Investing Blunders

Warren Buffett once said the following about his decision to purchase Berkshire Hathaway (BRKa) back in 1964:

"I had now committed a major amount of money to a terrible business. And Berkshire Hathaway became the base for everything pretty much that I've done since. So in 1967, when a good insurance company came along, I bought it for Berkshire Hathaway. I really should— should have bought it for a new entity.

Because Berkshire Hathaway was carrying this anchor, all these textile assets. So initially, it was all textile assets that weren't any good. And then, gradually, we built more things on to it. But always, we were carrying this anchor. And for 20 years, I fought the textile business before I gave up. As instead of putting that money into the textile business originally, we just started out with the insurance company, Berkshire would be worth twice as much as it is now...This is $200 billion. You can— you can figure that... Because the genius here thought he could run a textile business."

Buffett's $ 200 Billion Blunder

Berkshire's textile operations were shut down in 1985.

The above is from an interview with Becky Quick of CNBC that happened back in 2010. This past May she sat down for an interview with Warren Buffett, Charlie Munger, and Bill Gates. During the latter part of this interview she asked what they thought were the "worst trades" they've made in the past. Buffett, understandably considering the scale of the error, brought up Berkshire again.

QUICK: "...Warren has talked about his worst trades in the past. And Warren, I believe you said it was Berkshire Hathaway itself that was your worst trade."

BUFFETT: "Yeah, but I have plenty of other competitors...there are three companies [that] came together for Berkshire, actually. Diversified Retailing and Blue Chip Stamps were two others. And the base companies of both of the other two totally failed, disappeared. So we're three for three in terms of our building blocks. And we thought they were okay at the time, didn't we, Charlie?"

MUNGER: "Well, we bought them so cheaply, that we could return more money than we paid. And then we took the money and bought these other companies. So it wasn't as though we lost big chunks of money. It's just that it was such a dumb way to do business. Scrambling around with those unfashionable dying businesses, Textile Mills in New England. The power costs in the south...were 60% lower than they were in New England... What kind of an idiot would go into textiles in New England?"

BUFFETT: "The guy on your right."

MUNGER: "Yeah."

Later Charlie Munger said the following when asked a similar question:

MUNGER: "I made a tech company investment. And we damn near went broke and we hovered on the edge of a precipice for about three or four years. And it was agony. And it was a lot of money to me at the time. Now, we scrambled out of it with a pretty good profit. But it wasn't the world's smartest investment. And it took a lot of intelligent scrambling to rectify the situation. And I'm not looking to repeat the dumb decisions that got me there."

BUFFETT: "We'll find new ones."

QUICK: "Yeah."

MUNGER: "Yeah, we will."

I'd quibble with the terminology "worst trades" since neither Buffett or Munger really engage in trading activities or, at least, have not done so for a very long time.

Those who invest know -- or, one way or another, likely will come to know -- that mistakes are nearly inevitable. The question is how costly they are allowed to become and whether what's learned along the way is effectively put to use.

Some expend an awful lot of energy trying to prove to the world, and convincing themselves, that they're right. The process (of convincing) itself can serve to reinforce and solidify ideas -- whether flawed or otherwise -- possibly leading to a calcified world view that's increasingly less willing consider alternatives.

"The first principle is that you must not fool yourself -- and you are the easiest person to fool." - Richard Feynman

Sometimes -- or, possibly, often -- it'd have been better redirecting that effort towards the exploration of whether a particularly favored idea deserves such a status.

"To kill an error is as good a service as, and sometimes even better than, the establishing of a new truth or fact." - Charles Darwin

Ideas, even those most favored (especially those most favored?), should be viewed more skeptically and challenged relentlessly. Easier said.

"If others examined themselves attentively, as I do, they would find themselves, as I do, full of inanity and nonsense. Get rid of it I cannot without getting rid of myself. We are all steeped in it, one as much as another; but those who are aware of it are a little better off -- though I don't know." - Michel de Montaigne

Some healthy doubt can be a very useful thing.

An attitude that, to me, has a good chance of being applicable beyond the world of investing.

Though I don't know.

Adam

Long position in BRKb established at much lower than recent market prices

Related post:
Buffett's $ 200 Billion Blunder

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