Warren Buffett's Berkshire Hathaway is an epic turnaround story — and its latest deal looks a winner, expert says
- Warren Buffett's Berkshire Hathaway is the result of an incredible turnaround, Jacob McDonough said.
- The company was unlikely to succeed as it started from three failed business, the author said.
The rise of Warren Buffett's Berkshire Hathaway is a remarkable turnaround story, a chronicler of the company's early days said.
"The Berkshire we know today all started from three failed businesses," Jacob McDonough, the author of "Capital Allocation: The Financials of a New England Textile Mill 1955 - 1985," told Business Insider.
He was referring to Diversified Retailing, Blue Chip Stamps, and Berkshire, which was a textile company when Buffett acquired it in 1965.
Buffett and his late business partner, Charlie Munger, merged the first two into Berkshire in 1978 and 1983 respectively, after their retailing and trading-stamp operations dwindled. They shuttered Berkshire's floundering textile business in 1985.
That left Buffett and Munger in a situation where three companies they'd heavily bet on were virtually worthless just two decades later. Yet, "Buffett not only salvaged his investment in these 3 businesses, he turned it into one company approaching a $1 trillion valuation," McDonough said.
"Just survival alone to this day would be impressive if you were dealt a hand of textiles, trading stamps, and department stores, but the success achieved despite this difficulty is just even harder to comprehend," he added.
McDonough attributed Berkshire's unlikely success spoke to its bosses' flexibility and adaptability. Buffett and Munger pivoted from business to business as needed. They ultimately created a sprawling web of subsidiaries spanning insurance, energy, railroads, manufacturing, retail, services and other industries.
Berkshire now owns businesses like Geico and Dairy Queen, as well as multibillion-dollar stakes in Apple, Kraft Heinz, and other public companies.
Praise for Pilot
McDonough hailed Berkshire's latest deal, its purchase of the final 20% of Pilot Travel Centers. The truck-stop chain generated roughly $70 billion of revenue in 2022 — more than Nike, Coke, or Netflix.
The founder and portfolio manager of McDonough Investments highlighted Buffett's comments about Pilot's real estate during Berkshire's annual meeting last year. The Berkshire CEO described its "hundreds of hundreds of locations on the interstate," saying "there's nothing like it."
"They're not going to move the interstate two miles to the right or something," Buffett added.
"People will probably continue traveling on highways for many decades, and Pilot should be in some good locations to serve those customers," McDonough said. "That is a durable advantage that would be difficult to ruin."
He also pointed to Pilot's strong brand and the consistent quality of experience it provides compared to other truck stops.
Buffett is famous for prizing assets "moats" or durable barriers to competition like brands and real estate, so it's likely he bought Pilot in part because of its strengths on that front.