Never Too Big To Admit Mistakes

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I have repeatedly talked about the importance of not only tracking a sell stop but actually executing it when the price point is triggered. Many readers have told me that this is one of the most difficult things to do. Why? Very simply, because it is an admission of having been wrong especially if that sell stop triggers a loss as opposed to locking in a gain.

Get over it! When you invest, you will have losses and admitting that you were wrong from time to time will not kill your portfolio. What will kill it is letting small losses turn into large ones.

If you need a reason to get over that false sense of pride, take a look at how Warren Buffett, one of the greatest investors of our times, handles this issue. If you think he never makes mistakes, think again. Here’s an excerpt of his letter to shareholders (page 8) for the world to see:

And now it’s confession time. It should be noted that no consultant, board of directors or investment banker pushed me into the mistakes I will describe. In tennis parlance, they were all unforced errors.

To begin with, I almost blew the See’s purchase. The seller was asking $30 million, and I was adamant about not going above $25 million. Fortunately, he caved. Otherwise I would have balked, and that $1.35 billion would have gone to somebody else.

About the time of the See’s purchase, Tom Murphy, then running Capital Cities Broadcasting, called and offered me the Dallas-Fort Worth NBC station for $35 million. The station came with the Fort Worth paper that Capital Cities was buying, and under the “cross-ownership” rules Murph had to divest it. I knew that TV stations were See’s-like businesses that required virtually no capital investment and had excellent prospects for growth. They were simple to run and showered cash on their owners.

Moreover, Murph, then as now, was a close friend, a man I admired as an extraordinary manager and outstanding human being. He knew the television business forward and backward and would not have called me unless he felt a purchase was certain to work. In effect Murph whispered “buy” into my ear. But I didn’t listen.

In 2006, the station earned $73 million pre-tax, bringing its total earnings since I turned down the deal to at least $1 billion – almost all available to its owner for other purposes. Moreover, the property now has a capital value of about $800 million. Why did I say “no”? The only explanation is that my brain had gone on vacation and forgot to notify me. (My behavior resembled that of a politician Molly Ivins once described: “If his I.Q. was any lower, you would have to water him twice a day.”)

Finally, I made an even worse mistake when I said “yes” to Dexter, a shoe business I bought in 1993 for $433 million in Berkshire stock (25,203 shares of A). What I had assessed as durable competitive advantage vanished within a few years. But that’s just the beginning: By using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion. In essence, I gave away 1.6% of a wonderful business – one now valued at $220 billion – to buy a worthless business.

To date, Dexter is the worst deal that I’ve made. But I’ll make more mistakes in the future – you can bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions:

“I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.”

I like his down to earth style of describing how things are and not how he would like them to be. There are great lessons to be learned from his attitude, so take that to heart and next time you find yourself on the losing end of a transaction, swallow your pride and think how Warren Buffett handles failures.

If you openly admit to a loss, rather than trying to hide it, you might even get some (deserved) sympathy from your better half.

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