The 2-Minute Thought: On Investment Errors – Part II

When do you know your investment decision was wrong?  That was the topic of my post last week  I wrote that you may not know if you are right or wrong at a given moment, but eventually you will -- after enough time has passed. 

As part of my examination of our errors among the more than 400 stock investment decisions we’ve made since 2012, I’ve also been enjoying some spectacularly good writing by others about their worst errors. 

Warren Buffett, for one, always has enjoyed parading his mistakes.  They include buying failing textile company Berkshire Hathaway in 1962, buying another failing textile maker, Waumbec, 13 years later, and buying a lot of ConocoPhillips stock when energy prices were at a peak. 

About that last one, Buffett wrote in his 2008 letter: “I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year.  I still believe the odds are good that oil sells far higher in the future than the current $40 - 50 price.  But so far I have been dead wrong.  Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.”  (Note: by 2011, oil was back over $100).

Another famous error is Buffett’s purchase of US Airways preferred stock in 1989.  By sheer luck, Buffett says, he was able to get out of it at a gain, but it still was a terrible mistake. 

Airlines, he wrote in his 2007 letter, were a “bottomless pit”-- “the worst sort of business that grows rapidly, requires significant capital to engender the growth, and then earns little or no money.”  (He also joked that “if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”  And yet, by 2016-17, the industry had changed enough for Berkshire to make large investments in Southwest, United, and Delta.)

And then there are the “errors of omission” – the ones resulting from actions not taken, as opposed to “errors of commission.”   

When Buffett was asked in 2017 why he didn’t buy Amazon, he said he didn’t really know but that it was a mistake.  He said that he should have bought Google when he realized it was getting $10 a click from Geico, the insurance company he owns.  And one of his biggest regrets was not buying a Dallas-Fort Worth television station when he had the chance in the early 1970s for $35 million.  In his 2007 letter, Buffett wrote that the station had already earned at least $1 billion since he turned down the deal.  (“Why did I say ‘no’?  The only explanation is that my brain had gone on vacation and forgot to notify me.”)

In that same 2007 letter, Buffett wrote that he also almost missed See’s Candies -- one of his greatest purchases -- because he was so stubborn about his $25 million buy limit when the seller was asking for $30 million.  Fortunately, good luck intervened again, and the seller caved in.  Had he not, Buffett would have missed out on the $1.35 billion See’s had earned up to then. 

So luck really does have something to do with outcomes, even when you’re as good as Buffett.   
And how often have we stubbornly held fast to nitpicky buy price limits when we should have thought broader and looked longer?  I mean, what’s a $5 million difference in price when you’re looking at more than a billion in earnings in the decades ahead?

Please note: The 2-Minute Thought will be on holiday for three weeks and will return June 28.