On Chasing the Bags
Board: Berkshire Hathaway

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By Garranova
May 21, 2007

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In Summer 2001, I committed a small percentage of my portfolio to USG, at under $6. I'm sitting on an 8 bagger in under 6 years. Since I didn't sell 1 year ago, I missed out on locking in a 15-to-19-bagger. Please no flames; I beat myself up enough as it is. I post this brutal mistake as a learning exercise. While I did not lose any capital (Buffett's rule #1), I sure as heck left a lot of capital on the table.

Right around February 2006, with USG approaching $100, I remember calculating my compounded returns and marveling at the 80%+ figure popping up in my spreadsheet. As the price kept floating upwards I was basically frozen, like a deer in the headlights. I wanted bags. I had no exit strategy, although that same month I had written a note to a family member that I would consider selling at $120. Greedy bugger.

My biggest mistake was probably not taking the press releases literally/mathematically. When the rights offering was priced at $40 I should've just sold immediately. Instead, I outsmarted myself. I don't know what I read in between those lines, but it was way off target. Part of it was I wanted those warrants. Stupid. I did get them, and sold them at a price that would add 1.5 bags to my total, but so what? (Besides, my broker took weeks to get me those warrants, so even when they came out I lost a pretty penny)

At some point, I do recall thinking, "hmmm, maybe I should dump this USG and replace it with what looks like an undervalued Berkshire." D'oh!! If I'd done that I would be 20% richer (on paper and not accounting for capgains taxes on the USG).

I'm still trying to wrap my mind around how not to get caught in the bag-chasing trap, but I think one way to do it is to think of the bags that your entire portfolio achieves, instead of just individual positions. Additionally, while the bags might be worth chasing for a high-flyer like Dell in the 1990s, for a turnaround/special situation like USG, maybe having a well-defined selling strategy or timeline is best (In 2001 I was preparing myself to hold USG for 5 years).

Any thoughts on this?

In regards to USG, I have decided to hang on. I think the Barron's story is optimistic, but I do believe I have a market-beating stock at this price. Unless something obvious comes around, I won't make the switch.

While we all guess as to Berkshire's next major purchase, I think USG is an interesting company to study. Not because of the asbestos-liability and not because of all the other building materials companies Berkshire currently owns. I think USG is a capacity play. Many say it is a cyclical, which I guess I can't argue, but fundamentally I think it is about capacity and how much of that capacity USG controls.

USG and the railroads are very similar in this regard. We've got resource X, and such-and-such company owns a percentage of X. In USG's case, it is a large percentage, and with conservative management, that percentage won't shrink. In some cases, the railroads actually have near monopolies. Trucking and air freight keep anti-trust legislation off the railroads' backs. Since both of these other formats are more expensive, the railroads can keep their prices relatively high, as long as they are below trucking and air. Improvements in logistics technology makes the proposition even better, for customers, and railroad management.

I think Buffett's next purchase might be similar. We should look somewhere for a big market with a shrinking number of players, and with no possibility of new entrants. Also, I don't think we necessarily should ignore the debt-laden companies, since Berkshire can clean that up right away. Think geography before balance sheets.

I think the next pick will be elegant in its simplicity. An old-fashioned moat.

Shoot, at some point, the airlines might fit this bill. Yes, I said the A-word on the BRKA Board.

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