Sunday, August 13, 2006

A Buffett Quote du Jour

"It is comforting to be in a business where some mistakes can be made and yet a quite satisfactory overall performance can be achieved. In a sense, this is the opposite case from our textile business where even very good management probably can average only modest results. One of the lessons your management has learned - and, unfortunately, sometimes re-learned - is the importance of being in businesses where tailwinds prevail rather than headwinds."

This quote is from the 1977 Berkshire annual.

Certainly, some of the biggest mistakes I have made in my investment career have been on the basis of being overly contrarian when the obvious was staring me in the face...I was looking at a failing industry, the one-puff cigar.

Making too many excuses for why a stock is cheap often flies in the face of all the contravening evidence, that perhaps one is investing in a very tough industry, or one that is seeing new competitive forces.

Many years ago (even before I was an analyst) stock research departments were known as statistics departments. But research is far more than statistics...understanding the competitive advantage for a business is far more important over the long run to investment success than buying a stock just because it is cheap.

For years, Bethlehem Steel appeared to be one of the cheapest stocks around, trading at a fraction of its stated book value. It didn't matter. That was the problem, book value was not a reflection of value...competition from imports, rising health cost and pension costs from its roster of retired workers was far more critical than valuation.

One of the worst investments I ever made was in a catalog retail business, Service Merchandise, a 42 year old business that had once been a top retailer in the nation, achieving over $4 billion in sales. A series of restructurings were to no avail. The obvious should not be an impediment, yet I resisted the obvious and inevitable fate. Turnarounds and contrarianism provide some bravado, but sometimes a false one.

Ponder what stocks you hold simply because they appear too cheap to sell. What are you missing? What new competitive factors are nipping at the heels of your holdings?

Be in a business where tailwinds prevail rather than headwinds!

Disclaimer: I. my family, and some clients currently have a position in Berkshire Hathaway


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