Warren Buffett’s ingenious little float.

By Lawrence G. McDonald

It was 1967 when a New Bedford textile corporation in Massachusetts, suddenly upped and purchased National Indemnity, a substantial insurance operation out of Omaha, Nebraska. The textile mill was Berkshire Hathaway, and its owner, Mr. Warren Buffett stumped up $8.6 million, which was a sizeable amount of money in 1967, perhaps close to $100 million.

 At the time, there were financial journals in the USA which considered, quite frankly, that the sage of Omaha may have temporarily lost his grip, any kind of connection between the East coast fabric outfit and the Midwest underwriters being strictly coincidental.

They learned, however, the danger of trying to outthink Mr. Buffett, who as usual ignored them totally,  said nothing and went right ahead with what he believed made sense. He was guided by one star which glimmered above the old New England mill town, casting its cold light on the remnants of another industry which had once died in New Bedford, whaling.

 Because not so far from those ancient jetties, just a couple of streets back from the water, Berkshire Hathaway was eating up cash faster than a whaling fleet in barren seas. Warren needed to pump up that Berkshire cash-flow and he searched for a business which generated money, earned it before it needed to spend.

 Insurance was the answer he arrived at, because those financial institutions collect the premiums, and do not pay out claims for many weeks, maybe months. He was without doubt the first person on earth to understand the concept of ‘float’ – that’s the cash which is sitting in the bank accounts of insurance companies, the capital they may need for a big claim. But it’s still just sitting there, and Warren Buffett decided he could definitely put that cash to work, over 1,400 miles to the east, on the cold shores of Massachusetts where Berkshire Hathaway needed new investment in weaving looms, plant and equipment.

 Warren had no plans to run an insurance company. He just wanted their ‘float,’ just the money. He considered it to be ‘rocket fuel,’ like sending a pipeline into a river of money, which would lift his textile company higher. Not just with its own looms, but to enable it to buy other businesses, newspapers, even a bank, on the back of the cash stream from National Indemnity.

“A Colossal Failure of Common Sense – the Inside Story Of The Collapse Of Lehman Brothers.”

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