Regular readers of my articles will know that I like to spend a lot of time analyzing Warren Buffett (Trades, Portfolio)’s greatest mistakes. The reason why I spend so much time looking at the Oracle of Omaha’s errors is simple; I believe there’s far more to learn from mistakes than successes.
For example, a couple of years ago, Buffett decided he would devote some of Berkshire Hathaway’s (NYSE:BRK.A) (NYSE:BRK.B) massive equity portfolio to airlines. At the time, this seemed strange to his followers, but it made a lot of sense financially. The airlines were returning billions of dollars in cash to investors thanks to their highly profitable operations.
Unfortunately, the coronavirus pandemic has brought many of the airlines Buffett acquired at Berkshire to their knees. However, the Oracle of Omaha realized relatively quickly that he had made a mistake and decided to get out of the positions as soon as possible. The lesson for investors here is that it is better to exit mistakes as quickly as possible, rather than wait and see what happens.
Another mistake that could have been a disaster for Berkshire was the Gen Re transaction. Let’s take a look.
Buffett on Gen Re
Two things went wrong with this deal. First of all, it turned out that the business had much more exposure to financial derivatives than Buffett had anticipated. Secondly, it had a bad reputation.
As Buffett noted at the 2009 Berkshire annual meeting, “I was dead wrong, in 1998, when I bought it, in thinking that it was the Gen Re of 15 years earlier, which had absolutely the premier reputation in the insurance world.”
Buffett was able to avoid disaster by using his business experience. On the derivative front, he instructed the Gen Re team to unwind as many of the company’s derivatives as possible as quickly as possible. This was Buffett acting swiftly to limit the impact of a potential disaster rather than waiting around to see if anything would get better, just as he did earlier this year with the airline stocks.
Secondly, he brought in a new management team to help restore the business’s reputation. This is one of Buffett’s skills that often flies under the radar. Throughout his business career, he has acquired many businesses, but he’s always taken a back seat in these companies’ management. Where he has excelled is in finding good managers to run these businesses on his behalf. Solomon Brothers was perhaps the one big exception (excluding Berkshire itself).
Buffett knows how to find good managers and knows how to motivate them to achieve the best result. This has been by far a much more critical skill over the years than finding the businesses.
In 2009, Buffett highlighted the work of managers Tad Montross and Joe Brandon, who had helped turn Gen Re around:
“But Joe and Tad, when they took over in, what, September of 2001, actually — right about the time of the World Trade Center problem — they took after all of the problems. They went right after them, reserving, underwriting, whatever it might be. And Gen Re is the company now that I thought it was when I purchased it in 1998. So we’re proud of them. It was a very tough job. It wasn’t one that was going to get done by itself. And that, to some extent, when you tighten up on an organization that has fallen into some lax ways, it can — you know, that is not an easy job.”
We can draw two main conclusions from the Gen Re case study. First of all, if something goes wrong, it is sensible to cut your losses and get out as soon as possible. Second, good managers are key.
Disclosure: The author owns shares in Berkshire Hathaway.
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About the author:
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.
Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.