2002: Why did Berkshire buy Fruit of the Loom? And, what are Munger's book recommendations?
AUDIENCE MEMBER: Good morning. My name is Pamela Harrington and I live here in Omaha, Nebraska.
And my question concerns your investment in Fruit of the Loom.
Could you tell us about how that investment fits in with your philosophy about turnaround situations and your preference for businesses that have barriers to entrance? Thank you.
WARREN BUFFETT: Yeah. Well, Fruit of the Loom got in trouble for two reasons.
One is they borrowed too much money. They borrowed about a billion, 200-million, and actually it went something beyond that because they were engaged in some other transactions that were off balance sheet and so on.
So, it was a company that, in a financial sense, was out of control. Simultaneously with that, they had a lot of operating problems, too.
But we were not going to inherit the capital structure and we were not going to inherit the management that had caused the operating problems.
But, much to our pleasure, we were going to inherit a management that had done an incredible job in running the business for a long time prior to the sins of the recent period.
And, we made a condition — I don’t think there’d probably ever been a condition made to a bankruptcy court proposal — where we said our offer is not contingent on financing, it’s not contingent on, you know, if war breaks out, our offer is still good and everything else.
But John — but we did make it contingent on John Holland being available to run the business, because John had done a sensational job of running the business before the difficulties of the excess leverage and operating insanities. And he was willing to come back, which was very important to us.
And Fruit of the Loom has, I don’t know, between 40 and 45 percent of the men’s and boy’s market. It’s a product that has a deserved quality image.
It’s accepted in a big way by very important retailers who were disturbed by things that took place prior to, and early in, the bankruptcy, but who loved the idea of having a product like Fruit of the Loom in their stores.
And it’s a very low-cost producer of a very basic product.
So, it fits us very well. And now the management can simply worry about building the brand and running plants as efficiently as possible.
And there’s been some rearrangement of plants, as has happened throughout to many things connected with textiles.
But it’s an absolutely first-class business. And, you know, we’d like to get a little more share in the women’s market. We’d like to get a little more share in the men’s and boy’s market, too.
But it’s made to order for us. But it’s only made to order with the present management.
If we had to take on the management that was there for a few years, you know, we wouldn’t have bought it for a dollar. It would have been a disaster. And it was a disaster for a while.
But fortunately, it’s a little like GEICO in the mid ’70s. I mean, GEICO was a marvelous company that got mismanaged in a big way for a while.
But its fundamental advantages were there throughout the period, and what you had to do was get rid of the mismanagement and get back to the basics.
Charlie?
CHARLIE MUNGER: Yeah, I don’t have anything on that subject, but I neglected to answer the question about what books would we recommend.
The two books that I recommend this year were both sent to me by Berkshire shareholders who thought I might like them, and boy were they right.
The first is called “Ice Age,” which is a description of the past history of glaciation in the last few hundred-thousand years and how they figured out what had happened and why it had happened.
And I think it’s the best book of scientific explanation I have ever read. It’s been published in England and it’s going to be published in the United States this fall. And the airport has like 20 copies — PD Waterhouse — which they did by scrounging all of Canada.
And so, I recommend that book to you, but a lot of you are going to have to wait for the fall, I think.
The other book was “How the Scots Have Helped Create the Modern World.” That’s a subject that’s always interested me, how a tiny, poor, little population of Celtic people had such a huge favorable impact on the world, starting from poverty.
And, of course, it’s related to the Irish, who were a similar ethnic strain with a different religion.
And, it was marvelous book. And I forget the author’s name, but I recommend both of those books to all of you.
WARREN BUFFETT: Yeah. I’ll recommend a book which may sound a little self-serving, but it nevertheless — I think — I think this group, many of you would enjoy reading about the Berkshire managers.
And Bob Miles has brought out a book and it tells about the people who are handling your capital. And, I don’t think you could have a — well, I know you couldn’t have a better group.
And so therefore, if you feel like reading about them, I would — Bob has done a good job of interviewing — and I would encourage you to read about them.
And I think you’ll like your investment better after you read about the managers than if you just read what Charlie and I write.