What can we learn from Buffett's mistake?
Did Warren Buffett ever make mistakes in investment? The answer
is yes, he just made one quite recently. As Buffett fans, we can
at least learn as much from his mistakes as we can from his
successes.
In 1998 Berkshire 's MidAmerican operation initiated a zinc
recovery project. Large quantities of zinc were (and still are)
present in the brine produced by Berkshire 's California
geothermal operations, and Buffett and his CEOs believed they
could profitably extract the metal. During the process, it
appeared for quite a while that the operation was
commercially-viable. But as they solve one problem, another
problem popped up. In September 2004, Warren Buffett gave up.
Berkshire lost more than $500 million in this operation.
Warren Buffett has avoided investing in technology businesses
because those are too hard to understand. Zinc recovery does not
seem to be a high-tech, but it is certainly not a simple
business that he usually invested in. In summarizing this failed
investment, Warren Buffett wrote in his 2004 annual report: "Our
failure here illustrates the importance of a guideline - stay
with simple propositions - that we usually apply in investments
as well as operations. If only one variable is key to a
decision, and the variable has a 90% chance of going your way,
the chance for a successful outcome is obviously 90%. But if ten
independent variables need to break favorably for a successful
result, and each has a 90% probability of success, the
likelihood of having a winner is only 35%. In our zinc venture,
we solved most of the problems. But one proved intractable, and
that was one too many. Since a chain is no stronger than its
weakest link, it makes sense to look for - if you'll excuse an
oxymoron - mono-linked chains."
Stay with simple propositions! This is one of the key guidelines
for successful investing. We want to invest in the businesses
that do not need to a lot of guesswork and predictions. The
businesses need to have the track records of long-term
profitability. The operation models of the businesses do not
need to be changed due to economic conditions or emerging new
technologies.
Want a higher chance for a successful outcome? Stay with simple
business!
Source: http://www.gurufocus.com/