Day 5 - Understanding Greed and Fear

Yesterday I wrote about Disposition Effect: Holding on to losers and selling winners too soon. I give below a true example of how Buffett made this mistake but ultimately turned the investment around.

It would come as surprise to many that one of the most valuable companies in the world Berkshire Hathaway owned by the most successful investors of all time Warren Buffett, was actually a lemon as an investment when it was originally made. 

Warren Buffett began buying shares in Berkshire Hathaway on December 12, 1962 at $7.50 a share. His initial intention was to flip his shares for a relatively quick profit but changed his mind after having some problems with Berkshire’s president, Seabury Stanton, and ultimately bought enough Berkshire stock to control the company. Buffett’s investment in Berkshire Hathaway would go down as arguably the worst investment of his career.

Why?

• Berkshire Hathaway was undervalued for the wrong reasons; nine years of losses and had closed more than a dozen textile plants over the previous decade.
• The textile business in the US at that time was not a good business and was going downhill; to a significant part as a result of foreign competition, which was squeezing profit margins to the point of no return.
• Berkshire’s financial position was unlikely to improve.

He would later explain: “So I bought my cigar butt, and I tried to smoke it. You walk down the street, and you see a cigar butt, and it’s soggy and disgusting and repels you, but it’s free, and there may be one puff left in it. Berkshire didn’t have any more puffs. So all you had was a soggy cigar butt in your mouth. That was Berkshire Hathaway in 1965. I had a lot of money tied up in the cigar butt. I would have been better off if I’d never heard of Berkshire Hathaway.”

Buffett being Buffett turned Berkshire into a vehicle for making future investments and ultimately made it to a big winner. But there is only one Buffett and then there are the rest 99.9%.

So for the rest of us it is best to get out of losers early.

Tomorrow I will talk about my own follies. 

All the best. Please support the Nudge Foundation. They are doing a wonderful job. You can donate here. No amount is too small or big. Your participation will give the foundation and me a lot of joy and encouragement.

Regards

Anish

QED Capital  

Important Disclaimer: Please do not treat anything on my blog as investment advice. I do not provide any recommendations of any stocks or securities. Any stock mentioned may be merely by way of an example.

Related Links

1. WarrenBuffett Admits To 5 Big Mistakes
2. Brilliant Blunders