But I really disagree with Buffett on one thing, and that is his claim of his greatest errors being those of omission rather than commission. Here are comments from Buffett and Munger at the 2004 annual meeting:
The main mistakes we’ve made – some of them big time – are: 1) Ones when we didn’t invest at all, even when we understood it was cheap; and 2) Starting in on an investment and not maximizing it.
Charlie is a big fan of doing things on a big scale. But when I bought something at X and it went up to X and 1/8th, I sometimes stopped buying, perhaps hoping it would come back down. We’ve missed billions when I’ve gotten anchored.
Munger: Do you have anything worse to confess than Wal-Mart?
Buffett: I cost us about $10 billion. I set out to buy 100 million sharers, pre-split, at $23. We bought a little and it moved up a bit and I stopped buying. Perhaps I thought it might come back a bit – who knows? That thumb-sucking, the reluctance to pay a little more, cost us a lot. There are other examples.
And Buffett Again on mistakes of omission from the 2007 Letter to shareholders:
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.”)
I understand what he is trying to say. When you have quality in front of you at a fair or excellent price buy a big position, don’t worry about a few percentage points one way or the other. But what I desperately want to ask Buffett is how much have you saved Berkshire shareholders BECAUSE of your thumb sucking. How many times were you able to get a better price because you had such incredible discipline and refused to pay up ? How many times did your thumb sucking allow you to have a boatload of cash at your disposal at exactly the correct moment ? How many tens of thousands of good decisions did you make by passing on certain investment opportunities ?
My point is this. Buffett’s discipline and thumb sucking is probably the single greatest contributor to his investment outperformance over the year. Of course there are going to be a few instances where it resulted in him sitting on the sidelines when he should have been playing. Or more accurately taking pitches when he should have been swinging. Those omissions aren’t mistakes they are part of what makes Buffett great. Yes, looking back on the two examples above make it look like the decision to buy should have been obvious, but rather than having this short list of mistakes of omission I’d much rather have his very long list of investments he passed on where those pitches that he took were good decisions.
I say wear your mistakes of omission as a badge of honor Warren. That thumb sucking is what has made you great. I struggle every day to keep my thumbs in my mouth and off my buy button. Because of you Warren I’ve learned that sitting with cash is not a bad thing, it is a very sensible option. Yes I will miss a lot of opportunities and may underperform the stock market for long stretches of time. But I will not lose money. And that is the key to long term success. So I’m planning on making several mistakes of omission next week. And every week after that.