2 years ago



24 100-BAGGERS earned

24 100-BAGGERS earned around $21 million pretax in 1965 and was sitting with more cash than debt. At Disneyland, the $17 million Pirates of the Caribbean ride would soon open. Imagine my excitement—a company selling at only five times rides! Duly impressed, Buffett Partnership Ltd. bought a significant amount of Disney stock at a split-adjusted price of 31 cents per share. That decision may appear brilliant, given that the stock now sells for $66. But your Chairman was up to the task of nullifying it: In 1967 I sold out at 48 cents per share. He made a 55 percent gain, but what a costly sale that was! The problem isn’t only that we’re impatient. It’s that the ride is not often easy. This reminds me of a story from 2012 by fund manager Dan Oliver at Myrmikan Capital. He pointed out that Apple from its IPO in 1980 through 2012 was a 225-bagger. But . . . Those who held on had to suffer through a peak-to-trough loss of 80 percent—twice! The big move from 2008 came after a 60 percent drawdown. And there were several 40 percent drops. Many big winners suffered similar awful losses along the way. Author Barry Ritholtz in a column in the Washington Post had many more examples. Netflix, which has been a 60-bagger since 2002, lost 25 percent of its value in a single day—four times! On its worst day, it fell 41 percent. And there was a four-month stretch where it dropped 80 percent. And yet, you can’t just hold onto everything. Lots of big winners have gone completely bust. Ritholtz mentioned a few: Lehman Brothers, World- Com, Lucent and JDS Uniphase. I’m sure we could come up with more. So it takes patience, some savvy stock picking and—as with most things in life—some luck. (People who held onto Apple for the whole ride had no way of knowing about the iPod or iPhone or iPad. These things didn’t exist for decades during Apple’s run.) This is where the idea of a coffee-can portfolio can help. You don’t have to put all of your money in a coffee-can portfolio. You just take a

THE COFFEE-CAN PORTFOLIO 25 portion you know you won’t need for 10 years. I bet the final results will exceed those from anything else you do. A Coffee-Can for the Apocalypse You might think a coffee-can portfolio depends on an optimistic view, à la the one Warren Buffett expressed in his 2015 annual letter. It doesn’t. You can have quite a dim view of the world, and still I’d recommend you build a coffee-can portfolio. Below, I’ll explain why. But first, a bit on Buffett’s optimism. I read his annual letter. I also read a lot of commentary on the letter. One of the more interesting criticisms comes from SNL Financial columnist Ada Lee. She writes, The greatest flaw in the letter is the same as last year’s greatest flaw; Buffett is given to expressing bullishness on America’s prospects in a way that seems almost designed to instill precisely the sort of complacency that poses the greatest risk to that bullish view. In the letter, Buffett writes how he “always considered a ‘bet’ on everrising US prosperity to be very close to a sure thing. Indeed, who has ever benefited during the past 238 years by betting against America?” To that, Lee has a good response: Nobody. Unfortunately, that sort of statement is completely true right up to the day it is completely false. One might have said the same thing about Athens right up to the start of the Peloponnesian War, or Rome through the rule of Augustus, or even the Soviet Union up until around 1980, after which a great many people benefitted immeasurably by betting against those states. So that sets the table for thinking about a future that might not be quite as prosperous. What do past calamities tell us about preserving wealth? Many have tried to answer it. The first guy I thought of was the late Barton Biggs. He was a longtime strategist at Morgan Stanley and then a hedge fund manager and author. (Hedgehogging is his best book and worth reading.)

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