Sins Of Omission

With markets extremely difficult and volatile as we work through COVID-19, we thought it would be good to review important parts of our investment discipline. One way to do that is to consider stocks we found via our eight criteria for stock selection and did not keep long enough to get to their ultimate rewards.

Warren Buffett is always asked what his biggest mistake has been in his stock-picking discipline over the years. He points out that it was his “sins of omission” which hurt his results the most. In other words, stocks that he owned and did not stay with that ended up being huge winners. The poster child of this concept for Buffett was buying a 5% Disney (DIS) position in 1965 and selling it a year later for a 50% gain. Even though the stock is well off its high and part of today’s tribulation, the pain of selling is intense.

The math of the stock market explains why these omission sins matter so much. If you buy a five-percent position and it goes down 60%, you lose 3% of your portfolio. If you miss a ten-bagger/ten-fold price increase in a 5% position, it can make a 25% gain difference in the overall portfolio value even when the rest of the portfolio doubles. Disney has a market cap of around $196 billion, so Buffett’s position would be worth about $9.8 billion today. He bought his 5% position for $4 million. This means he passed on a 1,225-bagger since then (not counting dividends).

We will share three huge sins of omission which we have personally made, that have affected our long-term results over the years to help you frame this discussion. In early 2000, at the height of the dot-com bubble, we bought shares of Exxon (XOM) at around $35 per share with a juicy dividend yield. Oil prices were very depressed (like now). We held XOM for three years and sold it because it was one of our poorest performing stocks in a stretch where we did extremely well relative to the stock market. When the dot-com bubble broke, our investments flourished. Eventually, Exxon went up to $100 per share as stocks got pummeled in 2007-2008, and Chinese economic growth drove oil prices to $145 per barrel. Owning XOM from 2003-2008 would have had a huge impact on our overall results the first six months our strategy existed in the public domain.

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Disclosure: This article contains information and opinions based on data obtained from reliable sources, which is current as of the publication date, and does not constitute a recommendation ...

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