Street Capitalist: Event Driven Value Investments

This morning while reading today’s Heard on the Street column by Peter Eavis at the WSJ, I saw an interesting line:

But Mr. Buffett has expressed regret that he didn’t do certain deals differently, including an investment in Gillette in 1989.

This struck me as strange since Buffett’s investment in Gillette is generally regarded as one of his best. I never knew that he had any regrets for it. The investment was regarded as his best out of the four convertible preferreds from the late ’80s (USAir, Salomon Inc., Champion International are the others). He was able to not only keep the company defended from raiders but also make a handsome profit while owning “7% of the razor market”. Upon searching a bit, I think I found what Eavis mentioned as Buffett’s regret:

Our best holding has been Gillette, which we told you from the start was a superior business. Ironically, though, this is also the purchase in which I made my biggest mistake – of a kind, however, never recognized on financial statements.

We paid $600 million in 1989 for Gillette preferred shares that were convertible into 48 million (split-adjusted) common shares. Taking an alternative route with the $600 million, I probably could have purchased 60 million shares of common from the company. The market on the common was then about $10.50, and given that this would have been a huge private placement carrying important restrictions, I probably could have bought the stock at a discount of at least 5%. I can’t be sure about this, but it’s likely that Gillette’s management would have been just as happy to have Berkshire opt for common.

But I was far too clever to do that. Instead, for less than two years, we received some extra dividend income (the difference between the preferred’s yield and that of the common), at which point the company – quite properly – called the issue, moving to do that as quickly as was possible. If I had negotiated for common rather than preferred, we would have been better off at year end 1995 by $625 million, minus the “excess” dividends of about $70 million.

Berkshire Hathaway Letter to Shareholders (1995)

This is one of the best characteristics of Buffett, he’s able to scrutinize even some of his greatest successes and learn from them. It’s something that all of us as investors should do, sometimes we spend too much time trying to learn from our failures that we forget to closely examine our successes.