You will recall my earlier post about Warren Buffett’s terrible investment in ConocoPhillips where we noted that “Warren Buffett Holds When He Should Fold”.
In it I described how Buffett continued to hold onto his ConocoPhillips investment and managed to check through all the way to the river (fortunately he didn’t up his initial stake!) even though the “5 board cards” he was dealt – the oil price falling from $140 to $40 – were absolutely terrible compared to what his starting hand had needed from the flop, turn, and river.
When the investing community sees this kind of decision from Buffett (without Charlie Munger’s input) there seems to be a need to try to explain how the Sage of Omaha could stay in such a trade.
I found one way of answering this question when reading the latest post from the excellent “Jeff Matthews Is Not Making This Up” blog. The post is entitled “What They Want to Know: Our Top Ten List for Warren Buffett”. Jeff has stated that his objective for this year’s Berkshire Hathaway AGM is to provide Warren and Charlie with some searching questions that are directly related to Berkshire’s businesses. Therefore, Jeff asked his blog readers to send in suggested questions and he has selected 10 questions which will be put to the board at the Berkshire AGM. I’m sure that these 10 questions won’t be the only difficult questions that Buffett and Munger have to answer given the performance of Berkshire Hathaway as described in “Berkshire’s 31% Decline Spurred by Derivatives Buffett Derided” at Bloomberg today.
The key questions that relate to Buffett’s infinite Investment Flop referred to in the title of this post are:
- #3 Washington Post went from being a local paper to a national paper to a learning company. Wells Fargo went from being a conservative bank to a highly leveraged mortgage lender. Moody’s went from being a boring ratings agency to a co-conspirator in the mortgage bubble. How do you justify holding stocks “forever” when the original investment eventually becomes unrecognizable in most cases?
- #7 What factors, if any, would cause you to change your favorite holding period from “forever” to “sometime in the future” when thinking about the challenges your businesses face?
The “forever” holding period just doesn’t fit with the Texas Holdem Investing method. Every investment decision should have some sort of limit based on time or performance. And granted that you can change this limit as the investment progresses, but you shouldn’t set forever as your limit. Business history shows that very few companies can last for even 10 years, let alone forever.
And, as a round off to this post, I see that Jeff and his crew will also be asking Warren about his ConocoPhillips decision.
- #8 On Conoco, it seems Berkshire made the uncharacteristic move of buying an asset with a price chart that went straight up, rather straight down. Please explain the decision making process on Conoco and what you learned from this admitted mistake.
Maybe I should submit a Texas Holdem Investing question myself?
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