Tuesday, 14 August 2012

Buffett can also be hard on himself. Sometimes, too hard.

In 1996, Buffett once again became a shareholder of Disney when it merged with Cap Cities/ABC, of which Berkshire was a major shareholder.  Buffett recalled how he had first become interested in Disney 30 years earlier.  Then,

"....its market valuation was less than $90 million, even though the company had earned around $21 million pre-tax in 1965 and was sitting with more cash than debt.  At Disneyland, the $17 million Pirates of the Caribbean ride would soon open.  Imagine my excitement - a company selling at only five times rides!"

"Duly impressed, Buffett Partnership Ltd. bought a significant amount of Disney stock at a split-adjusted price of 31 cents per share.  That decision may appear brilliant, given that the stock now sells for $66.  But your Chairman was up to the task of nullifying it:  In 1967 I sold out at 48 cents per share."

With 20/20 hindsight, it's easy to see that selling at 48 cents per share was a major blunder.  But in criticising himself for doing so, Buffett overlooks the fact that in 1967 he was still largely following Graham's investment model.  In that model the rule is to sell a stock once it reaches intrinsic value.

Nevertheless, he has clearly taken to heart Philip Fisher's observation that studying "mistakes can be more rewarding than reviewing past successes."

Buffett shows it is better to be overly critical than forgiving of your own mistakes.  As Buffett's partner Charlie Munger puts it:

"It is really useful to be reminded of your errors.  I think we're pretty good at that.  We do kind of mentally rub our own noses in our own mistakes.  And that is a very good mental habit."

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