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In his 1989 letter to Berkshire Hathaway shareholders Warren mused on his change in emphasis from the qualitative (balance sheet in particular) to the qualitative, a thought prompted in part by the mistake of buying Hochchild-Kohn.
“Shortly after purchasing Berkshire, I acquired a Baltimore department store, Hochschild Kohn ….. I bought at a substantial discount from book value, the people were first-class, and the deal included some extras – unrecorded real estate values and a significant LIFO inventory cushion. How could I miss?
So-o-o – three years later I was lucky to sell the business for about what I had paid. After ending our corporate marriage to Hochschild Kohn, I had memories like those of the husband in the country song, “My Wife Ran Away With My Best
Friend and I Still Miss Him a Lot.”
I could give you other personal examples of “bargain-purchase” folly but I’m sure you get the picture: It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Charlie understood this early; I was a slow learner. But now, when buying companies or common stocks, we look for first-class businesses accompanied by first-class managements.
That leads right into a related lesson: Good jockeys will do well on good horses, but not on broken-down nags.
Both Berkshire’s textile business and Hochschild, Kohn had able and honest people running them. The same managers employed in a business ………
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