It's also a big part of the origin story of Berkshire, which has its roots in a 19th-century textile mill, and which Buffett famously acquired in the 1960s -- largely because of a perceived slight from the then-CEO, whom Buffett wanted to fire in retaliation.
In the long run, everything turned out well. Revenue from the textile business enabled Berkshire to buy its way into the insurance industry, which proved to be much more attractive. It's now a half-trillion-dollar company, with the highest per-share price of any public stock.
Still, for two full decades, Buffett was left in charge of the legacy textile business--one he had neither expertise nor particular interest in.
Even as investors and analysts pushed Berkshire to cut its losses, however, he kept at it, citing several key reasons over the years:
- First, corporate citizenship: Berkshire's textile mills were, in the 1970s and early 1980s, "among the largest employers in each town." Meanwhile, their labor forces had a "high average age" and possessed "relatively non-transferable skills."
- Workers and unions "exhibited unusual understanding" of the facts of business life, and worked with the company to keep costs down.
- "Management also has been energetic and straightforward in its approach to our textile problems." (Buffett made a point of continually praising Ken Chace, who led the textile business.)
- "With hard work and some imagination," Buffett wrote and hoped for years, "it seems reasonable that at least modest profits in the textile division can be achieved in the future."
Alas, as Buffett wrote 35 years ago, in describing Berkshire's ultimate decision to shut down its textile business: "It turned out that I was very wrong about (4)."
There were no interested buyers, Buffett wrote, even at a big discount, adding, "the economics that were finally obvious to me were also obvious to others, and interest was nil."
In fact, when Berkshire tried to sell equipment it had paid $13 million for over the previous years, the total proceeds came to $163,122. And textile looms that Berkshire had paid $5,000 each for a few years earlier were sold for scrap, at $26 each.
Now, there's a legitimate debate to be had over whether Berkshire could have or should have tried to keep the business going a bit longer, for the sake of the workers in Buffett's first rationale, above.
I grew up in New England in the 1980s, so I remember a bit about what this era was like for mill and factory workers, if not the specifics of Berkshire's business itself.
Buffett explores this question a bit in his 1986 letter, ultimately saying he would not shut down a business with even modest profits for the sake of its workers, but he also found it "inappropriate" to keep a subsidy going for an unprofitable venture indefinitely.
"Adam Smith would disagree with my first proposition, and Karl Marx would disagree with my second; the middle ground is the only position that leaves me comfortable," he wrote.
But as we look back at this decision with the benefit of 35 years of hindsight, I think three key lessons emerge -- lessons that Buffett has clearly taken to heart.
The first is that corporate responsibility matters. Big or small, businesses are stakeholders in the community and vice versa. This dynamic is not enough to sustain a company by itself, but it's important.
The second is that market forces matter, perhaps more than anything else. Buffett makes a repeated point of saying that a fantastic leader in a poor business has much less chance of success than an average leader in a fantastic business:
" It's not like the Olympics. You don't get any extra points for the fact that something's very hard to do. So you might as well just step over one-foot bars, instead of trying to jump over seven-foot bars."
Finally, the last lesson is simply to take the long view whenever you can.
Berkshire itself has a 190-year history, and Buffett has been in control of it for more than 50 years. And as interminable as the two decades that it remained tied up in the textile business probably seemed back then, it's now 35 years in the past -- ancient history, but still relevant, in the story of a historically successful company.
(Don't forget the free e-book: Warren Buffett Predicts the Future.)