Warren Buffett ( Trades , Portfolio )'s history with Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) is fascinating because it showcases his skills as a capital allocator. When he first became involved with Berkshire, the textile business was struggling. Despite the company's best efforts, it could not turn things around.
Originally, Buffett wanted to stay in the business, reduce capital spending and use all excess funds to expand of the rest of his empire. As Buffett wrote in his letter to shareholders in 1977:
Despite his best intentions, however, by the early 1980s, it was clear the mills were no longer a viable business. The closure of these operations began in the first part of the decade and had concluded by 1985. As he said in his letter that same year:
The reason Buffett was forced to shut down Berkshire's textile operations was cost. The business was struggling, so without further substantial investment, it would not be able to compete with peers. But this required investment would have generated a relatively weak return compared to Berkshire's other, growing lines of business at the time. As Buffett said in a 1985 letter to shareholders:
In the same letter, Buffett goes on to describe why it was kinder to kill Berkshire's textile business than keep it alive. The example of peer Burlington is used, a company which had spent significant sums on its manufacturing process only to see deteriorating returns:
Considering this performance, I bet Berkshire Hathaway's shareholders are glad Buffett decided to exit the business, rather than wasting his time, effort and capital trying to compete in a business with such terrible economics.
Disclosure: The author owns no share mentioned.
This article first appeared on GuruFocus .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
