The perils of selling too early | Wealth Builders Pt 2

Bryce: [00:01:24] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. Now we are licensed, but we are not aware of your financial circumstances. So any advice on this show is general advice. All information is for education and entertainment purposes. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you?

Alec: [00:01:50] I'm very good, Bryce. Very excited for this episode because we are pre-recording this episode as part of our long term Wealth Builder series for Wawa in America. And all I'm thinking is you do your intro is at this point in America. We will have been to Berkshire Hathaway's annual general meeting. And then we will have gone on to New York. And right now, at this point in New York, hopefully we'll be sitting down with some of America's best fundies. =

Bryce: [00:02:19] No, but if you have just joined, welcome to the Equity Mates community. You can follow all of the action over on our Instagram to keep up to date with what's going on. But this is the second part of our Long term Wealth Builder series. And we've spoken about one of Warren's best investments and longest investments. And today we're speaking about the perils of selling too early. =

Alec: [00:02:43] Yeah. Now, just for context, for people who are new to the show, Warren, that Bryce's referring to isn't his mate Warren. It's Warren Buffett. history's greatest investor who we're going over to America to see speak. The 93 year old sits in front of a room of, what, 40,000 people once a year and answers questions for like 7 hours straight.

Bryce: [00:03:04] His annual general meeting. 

Alec: [00:03:06] And at this point, we'll know if we go to ask a question. I've got mine prepared. 

Bryce: [00:03:10] Yeah, this is a good one. So it's long. But we'll leave that as a cliff-hanger and make sure you check it out on Instagram to see if we did get the chance to ask Warren a question. But today, Ren, is all about Disney. And the mistake, I guess, that Warren made when it came to his investment in Disney. 

Alec: [00:03:32] Most people probably don't know that Buffett invested in Disney, and that's because he invested in 1966 and sold just one year later. 

Bryce: [00:03:45] So it's a fascinating story. He he actually, as he said, 1966, he managed to scoop up 5% of Disney. In 1966, he paid 4 million bucks for it. At the time, the whole company was selling for 80 million, so scooped up 5%. At the time, Disney was nothing more than and nothing more. Nothing, nothing more. I mean, it was a theme park operator and as it still does today, had pretty strong mix of IP and a great content library. So he scooped it up for 4 million bucks. But at the time, Disney spent $17 million on the pirate ride in 1966. And so he looked at it from a valuation point of view, the market cap of 80 million, they're spending 17 million on a ride. Therefore, the valuation of the company is, quote, five times rides. And he thought it was just and that was it was just such a valued opportunity for him to get in. So he scooped up 5%. But Ren, as you said, a year later, he sold it for 6 million bucks. 

Alec: [00:04:51] So Bryce he sold it for $6 million, spent 4 million. That's a 50% return in a year. Pretty good. 

Warren: [00:05:00] Certainly the Disney sale in the sixties was a huge mistake. I should have been buying. I forgot about the whole thing. And that's happened many times. I mean, we think that anything we sell should go up subsequently because we are own good businesses and we may sell them because we need money for something else, but we still think they're good businesses and we thank goodness they're going to be worth more over time. So everything I sold in the past virtually that I can think of has gone on to solid debt and a lot more money for a lot more money. And I would expect that would continue to be the case. That is not that's not a source of distress. But I must say that selling Disney was a mistake. And actually the ad agencies have done very well. I would worry, frankly, if I sold a bunch of things right at the top.

Alec: [00:05:48] Except if you fast forward to today, 5% of Disney is worth $9 billion. So his $4 million investment could have been worth $9 billion. Forget any dividends Disney had paid along the way if you just held his 5% and didn't do anything. 

Bryce: [00:06:07] It's unbelievable. He doesn't actually explain why he sold. I imagine it was a value or he wanted to use the money elsewhere. For me, what is interesting here is just the short term nature of that investment. Like he's one to often talk about how he buys companies, you know, for the next decade when he makes that investment decision with the idea that it's a company he's going to buy. So I'd be really interested to know what actually happened between 66 and 67 for him to sell incredible rise in the rise of Disney if he's managed to make a 50% return. But from from what I could say, he he didn't really allude to the reasons whenever he's asked about it, he just says, yes, he just made a mistake. Yes. And we should see that he's still holding. 

Alec: [00:06:58] Yeah. And Disney isn't the only iconic American company that he sold too early. He also owned some of McDonald's for a while. He does. He does loves Coke, loves matches. And he's 93 and still going strong. So tell me what that means. Health experts. 

Bryce: [00:07:18] I think it's being active with your mind.

Alec: [00:07:21] I was Going to say he's not exactly like a

Bryce: [00:07:23] I think, you know, mind mind activity. Brain activity. 

Alec: [00:07:27] You think it's brain activity? I think it's billions of dollars.

Bryce: [00:07:30] Yeah, but like, what's he doing with that? We don't know behind closed doors what he's doing healthwise

Alec: [00:07:36] Maybe we'll find out when we are in Amecia. But here's another clip from Buffett talking about the mistake he made selling McDonald's too early.

Warren: [00:07:45] You know, I said it was a mistake to sell it and it was a mistake. And I just reported that in the interest of candour. And there were some I would say that that particular decision as, gosh, you in the area of $1,000,000,000 plus. Charlie, you want me to rub your nose and you're doing it and you're doing a pretty good job by yourself. 

Alec: [00:08:10] So Bryce I guess if we bring it back to our investing experiences, it's all good and well to look at Buffet in hindsight and say, I bet he regrets not holding on to Disney or McDonald's, but it's a lot harder for us to know which are going to be our big winners and which aren't. And so the question becomes how do we know when to cut our losses and how do we know when to hold through the bad times? 

Bryce: [00:08:35] so Ren, The simple answer, I think, and we've spoken about on the show is it just comes down to the investment thesis, I think, and whether or not that investment thesis changed between when you. And that point in time. And you would have to assume that Warren's investment thesis changed despite being up 50%. The question, though, is. Yeah, I guess that's that's the answer in short. But if you're up 50%, like let it run. 

Alec: [00:09:00] Well, here's my take. Psychologically analysing Warren 50 years in the past. Okay he took over Berkshire Hathaway 6465 failing textile mill, bad investment. He would have been pretty worried at that point. And he makes 50% on Disney the next year and he's just like, let's bankrupt it and sell too early.

Bryce: [00:09:23] You reckon he's just trying to be nervous? Look, he'd been investing since he was like 0.1 years old.

Alec: [00:09:29] Yeah, but he was, he was, you know, he just made the biggest mistake of his investing career. Was. Is Berkshire taking it over? Yeah, yeah, yeah. 

Bryce: [00:09:39] You reckon that was his biggest investing mistake? 

Alec: [00:09:42] It was a high profile one, you know.

Bryce: [00:09:45] You think he was just trying to? 

Alec: [00:09:47] I reckon it was. 

Bryce: [00:09:48] A bit of cash on the table. I mean, fair call. He, as I said, he. He doesn't say anywhere that, you know, his thesis changed, the valuation became too much. It was just. Oh, in hindsight I sold to. I mean, it's easy to say that. How else would you think about it beyond just thesis if it's like, how do I know when this is the time to sell or should I hold on here like you? I mean, you had a great investment in A2 milk that ran a mile. Yeah. How did you manage that?

Alec: [00:10:19] Well, I. I did the opposite. I held on too long. I bought it at $0.60. It ran up to over $20. And then I held it all the way back down and sold it at like $7 it. So, like, it was still a great investment, but I left a lot of money on the table by doing the opposite. 

Bryce: [00:10:39] What? What led you to hold on? 

Alec: [00:10:41] I saw Buffett screwed up with Disney and I was like, I'm not going to make the same mistake as this guy called. No, I think I. There's a cognitive bias. I think it's called the endowment effect, where you really love the stocks that you hold. I had made good money on A2 Milk and I loved it. It was like the thing that showed me the power of investing. And I just like whatever the bad news because it was all at the time it was there was this grey market of, you know, Chinese nationals in Australia buying A2 infant formula and sending it back to China. The Daigo market. You know, there was news coming out about that channel being shut down and the Chinese government wanting to build their own domestic infant formula industry back up. And um, I was just like, Nah, A2 milk will figure it out, but I should have realised that my thesis was quickly changing, that its key growth driver was facing some pressures. 

Bryce: [00:11:45] Fascinating. Anyway, you still did well from it. 

Alec: [00:11:47] Oh, I'm not complaining. Congrats. Well, when did this episode become? 

Bryce: [00:11:52] Ren, that's a good point. To take a break on the other side of this, where we're going to dig into why Disney has become such a great long term company and wealth builder. Obviously, unfortunately not for Warren, but for plenty of other investors out there and why it may continue to do so in the future. So we'll be right back after this break. 

Bryce: [00:12:25] So in the lesson here is the perils of selling too early and using the example of Warren and selling Disney for a 50% profit that unfortunately it could have gone on to be a $9 billion position in his portfolio. But that's not to say that the performance of Disney obviously has been pretty incredible over the years and is still no doubt a powerhouse in media today. No doubt, No doubt. Some of the most iconic brands. But Peter, history floated in 1957 at 13.98, a share adjusted for all of its stock splits. That was about the equivalent of $0.05 today. The shares are currently trading at about 100 bucks, so an increase of about 180,000% from the time it floated to now. So you can see why Warren's probably kicking himself. 

Alec: [00:13:15] Not bad. 

Bryce: [00:13:17] It's been a business that has managed to really leverage the incredible IP that it's developed since good old Mr. Walt Disney created. What was it? Mickey Mouse. Mickey Mouse. Mickey Mouse and the stable of Disney characters to now be, as I said, a powerhouse across media. 

Alec: [00:13:38] Yeah. Yeah. It is a pretty phenomenal story. It's a story that's well told, so it's probably not a hate. We need to speak about the business story. There's maybe a few lessons that we can unpack, but the Disney cartoons of the nineties that we grew up with, Lion King. Little Mermaid. Mulan. 

Bryce: [00:13:58] Rugrats.

Alec: [00:14:00] No, come on. But anyway, massive Disney animation success in the nineties and then in the 2000 so part of with Pixar eventually by Pixar and that's Toy Story Finding Nemo cause bunch of others they acquired Marvel everyone knows what Marvel is they acquire Star Wars need to come up with their own IP again.

Bryce: [00:14:27] What do you mean build their own?

Alec: [00:14:28] Yeah I mean like this. 

Bryce: [00:14:30] Is what we spoke about when we did our book club a couple of weeks ago is just that they got a couple of Eisner and iger. Yeah. Who were just amazing at buying companies. 

Alec: [00:14:41] I don't know if Eisner was.

Bryce: [00:14:43] Amazing at buying. 

Alec: [00:14:44] Or did he? Yeah. Yeah.

Bryce: [00:14:45] But it was obsessed with him. 

Alec: [00:14:47] Oh, okay.

Bryce: [00:14:47] Yeah, maybe not from acquisitions, but. 

Alec: [00:14:49] Yeah, yeah, yeah, yeah. But I'm just trying to think, like, what has Disney done themselves recently? Frozen. Yeah.

Bryce: [00:14:57] Bought a lot of good companies. 

Alec: [00:14:59] Anyway, but I think the streaming know they bought the streaming company Bamtech. 

Bryce: [00:15:06] I did not know that. 

Alec: [00:15:07] It's in the book.

Bryce: [00:15:08] That when I missed that 

Alec: [00:15:12] I must have had an updated addition. Um, but I think the thesis for Disney, if you were going to invest today and full disclosure, I do own Disney, is that they have a really strong stable of IP, but there's no company better at finding ways to monetise their IP, whereas some of their competitors will write a script, make a movie, sell tickets to that movie, put it on the shelf, sell the rights to a streaming company. Disney will create a character owned by character through the movie, the TV show, the comic book, the consumer products like toys and stuff like that board games. Then they'll do a bloody Disney cruise for it. They'll have a Disney on Ice Stage show. They'll have a ride at their theme park. Yeah, no one is better at extending IP. Disney. Yeah. Books. Books.

Alec: [00:16:09] And you can save some of that because competitors are really trying to catch up to that. The classic example is Nintendo. I reckon after Disney, if you're going to say strongest IP stable in the world after Disney, I think the two that probably come to mind are Nintendo and Warner Brothers discovery.

Bryce: [00:16:29] Yeah, I would have said Warner Brothers. What has Nintendo got? 

Alec: [00:16:32] They got Pokemon. Yeah, they got Mario. Yeah, they got Zelda. They got like Kirby and Yoshi. Um, Princess Paige, Bauza, Donkey Kong. 

Bryce: [00:16:43] Nice. Well, for those that are interested, Nintendo is listed on the Tokyo Stock Exchange. The ticker is 7974. 

Alec: [00:16:51] Yeah, yeah, yeah. We're just having a look at it earlier today. Actually, it's about 50 billion US dollar market cap compared to Disney, which is like 180 billion. Um, but Nintendo aren't as good at Disney at extending their IP. They have obviously tried. There's a number of Pokemon movies. Um, there's, I think it's like Nintendo land or Nintendo world AT No, I don't think it's a standalone theme park yet, but I think it's part of Universal Studios.

Bryce: [00:17:21] Imagine having A real life Mario Kart. 

Alec: [00:17:25] I know. That is exactly what we were saying earlier. How could that be?

Bryce: [00:17:28] With things that actually shot and. 

Alec: [00:17:30] Or a real life Pokémon battle. The more that you think about Pokémon, the more problematic it becomes.

Bryce: [00:17:40] Let's not think about it.

Alec: [00:17:44] But anyway, let's. Let's leave that. But Nintendo obviously tried to do that strategy. Their Mario movie just broke all box office records. Haven't seen it yet. Never. But it's. I think it's now had the best opening weekend for a cartoon ever. So you can see them trying to do that. Warner Brothers Discovery are also chasing the Disney model that would that day say comics. They're trying to build a a world and a universe and a series of movies. They've also got theme parks and stuff like that. But Disney is the best of it.

Bryce: [00:18:19] Still the OG? Yeah, well, they've bought back their former CEO, Bob Iger, to try and I guess right the ship they had Bob Chapek in there over the last couple of years. There was obviously a bit of discontent with the performance. So they bought back the guy that got them to the position that they are, whether or not it's going to play out as shareholders hope. I'm really looking forward to saying over the next I don't know how long he's going to be there, but I think he's got a contract for a few years. So but nonetheless, it's been a great investment for a number of shareholders. And unfortunately, Warren wasn't one of them. But I think the main takeaway then is it really does come down to keep an eye on your thesis, keep an eye on the companies. Yeah. If the thesis strikes. Think about what that means. But otherwise, if the thesis is still there, it still holds true. And it's running. Let it run. Let it become that $9 billion position in Europe. 

Alec: [00:19:15] Exactly. Yeah, yeah, yeah, yeah. And I think a final thought for us as everyday investors, we don't have a lot of advantages over professional fund managers, but one advantage that we do have is that we truly can let our winners run. Professional fund managers will often have mandates or rules when they're managing money that says things like that. Any position can't be more than 10% or 20% of that fund. And so that means that best performing stocks, as they're performing well, they have to sell some of them to keep them, you know, 10% or less of their fund. We as everyday investors aren't constrained by those rules. So don't artificially constrain yourself. If you have picked a winner, let it win for you. 

Bryce: [00:20:02] Let it win. Classic example of that was Cathie Wood during the bull run of Tesla. It was absolutely raining and she had to keep trimming almost every second day. 

Alec: [00:20:12] Yeah, right. 

Bryce: [00:20:13] I mean she could she had a mandate of 10%. And this thing could have been easily 50% of her portfolio because she got in so early and it was running so hard. But she just had to keep trimming, trim and trim. Good point. Good point to finish. Well, stick around. On Monday, we'll be back with another Equity Mates chat. And then the show continues on Thursday with the third instalment of our long term wealth builders, where we are talking about Moody's.

Alec: [00:20:40] Yes. 

Bryce: [00:20:41] Yeah. I really enjoyed having a look at this one. It's not a story that I was fully aware of, but it's a fascinating Company. 

Alec: [00:20:50] Great. Well, let's leave that cliff-hanger for a week and we'll pick it up next week.