A Mistake That Cost Buffett Billions

Sometimes the cost of omission can exceed the cost of commission

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Feb 04, 2016
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When we start to invest, we are eager to try different methods of investing. We will try the methods with which we feel in love the most, the methods about which we already have some fundamental knowledge.

For example, investors with advanced math knowledge might love quant and technical analysis. Others might follow value investment. Of course, all investors will have a similar goal: to compound money at the highest rate for the longest period of time. However, our minds are often toward short-term large profits, which might sacrifice long-term gains. Besides, short-term gains might go along with higher risks, meaning that the probability of losing capital is quite high.

I define myself as a value investor, and I also have the same goal: to compound my money at the highest rate for the longest period of time. I understand that it takes time for a value investment position to generate returns, and I shouldn’t let my emotions dominate my investments. However, I still make some mistakes, and one of my frequent mistakes is selling winners too soon – or the mistake of omission.

USANA Health Sciences case

That happened with USANA Health Sciences (

USNA, Financial), direct-selling company of nutritional and personal care products. In October 2011, I wrote about USANA on GuruFocus and labeled it “One Nutritional Stock with Great Fundamentals Being Ignored by the Market.” At that time, USANA had all the characteristics of being the classic value investment type.

While the whole industry was valued at 15.7 earnings, USANA’s P/E was only 10.8, and the Price/Cash flow was low, at 7.6x. Its return on equity was super high (more than 40% in 2010) while it stayed cash free. At the time I wrote the article, the company’s share price was hovering around $28 per share. By 2012, when it reached $40 per share, I sold it. And it’s just too painful to look at the price today. After it shot up to more than $161 per share in August 2015, USANA now is at $120.30 per share.

USANA is still growing its business healthily, employing no bank debt. Its operating cash flow has also been on a continuous rise, from $66.1 million in 2010 to $105.2 million in 2014. Trailing 12 months, its operating cash flow was $112.3 million while the free cash flow came in at more than $100 million. With $174.2 million in cash, its enterprise value is currently around $1.5 billion. Thus, the market seems to be fairly valuing USANA at the moment, at 15 times its free cash flow.

Warren Buffett (Trades, Portfolio)’s big mistake

Warren Buffett (Trades, Portfolio) made a similar mistake 50 years ago with his investment in Disney (DIS, Financial). In 1966, Buffett had the chance to meet with Walt Disney. At that time, the company was debt free and was valued only $80 million on the stock market. Buffett decided it was the right investment and paid $4 million for 5% of the company.

One year later, he was “lucky” enough to make 50% on his Disney purchase, and he sold his 5% stake in Disney. However, several decades later, it turned out it was not as lucky as he thought. He mentioned that he bought the stock for 31 cents in 1966, sold it for 48 cents in 1967 and painfully saw it rise to $65 per share 30 years later  an 18.4% compounding machine.

Today Disney is trading at $93.70 per share, with the total market capitalization of $157.91 billion. Thus, if Buffett kept holding Disney until now, he would turn $4 million into $7.9 billion in 50 years, a 16.39% annual return.

Investors should not be short-term minded, which might sacrifice significant long-term gains. To be successful in investing, we should be patient and rational.

Always remember what Benjamin Graham taught us: “The investor’s chief problem – and even his worst enemy – is likely to be himself.”

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