Every year, Warren Buffett writes to the shareholders of Berkshire Hathaway explaining how the company has performed. And it’s usually good news. Since becoming involved in 1965, he’s reported an annual increase in its stock price on 47 separate occasions.
But as well as reporting on the numbers, the American billionaire has built a reputation for coming up with some memorable quotes — or “Buffett Bites” as Alex Crippen of CNBC likes to call them.
In his 1985 letter, Buffett wrote: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks“.
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Of all his sayings, I think this is the most valuable. And one I wish I’d always remembered.
What does it mean?
With his boating analogy, I think Buffett is suggesting that it’s better to cut one’s losses than hold on to an investment that’s likely to fall further.
And I know from personal experience that he is right.
When I purchased shares in Greatland Gold (LSE:GGP), they were changing hands for around 26p. At the time, there was lots of hype surrounding the Australian mining exploration company, and I didn’t do my research properly.
In the three weeks before I took a position, the stock had fallen just over 30%. I thought it was one of those market corrections, where investors take some profit after enjoying a good run.
:ittle did I know that it was the start of a seemingly never-ending decline.
There were a few blips along the way, when the company released some positive news. But within a few days of these announcements, the positive sentiment seemed to evaporate and the shares continued falling.
The shares are now down 60%, to around 9p. And I don’t see any realistic prospect of a significant recovery.
Although the company’s recently reported good news about the size of its gold and copper deposits, to get to this position it’s had to raise money to fund its operations.
As I didn’t participate, my shareholding has been diluted. And it’s likely to shrink further.
Why?
I often ask myself why I failed to let go of my stake.
One possible explanation is that I’m a natural optimist, which means I have a tendency to believe that a bear run will soon reverse. More likely, I’m too stubborn and don’t like to admit failure.
Whatever the reason, there’s nothing I can do about it now.
Other leaks
But as much as I think Buffett’s quote is a good one, it’s not always easy to identify when leaks become chronic.
Distinguishing between a bad run — during which a stock falls temporarily out of favour — and that where the decline is terminal, can be tricky.
For example, I’m sitting on some other paper losses at the moment — my investments in Persimmon and Lloyds Bank are two that spring to mind. But I believe these to be quality companies whose share prices should recover when the UK economy starts to grow again.
And unlike Greatland Gold, they pay me a dividend.
However, I’ve learned my lesson. It’s been an expensive mistake.
As Warren Buffett also said: “The more you learn, the more you’ll earn“.
