At the 2019 Berkshire Hathaway shareholder meeting, Charlie Munger described Belridge Oil as the greatest investing mistake of omission of his life. In 1977, he bought 300 shares of the stock for $115 per share. At the time, Munger described it as the most undervalued stock in the world, with his calculation of intrinsic value finding that the stock was worth somewhere in the thousands of dollars.
Later that year, he was offered the opportunity to buy 1500 shares of the stock at the same price. Munger declined, leery of committing to a stock whose CEO was a dysfunctional drunk (though as Munger later recounted, though the CEO had a drinking problem, the Belridge oil wells didn’t).
In 1979, the Belridge CEO put the company on the auction block for sale in a bidding war between Mobil Corporation, Texaco, and Shell. Ultimately, Shell was the high bidder at a price of $3,665 in cash. Munger near instantly turned a $34,500 investment into $1,099,500. This instantly transformed Munger’s life and put him in the position to become a substantial Berkshire Hathaway shareholder alongside Warren Buffett.
Of course, as Munger recounts, those extra 1500 shares would have turned $172,500 into $5,497,500. If Munger had purchased those Belridge shares and then put it into Berkshire, which was trading at $260 per share, we are talking 21,114 Berkshire Hathaway Class A shares that currently trade for $314,750. Such a maneuver would have added $6 billion to the Munger family’s net worth.
In hindsight, Munger said that what bothered him the most was that he knew Belridge Oil was the most undervalued stock he would ever see in his life, and didn’t maximize the opportunity.
What I find fascinating is that, even in his earlier days, Munger had the confidence to stick to his calculations of value even when it was dramatically at odds with the market quotation of a stock. Not many of us would be comfortable calculating that a business was, at the time of purchase, worth 10x what we are paying, let alone approximately 35x.
The confidence to be tenacious is an important skill. There is a credit card issuer that trades at only one-fifth the valuation that you see in Visa and Mastercard. Its profits are growing organically and its repurchasing its own stock even as the stock price has gone nowhere in five years. If someone outsources their thinking to market quotations, it could be easy to grow impatient and sell the investment. And then the individual would miss out on the inevitable gains to come because there is no rule in life that price appreciation will come to us on our terms.
I always admired that Munger could stick with Belridge Oil even as it was underperforming its oil stock peers on a trailing one, three, five, and ten year basis. It takes an uncommon level of self-confidence to identify and stick with an investment that has a historical track record of underperforming all of its peers because of your analysis that its underlying assets were disproportionate to the price.
If IBM stock could languish for eighteen (!!) years before the stock price increased seven-fold in under an eighteen-month stretch coming out of WWII, it better sink in that anticipating the “what” right is within our analytical control but getting the “when” right is not. Munger may have gotten lucky that the “when” came only two years, rather than 5+ years, after making his investment, but he mastered the part that was in his control, namely identifying the undervalued stock, getting his name on the stock certificates, and being willing to be patient as long as need be until the value is realized.
I remember Bank of America languishing at $7, then shooting up to $30 in recent years. Elsewhere, South32 (as part of the BHP Billiton) was frequently being criticized at a price of $3 per share, and now it’s at $11. The answer is to always go back to the fundamental performance of the business itself, focusing on profit growth and business strategies over an extended period of time, and then diversifying among such businesses, so they will take turns realizing their value in due order. As the Berkshire maxim goes, the stock market is a device transferring money from the impatient to the patient.