Author archives: Alex Jamieson

Warren Buffet’s Biggest Lesson

smoke stake

This week I was driving back from visiting a number of clients who live in country Victoria’s Gippsland area.  On my way back to the office, I passed a large brown coal power plant and I started thinking about this sector…….. and in particular…..  if it is a growing or declining industry?

I realised too that there is a lot of parallels between this industry and Warren Buffet’s textile investment. Let me explain….

Warren Buffet’s company “Berkshire Hathaway” started originally as a US textile mill.  He has been quoted as saying that this was possibly one of his worst investments.  The reason being, is that the textile industry whilst cheap at the time of acquisition, was also in a declining industry in the US. Buffet has also famously said “If you get into a lousy business, get out of it….if you are wanted to be known as a good manager, buy a good business…”

Not surprisingly, Warren Buffet eventually closed the textile mill, however kept the name as a constant reminder of his lesson.

There are a number of lessons one can learn from this experience.  The first might be to act very cautiously around a cheap investment or asset.  It is important that the investment has a future and a prospect for growth in the future – otherwise you may find that although the asset is cheap ,it might also be a “value trap” similar to Warren Buffet’s textile mill.

In many ways, this brown coal power factory I was passing by is in my opinion similar, to the textile industry for Buffett.  At some point the alternative power sources will prove more efficient and more cost effective.  In this industry it is not a matter if it will be replaced, but more a case of when will it occur. In other words it is a declining industry.

It does however raise a larger question about the investments which you might hold.  Are they too in a declining sector?  Most people might quickly respond stating “not mine!”,  however since 1900 in the US there are only 3 companies which remain today.  So I believe it is not a case of if your investments will decline, but more a case of when.  Understanding the date stamp on your investments and the future prospects for growth are very important when managing your investments.