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Warren Buffett: Buying Berkshire Hathaway Was $200 Billion Blunder (yahoo.com)
166 points by px on Oct 18, 2010 | hide | past | web | favorite | 34 comments

Once I heard a story about Disney buying ABC (quotes not exact).

DreamWorks had hired some of Eisner's top guys producing TV animation and had a deal lined up to produce a slate of shows for ABC's Saturday morning lineup, which was a big deal in the mid-90s for a just-starting studio like DreamWorks. Of course, when Disney bought ABC, that deal quietly came to a end, and eventually so did DreamWorks' TV animation department.

Jeffrey Katzenberg was asked by one of his staff why he thought Disney bought ABC. He was convinced that what Eisner most wanted was to take the ABC Saturday morning lineup away from DreamWorks -- to torpedo one of Jeffrey's first deals at his new company.

The staff member said, "But come on, this is business, this is a nineteen billion dollar deal! Nobody pays billions of dollars in order to personally screw someone over." Jeffrey laughed and replied, "No, when it's that much money, it's always personal."

Your story is a little hard to follow because you have both ABC buying Disney and Disney buying ABC.

Wow, you're right. Fixed it, thanks.

He was right about the error, but wrong about it being hard to follow.

Thanks. I heard it from the person involved fifteen years ago and hadn't told the story before, so I'm glad it still came out well.

I recently read that Disney primarily bought CapCities/ABC because of ESPN.


It's certainly the reason you would cite now, with 20/20 hindsight.

The power of the broadcast networks went downhill pretty soon after that deal, so it seems curious that Disney (then mostly a theme park operator and movie studio) would buy the whole shebang in order to get a sports network.

Maybe Eisner would understand that by buying ESPN, in ten years he would have the greatest leverage against cable operators in carriage deal negotiations.

Maybe. He also bought Fox Family for $3 billion six years later. I wonder what he's saying about that deal now.

Or maybe he wouldn't have learned necessary and important lessons if he hadn't bought the textile business.

Learning lessons is good, but it's preferable to not blow a significant fraction of your net worth learning something you'd probably have learned anyway.

Sometimes the lesson isn't really learned any other way.

Which makes sense given his professed strategy of discovering sound businesses and investing in effective management teams for them and then staying out of their way.

Back then this was not his strategy. There are actually 3 types of Warren Buffett over the years.

Basically three stages, with a few strategies per stage. I'll try to use well known to hn tech examples to illustrate.

Early years (during the hedge fund): 1) The "cigar butt" value-investor -- looking for companies which held more book value (assets like cash on hand, factories, etc.) than capitalization (stock price times shares outstanding). Arguably Sun Microsystems (right before Oracle bought them) and Yahoo now are pretty close to this in big tech companies, but back in early/mid 20th century, there were LOTS of these.

2) Value investing -- looking for brands which have growth potential but are undervalued by the market. Apple right after Steve Jobs returned would be a tech example.

3) Special case situations, like arbitrage -- for instance, right before a merger, buying one or the other stock, and if you have someone like Apple releasing a product which has a component from one vendor, buying that vendor's stock.

WB largely ended this strategy for two reasons: it was successful enough to use up most of the available opportunities (as well as attract copycats), and it was very labor/research intensive for the returns you could get -- good percentage returns, but it was difficult to employ large amounts of money. Sort of like angel investment vs. mezzanine IPO financing.

Mid years (70s and 80s): insurance

WB discovered the insurance industry (through GEICO), and basically had "free money" to invest (which is what an insurance company does with premiums). He went from value investing to buying entire companies (or large shares) which he thought would grow and remain good companies.

Late years: (1990s to now): top-quality He basically has the problem of having too much money to invest, and thus can only go after the largest opportunities; a 10x return on $1m is not enough to move the needle. Thus, WB and BH buy entire top-quality companies, with a focus on sustained performance, vs. making a lot of speculative bets.

The old-school WB (and even better, Ben Graham, his early role model), is the only interesting one to me -- once he had established his track record doing something well, he was in a position to make reasonable investments no matter what. Getting to that point was the interesting part.

can you elaborate on the three Buffetts?

Initially Buffett started out as pretty much an arbitrageur, he focused on companies selling below their liquidation value. This was all from learning under Benjamin Graham. So if you look at his partnership years, he would often invest in companies where they had hidden assets.

Sanborn Map company sold maps, but they also had an investment portfolio that dwarfed their market cap. So he had them sell it off. He did a lot of cigar butts like that. Back then, Buffett was pretty pushy. He would do whatever it took to acquire all the stock of companies and would sack the management teams and replace them with others. At one point an entire town in Dempster protested against him.

Then he met Charlie Munger and Munger got him to start focusing on acquiring good businesses that had franchise values. See's Candy is the best example. So he looked for companies with sustainable competitive advantages and high returns on invested capital. So he started to buy your good businesses run by great entrepreneurs with little actual control. The only thing he would ask is if they could not meet an internal hurdle for ROIC (return on invested capital) that they give excess capital for him to redeploy.

Now, if you look at what Buffett has been doing, he's continued to evolve a bit. He seems much more focused on buying utility-like businesses. MidAmerican and Burlington Northern exemplify this. They don't throw off cash that can be redeployed elsewhere like the previous Berkshire deals. At the same time though, they potentially can be around for the next 50 years and increase prices to make up for inflation.

These deals are probably going to continue. Buffett must realize that his 3 replacements wont be as good at allocating capital, so he will need to find businesses that are great but also utilize a lot of cash. That would reduce the burden on his CIO replacements.

The transition from bargain trader to long term investor had a lot to do with the magnitude of his war chest. You can ex: flip houses with time, skill, and a million dollars, but it's much harder to see a large ROI when flipping houses with time and a billion dollars. It’s all about maximizing ROI as your time becomes more limited than your capital.

PS: He once said, I can find plenty of people that can consistently turn 1 million$ into 2million$ in a year, I can't find people that can consistently turn 1 billion$ into 2 billion$ in a year.

Buffet describes the 'businesses with franchise value' as a company with a large moat - or brand value. That's why he owns large stakes in companies like Coca-Cola. They're not unique, but consumers are willing to pay a premium even though there are competitors that offer a similar product.

Yeah, I mean one of the reasons he purchased Coca-Cola was actually because of what Roberto Goizueta did when he came into the company. At the time Coke was #2 in supermarkets behind Pepsi.

Goizueta did a lot of great things. He separated out the bottler business and got them to focus on returns on invested capital with every investment they made. He made a ton of money for shareholders. Buffett has remarked that he held KO stock too long but now I believe he keeps it mainly to collect the dividends, his cost basis is low.

Coke is now wanting to reacquire the bottling business to keep the costs low. Last year Pepsi re-acquired its entire bottling business and runs it by itself.

Yeah, if you watch his comments on CNBC, he was a bit disappointed by that decision since it will consume more capital in the business. He prefers just owning the concentrate business.

Buffett is an insurance guy. Insurance companies give him free float to go buy 'great companies' (well - at least until the economy crapped out its own skeleton). It will be interesting to watch the stock when that old man passes away. I have tried numerous time to read "The Intelligent Investor" and man - I guess my ADD is just too much to do it.

He also has unprecedented access to financial data of companies he may be sniffing around - not the garbage you and I see in SEC documents. (although 10q documents are treasure chests of company info for research).

You can try reading Graham's "Security Analysis" instead. It's a much harder book--so it might keep your interest for longer.

"cigar butts"?

Leaving emotion out of investing.

His comment about if you come back in ten years he might have another...

Is that a reference to his puts on S&P and other indexes?

My guess is that the bigger BH gets, the bigger that lost opportunity gets.

No, it is his usual humbleness. If you read his letters to the shareholders he is always willing to admit a mistake and is always tries to dispel all of the myths that he is some kind of an "oracle" that can see the future.

Right, but his puts run for another ten years, or thereabouts.

So when that time rolls around, we'll see if his big bet on derivatives was a mistake or not.

So I was wondering if he was alluding to that in particular.

It's nice to know that the Sage of Omaha is/was just as prone to irrational behavior as every other CEO.

How is that nice to know? It'd be much more edifying if he were rich precisely because he doesn't make this kind of mistake.

Because it makes you feel that it's possible for you too to make it and still make mistakes.

Er, there's a quantitative difference between one mistake and two mistakes.

Success like Buffet's is so adventitious, you can't make much of counter-factuals like that. For instance, it has probably been helpful to have his biggest-ever emotion-driven mistake staring him in the face, day after day.

The link initially redirected me to the Yahoo search page (maybe because I'm in Uruguay)

I was able to navigate to the news from there, but it's still odd (now the link here at HN works for me).

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