Missed Opportunities Count

Maybe I was the only one, but the news yesterday that UnitedHealth agreed to purchase Pacificare Health Services for $8.1 billion immediately made me think, incongruously, perhaps, of Disney CEO Michael Eisner's decision not to pick up The Apprentice, Lord of the Rings, CSI, and Survivor when each program was pitched to him.

I was the only one? OK -- let me explain.

You see, I thoroughly enjoyed DisneyWar, the latest book by super business author James Stewart. The book chronicles the history of Eisner's career at Disney, which culminated in a shareholder revolt against him. Over the course of his 20-some years at Disney, Eisner had the opportunity to take or reject many movies and television series. In all, there were some great calls -- and some incredible misses. The next time you're looking at the Nielsen ratings (or Disney's current share price), consider that Eisner passed on the aforementioned CSI, Survivor, and The Apprentice, among many others in the more distant past.

Who's to judge?
When questioned about some of those choices, Eisner repeatedly stated that he doesn't believe it's fair to judge him by what he didn't do, but only by what he did. That's fair -- up to a point. After all, there are dozens -- hundreds, perhaps -- of proposals that are rejected for every one that gets the green light. In 20 years, even the most experienced and instinctive entertainment professional is going to have a lot of hindsight-obvious misses. Virtually all of what Eisner accomplished at Disney, in terms of rewarding shareholders, was done in his first decade; his last 10 years showed essentially no shareholder benefits. If he had picked up some of those mega-home-run deals that were pitched his way -- and strongly advocated by other Disney execs, according to DisneyWar -- he'd obviously depart with a bit more gratitude from the investing public. Or to put it a different way, he might not be on his way out the door at all.

So, like it or not, if you're allocating capital (in the entertainment business or elsewhere), you'll be judged by missed opportunities. That Eisner fails to appreciate that -- even at the end of his Disney tenure -- helps us understand why he won't be the CEO forever.

When omissions are made part of the record
Eisner isn't the only master of his craft that has missed some -- again with hindsight -- painfully wonderful investment opportunities. Often, such opportunities get missed not for lack of awareness, but from simple miscalculation. Since no investment commentary is complete without citing a Warren Buffett quote, parable, or historical lesson, let's get ours out of the way now. (An aside: Shouldn't we and everybody else be paying Buffett royalties -- like $1 or something to one of his favored charities -- for every time we invoke him to make a point? Buffett jokingly suggested as much when asked about his thoughts on Google's (NASDAQ:GOOG) IPO filing, which cited Buffett's letters to shareholders as a model. I think it's about time we start started anteing up.)

Contrary to Eisner, or perhaps because of the security of his position, Buffett incorporates his missed opportunities into his record. When asked about his worst investing mistake at the Berkshire Hathaway 2004 annual shareholders meeting, Buffet discussedWal-Mart (NYSE: WMT): "I set out to buy $100 million shares of Wal-Mart at [a pre-split price of] $23," recalled Buffett. "We bought a little, and it moved up a little, and I thought, 'Maybe it will come back a bit.' That thumb-sucking has cost us in the current area of $10 billion."

Given the length of his career, Buffett is going to have plenty of other errors of omission in his record. Quite possibly Microsoft (NASDAQ:MSFT) should be included in his missed-opportunity tally. Buffett, whose friendship with Bill Gates goes back to 1991, had the opportunity to get a direct sales pitch from Gates regarding Microsoft way back when, and he reportedly purchased only 100 shares of the company. Though he's shedding no tears over the matter, Buffett has said he wished he had bought more when he first met Gates. And who wouldn't? Had he done so, his money would have multiplied 20-fold and would have significantly outperformed any of Berkshire's actual holdings over the same time period.

I'm not in the category of those who feel justified pointing to anything that Buffett has done and calling it a "mistake." But when he's the one citing his own mistakes or wishes for do-overs, I'm willing to take note.

Missed opportunities closer to home
All of which brings us back to the matter of UnitedHealth buying Pacificare. We're coming up on a two-year anniversary that I'm beginning to think Tom Gardner would rather forget. August 2003 is when he picked Hooker Furniture (NASDAQ:HOFT) as his recommended stock for Motley Fool Hidden Gems and put RylandGroup (NYSE:RYL), Pacificare Health Systems (NYSE:PHS), and WebExCommunications (NASDAQ:WEBX) on the newsletter's Watch List. The acquisition of Pacificare Health Systems by UnitedHealth is just the latest reason for Tom to kick himself over picking Hooker Furniture and one (or all) of the other three. Let's look at what their stocks have done:

Ooh -- that's got to hurt, even given that Tom's formal recommendations have outperformed the market. That's the equivalent of choosing between The Apprentice, CSI, and According to Jim, and figuring that James Belushi must be the easy money.

Tom's recommendations are still significantly outperforming the market over the history of the newsletter, showing average returns of 30% as compared with the S&P 500's 8% as of yesterday's close. However, the substantial margin by which Tom's stocks have topped the market falls short of the performance of the newsletter's guess analysts, whose picks are up 38%.

In Tom's ledger, if you swap Pacificare for Hooker Furniture, that would add a full 6.2 percentage points to Tom's bottom line, nearly catching him up with the analysts. But "what ifs" aren't how you get to play the game.

In particular, what has to be galling about this missed opportunity was the analysis provided on Pacificare two years ago. It read, in part, "Valued at just $1.8 billion, Pacificare sports nearly $2 billion in cash and restricted securities (alongside $575 million in debt that the company is paying down). The market is assigning almost no value to the operations of the business."

It seems obvious now, doesn't it? Well, after writing that the market almost immediately started assigning Pacificare more value, and then UnitedHealth raised the value even further through its bid. Since Tom saw promise in Pacificare but never partook of it, well, I'll happily taunt Tom about that.

And congratulations go out today to Pacificare shareholders, who apparently had better vision of the stock than mere hindsight.

While we can't promise Hidden Gems won't miss additional great investment opportunities, but we're hopeful we'll continuing to pick more than enough to keep our market-beating record going. Click here to take afree 30-day trial to see all our recommendations and Watch List stocks.

Bill Barker owns shares of Berkshire Hathaway but doesn't have a financial position in other companies mentioned in this column. The Motley Fool has a strict disclosure policy.