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Cost of being in a Hurry!

by Altais on June 3rd, 2013

Recently, I came across a startling fact that I did not quite know before, which really made a deep impact on the way I looked at investing in general and the utter importance of ‘preservation of capital’ in particular.

This is what Mohnish Pabrai spoke in an interview, and what he learnt from his meeting with Warren Buffett.

From the interview

I asked Warren a question about Rick Guerin. When Charlie and Warren had started out, there were three of them. It was Charlie, Warren, and then the third guy, Rick Guerin, and they used to make investments together. They ran separate funds, but they used to work together. In fact, even when they did the See’s deal, Rick, Charlie, and Warren had interviewed Chuck Huggins to be the CEO together. The three of them were firing questions to him together to figure out whether he was the guy.

Then Rick Guerin pretty much disappeared off the map. I’ve met Rick recently, but he disappeared off the map, so I asked Warren, are you in touch with Rick, and what happened to Rick? And Warren said, yes, he’s very much in touch with him. And he said, Charlie and I always knew that we would become incredibly wealthy. And he said, we were not in a hurry to get wealthy; we knew it would happen. He said, Rick was just as smart as us, but he was in a hurry.

And so actually what happened — some of this is public — was that in the ’73, ’74 downturn, Rick was levered with margin loans. And the stock market went down almost 70% in those two years, and so he got margin calls out the yin-yang, and he sold his Berkshire stock to Warren.

Warren actually said, I bought Rick’s Berkshire stock at under $40 apiece, and so Rick was forced to sell shares at … $40 apiece because he was levered.”

Additionally, in “The Snowball”, Buffett notes that he bought 100,000 shares of Blue Chip in 1973-74 from Rick, at 5 bucks, because Rick was getting squeezed.

Now, Rick Guerin is one of the Superinvestors mentioned in the Buffett’s famous “Superinvestors of Graham & Doddsville” speech.

His track record is as below:

Some thoughts,

1. This guy was not a novice investor who lost money due to ignorance. He was a super investor with a great 18 year track record, including the 1973-74 period!

2. The Berkshire stock he sold at USD 40 in 1973 is worth USD 171,000 today in 2013 (no dividend, no split so simple calculation :) ), and that’s compounding at 23.2% for 40 years!!

3. He lost the chance of being among the most famous of all investors around the world, in league of Warren Buffett and Charlie Munger!!!

Quite a heavy cost for being in a bit hurry to get rich!

I am reminded of Goldman Sachs motto “Be Long Term Greedy”.

So, Rule No. 1: Don’t lose capital. Rule No. 2: Don’t forget rule no. 1.

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