It is highly recommended that the reader start with part 1 of this series.
Part: 1, 2, 3, 4, 5, 6
This video begins in the middle of Warren answering question number 5. The discussion on question 5 exists entirely in this part of the 6 part series.
Question 5: Could you discuss one of your investment non-successes?
Answer: Let's just call it a failure. Buffett makes more mistakes when he has to much cash around. There is a compulsion to do something with it. He admits that he likes to blame cash, but it might be pure stupidity that has caused those errors.
Regarding the non-successes though, there is rarely a large loss relative to capital. The largest loss Berkshire or his partnership has ever had was probably 2%. The nature of not doing very many things and being careful will probably prevent you from making errors of commission (doing something). But being careful will not protect you from errors of omission. In 1988, Buffett began buying Fannie Mae. Berkshire made $500 million on it but should have made over $1 billion on it. It's the mistakes you don't see that are the failures. Those failures are way bigger than the mistakes you do see. Conventional accounting does not pick up mistakes like this.
In 1966, Buffett Partnership, Ltd owned 5% of Disney. It had a market cap of $80 million at the time. They spent $17 million to build the pirates ride. Buffett laughingly states that Disney was trading at 5 times rides. The kicker though was that Mary Poppins was showing that year in theaters and nothing was lined up for theaters the next year. So, Wall Street was down on the stock even though this year it was going to have good earnings. The good news is that the Buffett Partnership bought 5% of Disney for $4 million and sold that 5% for $6 million the next year. Had they held on, that $4 million would be worth $1 billion in 1996 if he held on. Conventional accounting does not pick up that mistake.
Question 6: What prompted him to make an investment in US Air?
Answer: The best answer is temporary insanity. The guy that runs US Air is a wonderful guy but it is a tough business. If you go back to Kitty Hawk, the airline industry in the United States has made no money (net earnings). But if you were at Kitty Hawk and realized the potential, of course you would want in. Despite all the capital investment, the net return to date (1996) for the entire industry is less than zero. So, along comes 1989 and Buffett has a lot of cash. Buying US Air was 100% Buffett's idea. He is the only one to blame. US Air is run by a bright guy. The root problem according to Buffet is that US Air operates on revenues that are driven by market factors and by costs that are not driven by market factors. That is a formula for disaster.
Kitty Hawk is Kitty Hawk, North Carolina. This is where the first Wright Brothers' flights occurred.
Question 7: Freely talking, no question
Answer: Warren Buffett never thinks about what the stock market is going to do. If Walt Disney came to him and asked Warren to buy 5% of the company in 1966 and it was a private company, he would not care about what the stock market was going to do. He'd care about what the company is going to do. He says the same exact thing about Coca-Cola. He'd only consider the Coca-Cola company.
If Alan Greenspan whispered in his ear about what he thinks interest rates or bonds are going to do, it wouldn't matter. He isn't going to take something he knows how to do and start doing something he doesn't know how to do just because someone whispers in his ear. He doesn't know how to predict interest rates or the stock market. He only knows that if he buys the right kind of business run by the right people at the right price, he will do well over time. With stocks, it is very hard to know when something will happen but very easy to determine what will happen.
Buffett bought See's Candy under the Berkshire Hathaway umbrella in 1971 or 1972. He didn't care about the stock market when he bought See's. He cared about what the risk from Russel Stover, if prices can be increased over time and how strong their hold is on chocolate consumers. If that's the proper attitude for buying 100% of a company like See's, why should it be different for 6% of a company like Coca-Cola?
He also briefly talks about how SunTrust Banks, Inc (ticker: STI) came to hold Coca-Cola. It's interesting to see that their investment in Coca-Cola of just over $100,000 is now worth over $1,000,000,000. That is a 10,000% gain. That's the power of buy and hold.
You can't tell what the stock market is going to be like 2 years out. If you see an intelligent investment, you invest in it.
Part: 1, 2, 3, 4, 5, 6