In 1969, Warren Buffett (Trades, Portfolio) made a huge mistake, although the scale of this mistake wouldn't become apparent for several decades.
That year, the young investor used 5% of his partnerships' capital to buy a 5% stake in a little-known, up-and-coming company called The Walt Disney Co. (DIS, Financial).
Buffett worked out that the market value of the company was less than the value of its theme parks, which made the stock a traditional value investment. He bought 5% and then sold it a year later for a 50% profit.
Buffett would own Disney again in the mid-90s when the company acquired one of his favorite companies, Capital Cities/ABC. The $19 billion cash-and-stock deal left Buffett's investment firm holding 21 million shares of Disney stock.
By the end of 2000, Buffett had sold all of Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) Disney stock. The reason why he did this isn't clear. There has been some speculation that the Oracle of Omaha was upset with Disney's executive compensation policies. According to my calculations, if Buffett had held on to the 5% Disney stake he acquired in the late '90s, it would be worth just over $13 billion today.
The decision to sell Disney was not the only missed opportunity mistake Buffett has made over the years. In the early 2000s, the Oracle of Omaha also made a similar mistake with Walmart (WMT, Financial). Here's how he explained this trade at the 2004 Berkshire annual meeting of shareholders:
"I cost us about $10 billion. I set out to buy 100 million shares of Walmart, pre-split, at about $23. And Charlie said it didn't sound like the worst idea ever came up with, which is — from him, I mean, it was just ungodly praise. And then, you know, we bought a little and then it moved up a little bit. And I thought, "Well, you know, maybe it will come back" or what — Who knows what I thought? I mean, you know, only my psychiatrist can tell me. And that thumb sucking, reluctance to pay a little more — the current cost is in the area of $10 billion."
Today that 100 million-share position would be worth around $12 billion, and that's excluding dividends received over the past two decades. The total return is substantially higher. Walmart has produced a total annual return for shareholders of 7.5% since the beginning of 2004.
It might seem pointless going back and looking at these missed opportunities, but as Charlie Munger (Trades, Portfolio) said in 2004, it is essential to look at these mistakes and learn from them, as overlooking them would only compound the error:
"At least we are constantly thinking about the past occasions when we blew opportunities. Since those don't hit financial reports, the opportunities you had but didn't accept, most people don't bother thinking about them very much. At least that is a mistake we don't make. We rub our own noses in our mistakes in blowing opportunities, as we just did."
We can learn a lot from these mistakes as well. For example, with regards to Disney, we can learn from Buffett's error that it pays to hold onto high-quality companies that have a durable competitive advantage for the long term as these businesses are highly likely to outperform the market.
Concerning the Walmart mistake, the primary takeaway from this scenario is that sometimes it is better to pay up for quality if you think an idea is deeply undervalued rather than sit back and try and wait for the perfect price. If you believe that the stock is trading at a substantial discount to its intrinsic value, paying an extra 5% is not going to derail your investment thesis.
Disclosure: The author owns shares of Berkshire Hathaway.
Read more here:
- Warren Buffett's 1999 Prediction About E-Commerce
- Why It Is Important to Follow Charlie Munger and Break Down Your Ideas
- Buffett and Li Lu: Using a Punch Card to Beat the Market
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