Warren Buffett on When To Give Up on a Business
\[00:00 - 00:25\] Question - Jenny Johnson, Franklin Templeton Investments:
>**Q: How do you know when to throw in the towel on an investment or a business?**
\[00:00 - 05:44\] Answer - Warren Buffett:
>Uh, when to throw in the towel on an investment or business. Or business? Yeah.
>Well, you know you do it too late. I went into the textile business by accident in 1965 and I threw in the towel about 20 years later and that was about 20 years too late.
>There's a great tendency to want to hold on, justify old decisions. I mean it's a human trait.
>But when you really know you've got a bad business is when you have a good manager and you're getting bad results. I mean when you're getting bad results with a bad manager you still have to examine the question of whether you can get better results if you got a better manager. Usually you can't. I've said in the past that when a management with a reputation for excellence encounters a business with a reputation for bad economics, it's the reputation of the business that remains intact. And I've proved that many times.
>There are businesses that are just plain tough, you know, and there may be too many competitors but there's reasons why they don't drop out. We started out in textiles and we made over half of the linings for men's suits in the country and we went through World War II and got awards and Sears Roebuck named us their supplier of the year and all of that sort of thing. And then we'd say, well we'd like to increase the price of these linings a quarter of a cent a yard and Sears would say, you must be out of your mind. There's 10 other guys that'll sell it to us at the old price. And nobody ever went into a Sears store and said I'd like a blue serge suit with a Hathaway lining. You know, it didn't exist. We had no connection to the consumer.
>And there are lots of lousy businesses, you know, and there's lots of wonderful businesses. My job over the years has been to try and figure out which is which and I've made plenty of mistakes. I bought a company called Dexter Shoes in the early 90s, I paid $400 plus million dollars for it and it made a lot of money before I bought it but as soon as I bought it, they pulled some switch or something and it immediately started losing money and it was because of foreign competition or it was maybe because I owned it, I don't know. And it went to zero. And the worst thing was that I paid for it in stock, so that $400 million in stock I gave at the time is now worth about 5 billion. So every time Berkshire stock goes down I feel a little bit better because of my opportunity loss on this business.
>But you know when I looked at Dexter Shoe they had a good position in retailers, they turned out good shoes, they had a great workforce, all kinds of things, but I just forgot one thing — that they weren't going to make shoes in the United States anymore. So you make mistakes and it does pay to recognize quickly when you made them. If you got a good person running a business and it isn't making any money, you know, you're in the wrong business and you've got to face up to that.
>**Q: And I think the other half of the question was about investments. Do you have any rule of thumb about when you give up on or when you realize it?**
>Well, again, I love it when the things we buy go down. I just, I get euphoric. You know, the stocks are down today and I buy more of something I was buying yesterday and buying it cheaper. Now, when you go to the grocery store and you buy something cheaper than you bought it the day before, you think that's terrific. But people with their stocks, they think that the stock knows more than they do. So that when the stock goes down they say the stock is telling them something. And it was telling me I can get more for my money. But they take it as kind of a referendum on themselves, you know, and it's me versus the stock — if it ever gets back to what I paid I'm going to sell it.
>Stock doesn't care what you paid. You have to remember the stock doesn't even care that you own it. You are nothing to the stock, that stock is everything to you. You remember you paid $10.13 and therefore the stock should get to 10.13 before you sell it.
>Stock has no feelings about you. I hate to disillusion you on this but it just doesn't care.
>And so the only question with every stock, every day — and you don't do it this frequently — is: can I get more for my money someplace else? You've got a chance to be in thousands and thousands of great businesses and their prices change all the time, so the realms of valuations change and you can make the exchange at very low cost these days, commissions are nothing, and so you can always shift from one business to another.
>You have a huge advantage over Andrew Carnegie, you know, when he was in the steel business, he was in the steel business. Or Rockefeller was in the oil business. He cannot shift over immediately to retailing or something like that. You can rearrange your business empire which you own through that little portfolio that you have. You can rearrange that at a moment's notice with practically no cost. It's a huge advantage which people turn into a disadvantage.
>**There is nothing about the price action of the stock that tells you whether you should keep owning. What tells you whether you should keep owning it is what you expect the company to do in the future versus the price at which it's selling now compared to the other opportunities of businesses that you think you know equally well. Make that same comparison and that's all there is to owning stocks.**
