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Aug
1
Hope. It can kill a portfolio. The more rational, cold, and calculated you are in your investing, the more confidence you can have in your portfolio. Each emotion you introduce only digs you further into the hole. You can hold a company because you love their products; but, you better be sure that the business is generating enough cash to keep those products rolling off the lines.
Sometimes, hope is enough and things pan out the way investors wish they would. And sometimes, hope makes people lose money.
Discussing Berkshire's 1994 USAir position, Buffett discussed the problems and difficulties facing the airline and what it meant for Berkshire stockholders. Berkshire was losing money with USAir and the airline's value was delicately balanced between being fully restored...or declaring bankruptcy.
Buffett admitted that the airline had a long road ahead of it, and then went on to say:
Whatever the outcome, we will heed a prime rule of investing: You don't have to make it back the way that you lost it.
The point? Just because you lost money on a company that lost value doesn't mean you have to wait for that company to grow again. When it comes to your money, put it where you will get the most value. There is more value in a money market than in a company that is declining in value. It's better to earn 5% interest in cash than to lose another 10% of value, hoping that management turns things around.
Price follows value. The longer you hold a company, the more clear that becomes. Why hold stock in a business that will lose value for the next three or four years? Instead, put your money into a growing company, and wait until after the "turnaround" happens.
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