Berkshire Hathaway
My Favorite Mistake

Format for Printing

Format for printing

Request Reprints


By TheSandman
December 19, 2000

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

Scuttlebutt: Another lesson I learned along the way

In early June of 1998, I visited a business where I used to work. This is a publicly traded company, therefore I will not mention their name in this post. However, I will say that it's a company that I understand very well, and I had invested in them a few years prior to this visit. I still owned those same shares at the time of my '98 visit.

While visiting, I was able to talk with various employees and customers, experience the company's new products for myself, see the volume of business they were doing, and *most importantly* I was able to have a long discussion with the vice president of the company. I had known this man for approximately 20 years. In fact, 20 years ago, this same vice president placed his own (troubled) son under my supervision. We always seemed to share a mutual respect.

This is where things got interesting. In the course of our conversation, I mentioned that I had owned shares in the company for the last few years. The vice president was very happy with that news, and replied by saying "you must be very happy with how well you have done with us!"

The truth is, I was very happy with my return up to this point in time.

Now for the part that I didn't know: I didn't know that this was just the tip of the iceberg as far as my returns with this particular investment. For reasons which I still do not understand, the vice president seemed determined to let me in on a little secret. He told me that I would soon be reading some BIG News concerning the company. BIG News! He did not mention any details of the news - and I didn't ask. He spoke quietly when he mentioned it, and definitely gave me the "wink, wink - nod, nod" look. LOL!

Well, I thanked him and went on my way. Later, the same day, I talked with various employees who told me that a major company was negotiating a merger with my old company. Luckily for me, I had heard these same rumors for the past 20 years.

Here's the dilemma: A Great company, a company which I already know very well, a company which I was already invested in, doing great business in a great business environment, and I have inside information. Inside Information from a reliable source. I knew that I would never, never, have an opportunity like this again.

My initial response was not IF I should invest more of my hard earned money ---- the question was How Much of my hard earned money could I put together, as quickly as possible, to take maximum advantage of this once in a lifetime opportunity. The financial Gods were smiling on me, and it was a sunny day.

I couldn't do the math in my head fast enough. Not only was I calculating how much cash I could raise to invest, but I was also calculating just how much money this new, "Can't Lose", investment was going to make me. Exciting times.

It didn't take long (a few hours) for my excitement to peak, before it waned. Rational thoughts crept back into my head. Slowly at first.... primarily because the greedy portion of my brain was offering so much resistance to these boring, and pesky, rational thoughts.

Some of my thoughts:
1. Would todays price offer a margin of safety if the "Big News" never came to fruition?

2. Would I want to increase my position in this company, at todays price, if I had never received this "inside info"? If so, why hadn't I already?

3. Was the risk/reward ratio in my family's favor?

4. I had no idea what this man considered to be "Big News". His big news might not seem like big news to me. In fact, the "Big News" might be that he's retiring. How would I feel about my investment then?

My Decision: The company was selling for far more than I was willing to pay. It just didn't make good business sense to bet my family's future on the hopes of some, unknown, to be announced at some point in the future, "Big News". I elected to take a pass on this inside information. In fact, a few months later, I sold my shares of this company. I had found an opportunity in another company which, from a business perspective, would be foolish to pass up.

Result: I still monitor the progress being made at my old company. I still like the company, but not at the price that it's currently selling for. And, I never did see any "Big News" release.

This same company, two and one half years later, is selling for 28% less than the price it was on the day that I received my inside information.

Sandman's Conclusion: Inside Information Can Kill You.

If you don't do the required research that you would normally do prior to investing - even though you are armed with the most reliable source of inside information - you are asking for disaster. Rational thought has to overrule your emotions.

Scuttlebutt can be a useful tool if:
1. You are skilled at knowing what to look for, and who to talk to.
2. You keep your emotions under control. Don't be a romantic. Never let yourself be charmed.
3. When you start dreaming Pie in the Sky dreams: Stop - take a Big step BACK - and Re-evaluate.
4. Realize that you can be blind sided if you focus only on the Qualitative analysis, and ignore the Quantitative analysis. They go hand in hand.

Good Luck,