Updated: Mar 5, 2022
CLEVELAND WORSTED MILLS
While Berkshire Hathaway stands out as one of Buffetts worst blunders, his venture into textile manufacturing started at a much younger age. In 1951, Buffett identified a promising purchase for his partners, Cleveland Worsted Mills.
The company had $146 per share in net current assets against a stock price of $115. This represented a shallow 21% discount to NCAV, but Buffett spotted significant value in long-term assets, specifically the firm's ownership of "several well-equipped mills".
He also liked the firm's 7% yield, representing a significant amount of the firms earnings. Despite the solid payout ratio, he thought the dividend was his protected due to its excess of profit over declared dividends.
Long-time value investor Glen Arnold explains what happened next "After buying, in, Buffett discovered that the company faced intense competition from textile plants in the southern US states and from synthetic fibers, It made large losses, cut its dividend and its share price dropped."
Buffett was dismayed. He had backed the firm and encouraged others to invest in the company, only to watch the stock crater. He had to find a way to see what was going on and rescue the investment:
"I flew all the way to Cleveland [to an annual meeting]. I got there
about five minutes late, and the meeting had been adjourned. And
here I was, this kid from Omaha, twenty-two years old, with my own
money in the stock. The chairman said, 'Sorry, too late.' But then
their sales agent, who was on the board of directors, actually took
pity on me, and so he got me off on the side and talked to me and
answered some questions."
It didn't help. But as Glen Arnold wrote, "Buffett learned the importance of strategic competitive positioning and pricing power." Buffett also began to show a preference for good industries, solid business growth, and deep discounts.
Source: Benjamin Graham's Net-Net Stock Strategy/ Harriman House