Investing In the Wonderful Business

Another blast from the past.

(Continuing on the wonderful compilation of Warren Buffett's sayings done by Bud Labitan called "The Warren Buffett Business Factors" but unfortunately the link I had recorded is broken.)

The Wonderful Business

Time is the friend of the wonderful business, the enemy of the mediocre. You might think this principle is obvious, but I had to learn it the hard way. In fact, I had to learn it several times over. Shortly after purchasing Berkshire, I acquired a Baltimore department store, Hochschild Kohn, buying through a company called Diversified Retailing that later merged with Berkshire. I bought at a substantial discount from book value, the people were first-class, and the deal included some extras - unrecorded real estate values and a significant LIFO inventory cushion. How could I miss? So-o-o - three years later I was lucky to sell the business for about what I had paid.

I could give you other personal examples of "bargain-purchase" folly but I'm sure you get the picture: It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie understood this early; I was a slow learner. Now, when buying companies or common stocks, we look for first-class businesses accompanied by first-class managements.

That leads right into a related lesson: Good jockeys will do well on good horses, but not on broken-down nags. Both Berkshire's textile business and Hochschild, Kohn had able and honest people running them. The same managers employed in a business with good economic characteristics would have achieved fine records. But they were never going to make any progress while running in quicksand.

I've said many times that when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. After many years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them. To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers.

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Truly a stock investment classic!

Warren Buffett's excellent comments highlights the folly of buying/investing in a company just because the price is cheap.

As commonsense would tell us that the cheap price does not gurantee us anything at all.

What one merely did is one paid for a business at a cheap price but obviously the more important thing is the type of business we paid for!

Buying a lousy stock at a cheap price - is never a sure win thingy.

The lousy could simply get lousier!

Anyway, this is another example of how one could benefit from learning from other people's mistakes. Buffett bought Berkshire because Berkshire was selling at a substantial discount from its book value, got fantastic people managing the company and even has some hidden gems in terms of unrecorded real estate.

So what went wrong for Buffett?

He made the folly of underestimating the poor underlying business economics of the textile business in Berkshire. By 1985 the textile business in Berkshire failed.

Quote:

"I knew it was a tough business... I was either more arrogant or innocent then. We learned a lot of lessons, but i wish we could have learned them somewhere else," he said.

Buffett once joked of Berkshire's textile business that the assets weren't worth what he tought they were, "but the liabilities were solid."

-- Of Permanent Value ( pg 157)

Lesson?

Buying a stock because of a low price versus NTA or low price versus book value is never a sure win thingy.

Berkshire Hathaway is a real example!