In the previous article, we learned that Warren Buffett earned a 1.5x return on his investment in American Express. Let's continue learning about his fascinating investment story in this article!

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In the 1950s, while Warren Buffett was studying with his teacher Benjamin Graham and working hard to establish himself as an investor, the textile industry in the New England region of the United States was facing its biggest crisis ever. Due to the inability to compete with cheap goods from Asia in terms of cost, many large factories had to continuously reduce their workforce and close down, resulting in significant losses.

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At that time, the industry was undergoing rapid restructuring. In 1955, two renowned textile factories in the industry, Hathaway Manufacturing Company, founded in 1888, and Berkshire Fine Spinning Associates, founded in 1889, decided to merge and form a new company called Berkshire Hathaway. This new company had 14 factories and employed 12,000 workers, making it the industry leader at that time and ensuring its survival in the fiercely competitive industry.

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Despite this, the textile industry in the United States continued to decline, which was evident to everyone in the industry. Even though Berkshire Hathaway was the leader then, during the annual budget assessment and year-end settlements, the company's deficit kept increasing, shareholders' capital significantly shrank, and no found solution to stop the bleeding. By the end of 1961, Berkshire Hathaway's stock price had fallen below the corresponding capital left after using short-term assets like cash to repay short-term liabilities.

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Warren Buffett knew very well that buying Berkshire Hathaway's stock at a price below its capital was in line with the principles of safety margin in Graham-Dodd's theory. So he didn't let the opportunity slip away. Starting from 1962, he continuously bought and held Berkshire Hathaway stocks through his partnership alliances, and by 1963, he became the largest shareholder of Berkshire Hathaway. 

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Although he initially had no intention of acquiring the company, he felt the stock price was low enough to buy. However, by 1965, the value of his stocks had reached 50% of Berkshire Hathaway, and Warren Buffett naturally gained control of the company and became a board of directors member.

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At this time, Berkshire Hathaway's capital had been halved, and the number of employees had decreased from 12,000 to 2,300. The entire industry couldn't see any prospects for this company because, in terms of the textile industry, Berkshire Hathaway's product quality was not significantly different from the cheap products of overseas Asian factories. There was no possibility of increasing the selling price. However, the labor cost in the United States was at least twice that of Asia. Under these circumstances, no one believed that this company had any future!

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But only Warren Buffett continued to think about the investment strategy of his mentor, the Graham-Dodd theory, during this process and actively sought out a transformative battle strategy!

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How did Warren Buffett turn around Berkshire Hathaway? We’ll find out in the next article!

We’ll learn more about Berkshire Hathaway's transformation, so stay tuned!

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Early History of Berkshire Hathaway:

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Oliver Chace established the Valley Falls Company in Valley Falls, Rhode Island in 1839. This event marked the beginning of the early 19th century and the beginning of Berkshire Hathaway. Chace had experience working for Samuel Slater, who is credited with founding the first prosperous textile mill in the United States, before starting this business. In 1806, Chace himself founded his first textile mill.

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The Adams, Massachusetts-based Berkshire Cotton Manufacturing Company and the Valley Falls Company merged in 1929. The new company was given the name Berkshire Fine Spinning Associates. The knowledge and resources of both businesses were combined due to this merger.

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Time travel to 1955 was when Hathaway Manufacturing Company and Berkshire Fine Spinning Associates merged. Horatio Hathaway established the Hathaway Manufacturing Company in 1888 New Bedford, Massachusetts. The company prospered through its involvement in businesses like whaling and trade with China. Like many others in the textile sector, Hathaway had to deal with difficulties following World War I because of the sector's decline.

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Under the leadership of Seabury Stanton, Hathaway Manufacturing Company managed to navigate through the difficult times and achieve profitability once again, particularly after the Great Depression. In 1955, the merger with Berkshire Fine Spinning Associates took place, forming Berkshire Hathaway.

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Following the merger, Berkshire Hathaway became a significant player in the textile industry, operating 15 factories and employing over 12,000 workers. The company's headquarters were in New Bedford, and its revenues exceeded $120 million. However, by the late 1950s, the textile industry faced further challenges, leading to the closure of seven Berkshire Hathaway locations and subsequent mass layoffs.

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