lunch in which
some of the world's best-known investors discuss the worst trade they've made.

An excerpt of Becky's conversation with Buffett aired this morning on Squawk.

Here is the complete interview, in video and transcript form, including portions
that did not appear on television.

BECKY: All right. Warren, thank you very much for joining us today.

BUFFETT: My pleasure.

BECKY: What we're trying to get to the bottom of is what was the worst trade
you ever made and what'd you learn from it?

BUFFETT: The dumbest thing I ever did? (LAUGHTER)

BECKY: Yeah, the dumbest thing you ever did.

BUFFETT: The— the dumbest stock I ever bought— was— drum roll here—
Berkshire Hathaway. And— that may require a bit of explanation. It was early
in— 1962, and I was running a small partnership, about seven million. They’d
call it a hedge fund now.
And here was this cheap stock, cheap by working capital standards or so. But it
was 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 proceeds
and they would buy in their stock. And I figured they were gonna close, they only
had a few mills left, but that they would close another one. I'd buy the stock. I'd
tender 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 I
went back and visited the management, Mr. (Seabury) Stanton. And he looked
at me and he said, ‘Mr. Buffett. We've just sold some mills. We got some excess
money. 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 at
11.50?’ And I said, ‘Mr. Stanton, you have my word that if you do it here in the
near future, that I will sell my stock to— at 11.50.’ I went back to Omaha. And a
few weeks later, I opened the mail—

BECKY: Oh, you have this?

BUFFETT: And here it is: a tender offer from Berkshire Hathaway— that's from
1964. And if you look carefully, you'll see the price is—

BECKY: 11 and—

BUFFETT: —11 and three-eighths. He chiseled me for an eighth. And if that


letter had come through with 11 and a half, I would have tendered my stock. But
this made me mad. So I went out and started buying the stock, and I bought
control of the company, and fired Mr. Stanton. (LAUGHTER) And we went on
from there.
Now, that sounds like a great little morality table— tale at this point. But the truth
is I had now committed a major amount of money to a terrible business. And
Berkshire Hathaway became the base for everything pretty much that I've done
since. 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 that
money into the textile business originally, we just started out with the insurance
company, Berkshire would be worth twice as much as it is now. So—

BECKY: Twice as much?

BUFFETT: Yeah. This is $200 billion. You can— you can figure that— comes
about. Because the genius here thought he could run a textile business.
(LAUGHTER)

BECKY: Why $200 billion?

BUFFETT: Well, because if you look at taking that same money that I put into
the textile business and just putting it into the insurance business, and starting
from there, we would have had a company that— because all of this money was
a drag. I mean, we had to— a net worth of $20 million. And Berkshire Hathaway
was earning nothing, year after year after year after year. And— so there you
have it, the story of— a $200 billion— incidentally, if you come back in ten years,
I may have one that's even worse. (LAUGHTER)

BECKY: If you— if you had to look at a moral for that story, though, is it don't cut
off your nose to spite your face?
BUFFETT: I would say— I would say that no matter whether you cut off your
nose to spite your face or whatever, if you get in a lousy business, get out of it. I
mean, it— it was— it was a terrible mistake, just because I drifted into it, in a
sense. And— and I've always said that if you want to be known as a good
manager, buy a good business. (LAUGHTER) That's the way to do it. And
everyone will think you're smart.

And when I'm in a good business like See’s Candies, people think, ‘Boy that
guy's smart.’ And when I'm in a dumb business like textiles and don't know what
I'm doing, you know, or shoes later on, or whatever it may be, you know, all that
other — if you think you're a managerial genius, just try yourself in a bad
business.

BECKY: Is that the lesson that you learned from it?

BUFFETT: Sure.

BECKY: But— and that is something that you've actually put into practice?

BUFFETT: I've actually put a line in my annual report many, many, many
decades late— ago, after doing this. And I said, ‘When a manager with a
reputation for bril— brillia— brilliance, meets up with a business with a reputation
for bad economics, it's the reputation of the business that remains intact.’

BECKY: (LAUGHTER) So that is a lesson you carried with you? And yet, it's
one that is— you're reminded of every single day. It's Berkshire Hathaway.

BUFFETT: Yeah. And every now and then, I get tempted. Because I started out
with Ben Graham in 1950 or so. And his whole idea was buying things that were
cheap. You don't want to buy things that are cheap. You want to buy things that
are good. It's much better to buy something that's good at a fair price, than
something that is cheap at a bargain price. And I wasn't— I didn't start out that
way. I— I was taught a different system. But— but if I didn't learn from Berkshire
Hathaway, I'll never learn. (LAUGHTER)

BECKY: How long did it take you to figure out this lesson? You said it was—

BUFFETT: Well, it took me 20 years to give up on the textile business. I— I had


a wonderful guy running it after— after Seabury Stanton— a fellow named Ken
Chase ran it. And he was terrific. Honest and able, hardworking. And he
couldn't make it go. But we just kept working at it, trying— we bought another
textile company called Waumbec Mills in Manchester, New Hampshire. Another
mistake. If— if— if you're gonna be brilliant with a lousy business, why not be
brilliant with a good business?

BECKY: But really, how— it took 20 years for you to finally give up on it. When
did you kind of figure, oh, this is not working? Was it— did it— was it really 20
years? Or did you kind of know—

BUFFETT: Well, it was— no. I figured it out fairly soon. But I just kept thinking
I'm not gonna give up on this. And incidentally, we had a work force that was
terrific. I mean, it— it was— we weren't done in by anything except competitive
dynamics. And I— we'd buy new equipment, or we would move— we would add
this mill in— in— in— in— Manchester, and we'd say, ‘Look at all those
synergies,’ and all that. Nothing works.

I— In fact, I used to have a desk in my drawer. And they would keep sending me
these things that if we buy this machine, we'll save 14 people. If we buy this
machine, we'll save 12 people. I kept putting it in my drawer. With all those
machines, we'd save more people than we had at the start of the— supposedly,
we were operating with zero people. But it doesn't work that way.
BECKY: Is there any business that you didn't get into because you thought, wait
a second, I've been down this road before? Where you were tempted and you
kind of pulled back?

BUFFETT: I get calls on them every day. You know, I mean, I get calls— not
every day. I mean, it's an exaggeration. But I get calls frequently on businesses
that are just too tough. And— and people say, you know, why don't you tackle
it? You know, got all these resources now and good managers.

But the interesting thing about business, it's not like the Olympics. In the
Olympics, you know, if you do some dive off the— on a high board and have four
or five twists— (LAUGHTER) on the way down, and you go in the water a little
bad, there's a degree of difficulty factor. So you'll get more points than some guy
that just does a little headfirst dive in perfectly.

So degree of difficulty counts in the Olympics. It doesn't count in business. Now,


you don't get any extra points for the fact that something's very hard to do. So
you might as well just step over one-foot bars instead of trying to jump over
seven-foot bars.

BECKY: You know, people will say, well, wait a second. You're in some
businesses that some people have written off for dead: the newspaper
business. How is that different?

BUFFETT: You're right. (LAUGHTER) But— but we bought that in 1977. And—
and we've done very well over the years. At— at first, we didn't do so well. But
then we did very well. But I— the newspaper business of 2010 is not the
newspaper business of 1977. I mean, it is diametrically different.

And it is true, and we put it in the annual report, that we run Berkshire in a way
that they don't teach in business schools. Because in business schools, they say
sell off your so-so businesses and keep buying new businesses. I call that gin
rummy management.

And when I— if I had 50 kids, you know, and one of them isn't doing quite as well
as the others, I'm not gonna put him up for adoption. Unless they are going to
lose us money permanently, or if they have major labor difficulties, we keep the
businesses that aren't as good as the others. So if I'm gonna follow that
philosophy, I'd better be very careful about what I buy, right?

BECKY: Exactly. What about your business partner, Charlie Munger? What
would he say your biggest mistake is?

BUFFETT: Well, he would probably repeat this. And I would say I've learned a
lot about what I just got through talking about— I've learned a lot from Charlie.
Charlie told me this from the first moment I met him in 1959. He said— he said
exactly— I could have— I could have saved myself a lot of trouble if I'd just
listened to him. But what did Charlie know? (LAUGHTER)

BECKY: Okay. Warren, thank you very much. We really appreciate your time.

BUFFETT: Thanks. Thanks for having me.

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