Forever Investor

Everybody knows about Warren Buffett’s great investments, whether American Express, GEICO, or Coca-Cola, but what about his mistakes?

One of the best things about Buffett is his generosity, and I am not referring to the obvious bequeath here, but instead to his frankness in discussing investing in general and particularly his mistakes. I touched on one of these recently in a post about Tesco and it made me think that it might be interesting to read through a few of his old letters to shareholders to see what else would turn up; after all, in fifty years of investing he must have dropped a few balls? It will be interesting to see whether there are lessons that I can learn from these episodes.

But before we even get to his time at Berkshire, there is one fascinating piece of business to look at first–namely, the Walt Disney company.

Walt Disney

In 1966 Disney became possibly the first template Buffett investment, i.e. it possessed the full set of characteristics that Buffett has since became famous for seeking:

• Cheap to Fair price
  Roger Lowenstein says that it was selling for about ten times earnings. The entire company was selling for $80 million dollars, despite the fact that Mary Poppins had just made $30 million that year. It was also debt free.
• Moat = Pricing Power
  Its library was its own. Mary Poppins, Snow White and Bambi would be making kids laugh and/or cry for years to come. In fact there were 220 films and their value was–unbelievably–written down to zero. Nobody else could undercut him on Mary Poppins.
• Talented and Trustworthy Management
  Apparently Buffett, after meeting Walt Disney, was struck by his childlike enchantment to his work. Disney was a clearly talented and hard-working owner operator and would make an ideal partner.

Buffett didn’t hesitate and purchased 5% of the entire company for the partnership he was running at the time. He got this for the princely sum of $4 million dollars, which would barely purchase you a house in central London today. By the end of 1967, he had netted a profit of 55% for his partners on the Disney investment. So what’s the problem? He sold it at the end of that year for less than fifty cents a share (about $6 million). Today 5% of the Walt Disney company would be worth about $7.5 billion dollars, although that does not include any benefits that would have come from dividends, buybacks and spin-offs over the years and so you could probably nearly double that figure. You can watch WB discussing that $4 million dollar investment here.

Lessons

This is preaching to the converted but, for me, the lesson is simple: think long and hard before selling a holding in a great company that was purchased at an attractive price, however tempting another opportunity may look. While Buffett obviously did get extraordinary returns elsewhere, for most people selling Disney in 1967 would have haunted them for the rest of their lives.

Reckitt Benckiser might be a current parallel. While it is neither as ground-breaking nor as clever a company as Walt Disney, it is a well-run operator in the highly profitable business of marketing and selling consumer branded goods. It was announced yesterday that Neil Woodford has sold his holding due to its overly rich rating, which must ring an alarm bell for anyone else with a holding, nevertheless I will not be selling mine. I purchased my first lot of RB shares about three years ago and have added to this several times since then and so am lucky to have some ballast against a price fall (should this happen). Therefore, I will sit tight but with expectations of flat to negative returns in the medium term. In due course, hopefully RB will grow into its current valuation.

Disclosure: Long BRK.B, RB.
Disclaimer: This post is not a recommendation to either buy or sell. Please consult your investment advisor.