When an outstanding business is affected by a temporary one-time solvable problem, it can be a huge opportunity to invest in the company and get great gains in the process. “A great investment opportunity occurs when a marvellous business encounters a one-time huge, but solvable, problem.” – Warren Buffett. The following is an example of how Warren Buffett practiced what he preached.
In 1963, a “salad oil” scandal occurred when American Express found that $60 million lent against collateral were mostly sea water instead of salad oil. The borrower was bankrupt and American Express had to take a loss of $60 million. Buffett analysed the situation and found that the trust in American Express travellers’ check and charge cards were unaffected. The company’s intrinsic value was also higher than the share price then. He saw virtually no downside and maximum upside. He invested 40% of the net worth of the Buffett Partnership, or roughly $13 million. Buffett bought 5% of American Express stock, which had collapsed to $35 a share from a high of more than $62. In the following two years, the stock price of American Express tripled and the Buffett Partnership reportedly sold out with a $20 million profit.
On hindsight, it seems easy to buy more when a company is having a one-time solvable problem and the share price gets a huge hit. However, do we have the stomach to buy more without hindsight (when the problem is staring at your face currently)?
We should not be affected emotionally when the stock price gets a hit. We should cut out all noise from the media, fora, friends and so on. Then, we should look at the problem objectively and discern whether it is really a solvable and one-off issue or is there something larger. For example, when Kingsmen had a problem back in January, I analysed the problem rationally without any noise from a forum and decided that it was one-off. The investigation by Criminal Affairs Department is not over and I might be wrong (that is, it might not be a one-off problem). What I am driving across is that we need to have independent thought and do due diligence when a problem strikes our company and act accordingly, no matter what others may say. Warren Buffett’s quote of “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right” rings true here.
Starting investing at a young age also gives the advantage of seeing more of such problems and learning from them. Experience is a wonderful teacher that certainly cannot be obtained by merely reading books. Since I started investing in 2009, the Kingsmen problem was the first one I faced as an investor and it really made me gain a great deal of experience. I have come across other problems with other companies like Osim, Boustead, Olam and Sakae Sushi but I wasn’t invested in them when the problem occurred. In any case, we can look into the problems that other companies face (as if we are invested in them) and analyse if they are one-off or not, gaining experience in the meantime.
Therefore, when a company is hit with a problem, we have to look at it rationally without any external noise. The ability to rationally think and buy more during a problem comes with experience as well. It is easier said than done but nothing is impossible.