How Buffett Built Berkshire Hathaway Into an Empire

Look, most people think building an empire starts with some grand vision and a pile of cash. Buffett built his out of a failing textile mill that nobody wanted. A company bleeding money in a dying industry. And he turned it into one of the most valuable conglomerates on the planet.

Let me tell you how that actually happened, step by step.

It Started With a Grudge

When Buffett first found Berkshire Hathaway, it was a textile manufacturer getting crushed by competition. Revenues were shrinking, factories were closing, and layoffs were constant. Not exactly a dream investment.

But here is the thing – Buffett did not care about the business quality at that point. He cared about the price. In 1963, he started buying shares through the Buffett Partnership at an average cost of $14.86 per share. At the time, the company’s working capital alone was $19 per share. That does not even count the buildings and equipment. He was buying dollars for seventy-five cents.

Then the market disagreed with him. The stock fell. Did Buffett panic? He bought more.

Here is where the story gets personal. Berkshire’s CEO at the time, Seabury Stanton, verbally agreed to buy back Buffett’s shares at $11.50 each. Buffett said fine. But when the formal tender offer showed up in the mail, Stanton had changed it to $11.375.

An eighth of a dollar. That is all it took.

Buffett got furious. Instead of selling, he went on a buying spree. He decided to buy enough shares to take control of the entire company and fire the CEO. By 1967, the Buffett Partnership owned 59.5% of Berkshire Hathaway. The takeover was complete.

In 1965, at a board meeting, Buffett ousted Stanton and installed Ken Chace as the new CEO. One of the greatest business empires in history was born because a guy got lowballed by twelve and a half cents.

The Insurance Pivot That Changed Everything

Now here is where Buffett’s genius really shows. He took control of a textile company, but he had zero illusions about textiles being a great business. Instead of doubling down on what Berkshire already did, he told Ken Chace to use the textile operation’s cash flow to buy businesses in completely different industries.

The first big acquisition was National Indemnity, an insurance company, purchased for $8.6 million. Right behind it came National Fire and Marine Insurance Company.

You might wonder – why insurance? It is not exactly a glamorous industry. In fact, Buffett himself has pointed out that insurance is basically a commodity business. Nobody walks into an office and asks for a specific insurance brand the way they ask for a Coca-Cola. Customers shop on price, competition is brutal, and most insurers earn poor returns.

So what made Buffett different?

Discipline. Pure, stubborn discipline.

Most insurance companies slash prices to attract more customers, even if it means losing money on the policies. Buffett refused to play that game. His insurance operations priced their policies to make a profit, period. If customers left because competitors offered cheaper rates, so be it. He let them walk.

From 1986 through 1999, National Indemnity’s revenue actually declined because Buffett would not cut prices to keep customers. Imagine telling shareholders your revenue is falling for thirteen straight years – on purpose. Most CEOs would get fired. Buffett called it good business.

And he was right. While competitors were getting destroyed by catastrophic losses from underpriced policies, Buffett’s insurers were generating steady cash flow. That cash flow could then be reinvested into more businesses and more investments.

Buffett has said that without the National Indemnity acquisition, Berkshire would be worth less than half of what it is today. That $8.6 million purchase was probably the single most important deal in the history of the company.

The Acquisition Machine Turns On

The strategy was now clear: use cash flow from existing businesses to buy new ones in completely unrelated industries. Run them well. Repeat.

In 1970, Buffett named himself Chairman of Berkshire Hathaway and gave the company his full attention after dissolving his investment partnership. That year, the textile operations earned a pathetic $45,000. Insurance and investments brought in $4.7 million. The future was obvious.

What followed over the next several decades was one of the most remarkable business-building runs in history. Let me walk you through the highlights:

1972 – See’s Candy for $25 million. This San Francisco chocolate maker would go on to generate over a billion dollars of cumulative cash for Berkshire. A billion. From a $25 million investment. This is the kind of deal that makes other investors lose sleep at night thinking about what they missed.

1973 – Washington Post Company. Buffett started buying shares of the media company and held them for decades.

1976 – GEICO at around $2 per share. Buffett had been fascinated with GEICO since he was twenty years old. He finally started building a position. In 1995, Berkshire acquired the rest of the company outright.

1983 – Nebraska Furniture Mart for $60 million. One of Berkshire’s most important investments. By year-end, the corporate equity portfolio had crossed $1.3 billion.

1985 – Textiles finally die. Buffett shut down Berkshire’s original textile operations, roughly two decades after first getting involved. He also helped orchestrate a major merger between ABC and Capital Cities Broadcasting, and bought Scott & Fetzer for $315 million.

1988 – Coca-Cola. Buffett initiated a stake in the Coca-Cola Company. This became one of the most profitable investments in Berkshire’s history. The kid who sold Coke cans at age six ended up owning a massive piece of the company.

2009 – Burlington Northern Santa Fe for $44 billion. Buffett called this an “all-in bet” on the future of the American economy. A railroad. In 2009. While everyone else was panicking about the financial crisis, Buffett was buying a railroad.

2013 – H.J. Heinz for $28 billion (50% stake, alongside Brazilian private equity firm 3G Capital). This later led to the creation of Kraft-Heinz.

2014 – Duracell from Procter & Gamble. This was done through a brilliant tax-free share-for-business swap that let Buffett offload $4.3 billion worth of P&G stock without paying capital gains taxes. That same year, Berkshire acquired the world’s largest network of automotive dealerships.

The pattern is always the same. Find a good business, buy it at a fair price, run it forever. Never sell.

How Berkshire Measures Success

Here is something most people do not think about: how do you even measure success for a company like Berkshire Hathaway?

Buffett has always believed that what matters is growing intrinsic value – the actual economic worth of the business. For decades, he used book value as a rough proxy. Not because book value equals intrinsic value, but because they tend to grow at similar rates.

But here is where it gets interesting. In the early years, most of Berkshire’s assets were publicly traded stocks, so the balance sheet was essentially “marked to market.” The book value was a pretty good reflection of reality. As Berkshire shifted toward owning entire operating businesses in the 1990s, the accounting rules changed the picture. Under standard accounting rules, losses on owned businesses get written down, but gains on winners never get written up.

So over time, book value increasingly understated Berkshire’s true worth. The gap between what the books say and what the company is actually worth kept growing – especially in insurance and other major operating businesses.

The stock market eventually figured this out. Over 52 years under Buffett’s management, Berkshire’s per-share book value grew from $19 to $172,108 – a compound annual rate of 19%. But the market value compounded at 20.8% annually. The overall gain in market value from 1964 to 2016 was 1,972,595%.

Let me say that again. Nearly two million percent.

Meanwhile, the S&P 500 with dividends reinvested returned 12,717% over the same period. Still great. But Berkshire did more than 155 times better.

The lesson here goes beyond just Berkshire. In the short term, market prices bounce around like crazy. Book values, stock prices, and intrinsic values all diverge from each other constantly. But over the long term, prices gravitate toward true value. If you own genuinely great businesses, time is on your side.

Key Takeaways

Start with what you have, not what you wish you had. Buffett did not wait for the perfect business. He started with a dying textile mill and redirected its cash flow into better opportunities. You do not need the ideal starting point. You need the right strategy.

Cash flow is the real weapon. The entire Berkshire empire was built by taking cash from one business and deploying it into the next one. Insurance float, textile cash flow, candy profits – all of it got recycled into the next great investment. Think of every dollar of cash flow as a soldier you can deploy.

Discipline beats aggression. Buffett’s insurance companies let customers walk away rather than cut prices to unprofitable levels. In the short term, that looked like losing. In the long term, it was the foundation of the entire empire.

Never sell the winners. Berkshire’s policy is to never sell an operating subsidiary. This creates compounding that is almost impossible to replicate if you are constantly trading in and out of positions.

Time turns good decisions into great outcomes. See’s Candy cost $25 million and generated over a billion. GEICO started at $2 per share. Coca-Cola became one of the greatest investments ever. None of these would have mattered if Buffett sold after a year or two. The magic is in the holding.

Here is the thing – you do not need to build the next Berkshire Hathaway. But the principles behind how Buffett built it? Those apply to every investor. Buy quality. Be patient. Let your winners compound. And when the market gives you a great price, do not be afraid to go big.