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Warren Buffett: There Is a Big Difference Between a Great Stock and a Great Industry

I recently came across a section of the 1999 annual Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) shareholder meeting during which Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) were asked about the then-rapidly growing telecommunications sector.


The two gurus were asked whether they had looked at this sector and whether they thought that it would be a good place to deploy capital. Buffett has historically been reticent to buy companies in industries that he does not understand, which tends to include new, rapidly growing sectors like technology:


"I think for people that understand it reasonably early there is substantial money to be made...I have no insights to bring to that game that I think are in any way superior, or in many cases not even equal to those of other participants. There's a lot of difference between making money and spotting a wonderful industry".



The last part of Buffett's statement here is very important. There is a huge difference between understanding that a particular industry is going to change and assuming that every company in that industry is a screaming buy regardless of price. As the value investor Howard Marks (Trades, Portfolio) is fond of saying, even the best investments can become bad at a sufficiently high price.

Buffett went on to highlight two key innovations of the beginning of the 20th century - the airplane and the automobile. Both of these things revolutionized life in the U.S., as well as across the globe. Buffett said that even though these innovations caused profound changes to our way of life, very few people made money off of them. One reason for this is, of course, that it is difficult to foresee which new technologies will go on to be important. But even if you had known for a fact in 1900 that the automobile industry would go on to be as important as it is today, you still might have missed out on making money.

There's a fascinating Wikipedia page called "List of defunct automobile manufacturers of the United States," and it contains close to 1,500 entries. Today, the big three (Ford (NYSE:F), Chrysler (NYSE:FCAU) and General Motors(NYSE:GM)) account for the vast majority of car sales in the U.S., with another 13 companies catering to more niche demand. As an investor during this period, how could you possibly have known not to pick one of the losers? True, the very first U.S. automaker, Henry Ford's Henry Ford Company (which would go on to become Cadillac) did well, but history is littered with examples of first movers who did not achieve success.

So the lesson to be learned from Buffett's statements on the matter is that it is not enough to get swept up in the excitement of a new industry - you still need to have some kind of edge or expertise in determining which companies in the new sector will be the successful ones. If anything, this exercise is harder to carry out in a rapidly-growing sector because so many new companies fail. Bear this in mind the next time you are pitched an investment that is touted as "the next Amazon" (NASDAQ:AMZN).

Disclosure: The author owns no stocks mentioned.

Read more here:

  • Investors Should Consider Adding Gold to Their Portfolios
  • Warren Buffett and Charlie Munger Called the 2008 Crisis
  • Howard Marks Urges Investors to Exercise Caution



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