Warren Buffett and The 800 Billion Dollar Misunderstanding
The roots of Berkshire Hathaway are often attributed to the acumen of a budding business mastermind. But an alternative version is based on the hubris of a New England textile mill CEO.
“My only measure of success is how many people love me.”
— Warren Buffett
1964 New Bedford, Massachusetts
In the early hours of May 6th, an entrepreneur less than ten years out of Columbia Business School eagerly picked up a letter from his inbox tray. He had been waiting weeks for it to arrive. Elegant embossing revealed the sender was a CEO the young man had met recently. They had an agreement, and he thought the older gent, we use the term loosely, was writing to seal the deal. Instead, it sealed his fate.
As the 33-year-old Warren Buffett glanced over the contents, the lively twinkle in his hazel eyes faded. Then, the steady jaw started twitching. That was a tell, usually reserved for long-winded stockbrokers. Almost reflexively, his hand cradled an elbow, then the other. A double elbow was like a car alarm. It meant trouble. He took another look at the signature. Stanton. The cheek of the man was appalling.
Two men could not have been more unalike than Warren Buffett and Seabury Stanton. They were chalk and cheese. Buffett, a scion of humble Midwestern stock, had tasted rejection from Harvard and dropped out of Wharton before graduating from the University of Nebraska. He had to carve his path. He was Omaha’s pride and embodied its indomitable spirit.
Stanton paraded his lineage like a war medal. His family, he boasted, traced back to Yankee whaling captains. Always taking advantage of an opportunity to flaunt his Harvard credentials, he found the view from the top so enjoyable he started with the Hathaway Company as treasurer. Stanton sat on the throne of the largest textile empire in New England after he merged it with Berkshire Fine Spinning. Yet, for all his privilege, behind the blue blood was a Scroogelike temperament and a mind shadowed in deceit.
As fate would have it, a trivial matter tied the destinies of the two men together. Stanton would become an exemplary case history in business schools. Meanwhile, used to being consistently underestimated, Buffett would challenge gravity to ascend to unparalleled heights. In the process, he would also redefine the soul of capitalism. The most surprising part of the story?
It was the result of a twelve-cent discrepancy.
Two Bit Stanton
As Buffett would later reveal, he started to notice the stock gyrations of a near-bankrupt textile mill in 1962 called Berkshire Hathaway:
“ I was running a small partnership, about seven million. They’d call it a hedge fund now. And here was this cheap stock — in a textile company going downhill. 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 buy in their stock.
By 1964, Buffett saw the business was in hopeless decline and wanted out. He’d had enough fun.
“I went back and visited the CEO, 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 going to have a tender offer. And at what price will you tender your stock?’”
Buffett confirmed he was a seller at $11.50 per share.
Stanton made him repeat it: “Do you promise me that you’ll tender at $11.50?”
Buffett acknowledged for a second time: “Mr. Stanton, you have my word that if you do it in the near future, I will sell my stock to you — at $11.50.
Buffett recalled, “Now I was frozen. I felt that I couldn’t buy or sell the stock because I knew too much” (any action before the tender offer would be a potential violation of insider trading rules).
Buffett said, “Not long after, I received a letter from the Old Colony Trust Company offering $11⅜ per share to anyone who would tender their shares. I would have tendered my stock if that letter had come through with 11 and a half. But Stanton chiseled me for an eighth after shaking hands on the deal. And this made me mad.”
Buffett placed the letter in an outbox marked Too Hard as evidence in a trial, and a look of profound resignation, worse than a child dropping an ice cream cone, flashed across the handsome features. Later, in a striking example of understatement, he would ruefully admit, “I had expected the letter; I was surprised by the price.”
The term “two bits” originally referred to silver wedges cut from Mexican coins that translate to an “eighth of a dollar,” or about 12 and one-half cents, the exact amount Seabury Stanton was trying to chisel. Only a complete fool or a scalawag would lie for twelve cents a share, making him a ‘two-bit’ swindler.
Long before he was destined to become the world’s most admired billionaire philanthropist, Buffett had put an unshakeable faith in the goodness of people. That was how he was brought up. It was an Omaha ethos. But when the boardroom grifter from New Bedford gave him a crash course in ethics, it taught him a lesson he would follow for the remainder of his career: the only revenge is success.
“So I went out and started buying the stock and got control of the board of Berkshire Hathaway.”
As always, there was a complication. Buffett needed more shares. Fortunately, a group of insiders was willing to tender. But what made that move particularly delicious was that one member was close to Seabury Stanton, the CEO. At a meeting at New Bedford’s prestigious Wamsutta Club, Buffett arranged with Stanton’s brother to buy up his shares, and the his fate was sealed. Call it regicide by fratricide.
“I fired the CEO, and we went on from there.”
The roots of Berkshire Hathaway are often attributed to the acumen of a budding business mastermind named Warren Buffett. But an alternative version is the hubris of a New England textile mill CEO who dismissed a young man from the sticks. Those “sticks” turned out to be the sturdy beams made to build an empire.
