1996 U.N.C. Lecture Series continued...
6. What are some of your investment mistakes?
Warren Buffett says that anytime he has a lot of cash, he is prone to making investment mistakes. However, the type of mistakes he discusses are not found in any type of accounting.
"The nature of not doing very many things and being careful about them probably will keep you from making big errors of commission. Errors of omission are the ones that are the big sins"
Errors of omission are great opportunities that he should have taken advantage of when they arose, but did not and ultimately cost the shareholders billions of dollars. For example, he had the opportunity to take a huge position in The Walt Disney Company. He bought shares (5% of the company) costing a total of $4 million and sold it a year later for $6 million when at the time of the lecture, it would be worth approximately a billion. These are mistakes that investors don't see; mistakes he refers to as 'errors of omission'.
7. Why invest in U.S. Air given that the airline industry is such a challenging one?
Warren Buffett's response was 'temporary insanity'. It was a case of great manager, terrible industry. The manager was operating with revenues based on market factors, and costs that are not based on market factors and that's a recipe for disaster.
An important point to know is that the airline industry, collectively, has an overall negative return, and therefore has not returned any wealth to shareholders. Billions of dollars have been invested in this industry, but no value has been created collectively. This reminds me of a quote he made at some point in time;
"When the great manager enters a lousy business, it is the reputation of the business that remains."
Sometimes, no matter how great the manager is, it is the reputation of the business, or in this case, the industry that has a greater impact.
8. Question about the stock market...
His response was as consistent as always, and this is a very important concept to understand. It is simple, yet difficult to implement.
"I never think about what the stock market is going to do when thinking about an investment. I think about what the company is going to do over time. If something looks intelligent to do, I'm not going to forego it because someone else has an opinion on the stock market. I am not going to trade or give up something I know how to do because of some opinion of something I do not know how to do. And I do not know how to predict interest rates, I do not know how to predict stock market movements. All I know is that if I buy the right kind of business at the right price, with the right people, I will do well over time. And in stocks, it is very hard to know when something will happen, but it is easy to know what will happen.
...My attitude towards buying the whole company is the same towards buying a percentage of the company."
Part 1: Qualities of Character