Sunday, March 15, 2009

Even Buffett Isn't Perfect: Chapter 4

The moral of this chapter is: "Never Marry A Stock".

The author points out a number of instances where some of Buffett's stocks may have traded above intrinsic value, but Buffett has not sold. Unfortunately, this costs his shareholders money. The author argues that Buffett doesn't do this because he doesn't want to maximize shareholder value, but instead this is a result of the fact that Buffett does not think of himself as a stock picker, but instead a buyer of a business. As such, Buffett marries businesses.

The following quote from Buffett in Berkshire's Owner's Manual illustrates this point perfectly:

"You should be fully aware of one attitude Charlie and I share that hurts our financial performance: Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns...[G]in rummy managerial behavior (discard your least promising business at each turn) is not our style. We would rather have our overall results penalized a bit than engage in that kind of behavior."

Janjigian also discusses one method of investing that Berkshire is able to do that ordinary investors cannot: Private Investments in Public Equity (PIPE). Large investments in public companies allow the public company to save time and money. Some of this discount can be passed onto the buyer, who gets a deal on a stock that ordinary investors cannot. The author discusses a number of such PIPE deals Berkshire has profited from.

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