Buffett's $18B miss on Disney
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Buffett's $18B miss on Disney
The legendary investor says selling his stake in Disney was a "huge mistake".
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Today, we’re talking about Warren Buffett’s history with Disney, which many consider one of his biggest investment mistakes.
Also this week: Some smart links (how the Coca-Cola bottle was created) and some dumb memes (the funniest Linkedin profile ever).
Buffett & Disney
Warren Buffett celebrated his 92nd birthday on Tuesday.
As someone that writes about business, I’m obligated to pen a Buffett-related piece this week.
In February, I wrote about Berkshire’s monster investment in Apple, which has led to an absolute dollar gain of $100B+ in 6 years (I concluded that it’s the “greatest public market tech investment ever”).
So, now it’s time to look at the other side: what is Buffett’s biggest public equity mistake?
Probably Disney.
While Berkshire Hathaway currently holds no Disney stock in its ~$340B public equity portfolio, there is an alternative universe in which Buffett & Co. own 8.6% of The House Of Mouse. That stake would total $17.6B and be Berkshire’s 6th largest position after Apple, Bank of America, Chevron, Coca-Cola and American Express.
This alternative universe — one where I bought a lot of Bitcoin at $1 — rests on two deals per The Motley Fool:
1966: The Oracle invests $4m to acquire 5% of Disney for the Buffett Partnership. He sold one year later for a 50% gain.
1996: Berkshire receives 3.6% of Disney stock as part of Disney’s $19B acquisition of the broadcaster Capital Cities/ABC. He sold the stake down within 5 years.
Today, Disney is valued at $205B (vs. markets caps of $80m in 1966 and $34B in 1996). At a weighted cost-basis of $513m — and with no consideration for re-investing dividends — Berkshire’s $17.6B Disney stake would be a 34x bagger (side note: Dividend Growth Investor has a much more thorough analysis on the 1966 investment than my super crude hypothetical).
You’re probably thinking, “so what if he sold early, people do it all the time?"
What makes Disney interesting is that Buffett’s investment thesis from the mid-1960s was spot on and is still valid. However, he still sold…twice.
The Disney story gives us the perfect chance to implement this Buffett quote: “It's good to learn from your mistakes. It's better to learn from other people's mistakes.”
1960s: Buffett meets Walt Disney
In a series of lectures at Notre Dame’s MBA school in 1991, Buffett tells the story of how he bought 5% of Disney for only $4m in 1966.
He was 35-years old at the time and a decade into running his investment firm Buffett Partnerships (which would acquire a textile manufacture called Berkshire Hathaway in 1969 and take on its name before morphing into a holding company).
Buffett actually paid an in-person visit to Walt Disney — who was in his mid-60s — to assess the deal and shared this memory:
“I went out to see Walt Disney (he’d never heard of me). We sat down and he told me the whole plan for the company – he couldn’t have been a nicer guy.
If he’d privately gone to some huge venture capitalist, or some major American corporation, if he’d been a private company, and said ‘I want you to buy into this deal’, they would have bought in based on a valuation of $300m or $400m.
The very fact that it was just sitting there in the market every day convinced [people that $80m was an appropriate valuation]. Essentially, they ignored it because it was so familiar. But that happens periodically on Wall Street.”
There’s no transcript of their conversation but I imagine it went like this:
BUFFETT: I intend to buy 5% of your entertainment enterprise.
DISNEY: Who are you and how did you get into my office?
BUFFETT: Oh apologies. I’m Warren Buffett and I love compounding.
DISNEY: Why don’t you compound me some good movie ideas?
BUFFETT: Fine, here are two: 1) Imagine a mermaid but she’s little; and 2) Imagine a king, but he’s a lion.
DISNEY: I think we can work together.
Thankfully, Buffett does provide his original investment thesis and it’s quite timeless:
Intellectual property: “Mary Poppins had just come out. Mary Poppins made about $30m that year, and seven years later you’re going to show it to kids the same age. It’s like having an oil well where all the oil seeps back in. Now the [numbers today are] probably different, but in 1966 they had 220
pictures of one sort or another [Snow White, Three Little Pigs, Fantasia]. They wrote them all down to zero – there were no residual values placed on the value of any Disney picture up through the 1960s.”
"Every seven years a new crop of kids comes along and they all want to see Snow White. And they drive their parents crazy until they get to see it.”Theme parks: “$80m bucks was the valuation of the whole thing. 300 and some acres in Anaheim. The Pirates of the Caribbean ride had just been put in and it cost $17m bucks.” (Buffett later remarked “Imagine my excitement - a company selling at only 5x rides!”)
“You don’t have to be a financial analyst, you don’t have to be finance major, to know that $80m is a ridiculous valuation. Eleven million people a year go to Disneyland. That’s $7 a person [or $77m a year] and you get [the rest of the company] thrown in free. It was a joke.”
Even though IP and theme parks are clearly long-term investment cases, Buffett ended up selling a year later for about $6m (+50%).
He'd get another bite at the apple 30 years later.
1990s: Disney acquires Capital Cities/ABC
Buffett’s road back to Disney begins in 1985.
As reported by Forbes, Buffett “invested in television and radio broadcaster Capital Cities in 1985 to help it finance its $3.5 billion pickup of much larger ABC.”
A year earlier in 1984, ABC — which was also a television and radio broadcaster — had scooped a random sports network called ESPN for only $188m.
Fast-forward to 1995 at the Sun Valley conference in Idaho. There are three people we need to zoom in on: Buffett (largest Capital Cities/ABC shareholder), Michael Eisner (Disney CEO), Tom Murphy (Capital Cities/ABC CEO).
As the story goes, Buffett was walking to meet Murphy for a golf match when he bumps into Eisner. The two start talking shop and…well, I’ll let Buffett’s 1995 annual letter tell the rest of the story:
“This wasn't the first time a merger had been discussed, but progress had never before been made, in part because Disney wanted to buy with cash and Cap Cities desired stock.
Michael and I waited a few minutes for Murph to arrive, and in the short conversation that ensued, both Michael and Murph indicated they might bend on the stock/cash question. Within a few weeks, they both did, at which point a contract was put together in three very busy days.
The Disney/Cap Cities deal makes so much sense that I'm sure it would have occurred without that chance encounter in Sun Valley. But when I ran into Michael that day on Wildflower Lane, he was heading for his plane, so without that accidental meeting the deal certainly wouldn't have happened in the time frame it did.”
What was the deal? Disney bought Capital Cities/ABC for $19B and Buffett ended up with 3.6% of Disney when the deal closed in February 1996.
The second time was not a charm: Buffett mostly sold the position by 2001.
Let’s go back to his OG Disney thesis.
On the IP side, Disney had beefed up quite a bit over the following three decades: Beauty & The Beast, Toy Story, Aladdin, The Lion King, The Little Mermaid.
However, theme parks were actually not doing as well. Disney was underinvesting and there was the disastrous 1992 launch of Euro Disney in Paris (TLDR: turns out competing against Paris’ existing tourist sites is an uphill battle).
Per Parkeology, there were other red flags around Eisner’s late-90s leadership:
Chasing dotcom trends: Buffett was long tech-adverse and Disney’s attempt to launch its own AOL-like portal — called Go Network — probably didn’t sit well with the Oracle. To jumpstart its Go plan, Disney spent $1.7B+ in 1998-99 on a search engine not called Google (it was called Infoseek). The project was soon shuttered.
Internal politics: Eisner famously hired CAA super-agent Michael Ovitz in 1995 to be his heir apparent. Ovitz was fired in January 1997 with a $138m severance package that really pissed off Disney shareholders (shareholders sued Disney over the payout but lost the case).
Diluting brand: To milk extra bucks, Disney made some really awful direct-to-video sequels (while we can’t know for sure whether or not Buffett seeded the ideas for The Littler Mermaid or The Lion King, we def know it was not his idea to make The Little Mermaid II: Return to the Sea or The Lion King II: Simba’s Pride).
Looking back, Buffett’s second Disney sale was definitely more justified. However, if he was sitting on that original 5% stake from 1966, it seems more than plausible that he would keep the entire 8.6% stake after the Capital Cities/ABC deal.
As Buffett has said, “Our favorite holding period is forever.”
Things were getting ugly under Eisner but the IP and theme park issues could — and did — get fixed. Granted the fix happened under Disney’s next CEO Bob Iger who went absolutely bananas on content acquisitions (Fox, Pixar, Star Wars, Marvel etc) before making a timely pivot to streaming.
Berkshire has obviously missed all of that.
Final Thoughts
For such a long career, Buffett is going to have many stock misses along with his Grand Slam picks. CNBC has a few interesting whiffs:
Dexter Shoes Co: Buffett bought the company for $433 in Berkshire stock in 1993 (1.6% of the market cap). As Berkshire’s stock soared, the move has cost shareholders billions.
ConocoPhillips: Buffett bought $7B of the O&G giant in 2008 near the top of oil prices and took a multi-billion write down.
Google: Before Apple, Buffett missed on a ton of tech. He has expressed regret for missing Amazon and Microsoft but also says that he passed on these names because the business models weren’t super-clear to him (aka outside his “circle of competence”). What’s interesting about the Google miss is that Berkshire actually had an insider-ish view: GEICO — the Berkshire-owned insurer — was spending boatloads on Google in the mid-2000s and the search business model was clearly a money printer (as Stanley Druckenmiller told me when I interviewed him: “[Google] is literally the best business I’ve ever seen”).
There have been other stock misses (Kraft Heinz, Tesco, IBM) but the Disney one stands out because Buffett had the long-term thesis down pat and didn’t let it play out.
When asked about Disney during Berkshire’s 1998 annual meeting, Buffett said that seeing a stock go up after selling is actually a positive sign (it signals that the underlying business is good). There is clearly some regret, though:
…the Disney sale in the ’60s was a huge mistake. I should have been buying, forget about holding.
That’s happened many times. I mean, we think that anything we sell should go up subsequently, because we own good businesses and we may sell them because we need money for something else, but we still think they’re good businesses, and we think good businesses are going to be worth more over time.
So everything I sold in the past, virtually that I can think of, has gone on to sell at a lot more — for a lot more money. And I would expect that would continue to be the case. That’s not a source of distress. But I must say that selling the Disney was a mistake…
In conclusion: if you find something that is valued at “5x theme park rides”, buy it and hold forever.
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Links and Memes
Coca-Cola’s bottle patent: Buffett’s comment that his favorite holding period is “forever” is from his 1988 Annual Letter and partially in reference to Coca-Cola, which is now Berkshire’s 4th largest position (~$25B). Berkshire initiated its Coca-Cola position that year as markets were beaten up following the Black Monday crash on October 19th, 1987. Berkshire now owns 9.2% of the company.
Here are two fun facts about Coca-Cola:
Origin story: Businessman Asa Candler launched The Coca-Cola Company in 1892. He did it after cutting maybe the greatest business deal ever: in 1888, Candler bought the Coca-Cola recipe from chemist John Stith Pemberton for ~$2300.
The bottle: To create its iconic glass bottle, Coca-Cola sent a creative brief to glassmakers around the US. The winning bid had to design a bottle “so distinct that you would recognize if by feel in the dark or lying broken on the ground.”
The patent for the winning design was issued on November 16th, 1915 (in the name of science, I just smashed a small Coke bottle and — while my toe is bleeding — can confirm the design is still identifiable).
Bill Murray stories: One of my favorite pastimes is reading random stories about comedy legend Bill Murray. He doesn’t have an agent or manager and if you want to reach out to him, there’s a 1-800 voicemail that he will never answer.
Here’s a 6-minute YouTube video of the Farrelly Brothers talking about how they got Murray to do the classic film Kingpin. There’s a scene in the comedy where Murray’s hysterical villain (Big Ern McCracken) bowls 3 straight strikes. There was no editing, Murray actually did it.
Separately, some a-hole stole $185k from a crypto wallet that Murray used to raise money for charity. To leave this Murray tidbit on a positive note, check this tweet:
Some other stuff: A good thread of “first products” for famous companies: Sony = Rice Cooker, Nokia = Toilet Paper, Nintendo = card game (Link). ProPublica exposed a multi-million-dollar scam to get shady people verified on Instagram (Link). Funny video of a Tesla slicing a pizza (Link).
And here some gold tweets:
The “main character” on Twitter last week was probably Leonardo DiCaprio. The superstar actor parted ways with his GF, who recently turned 25. For those out of the loop, in-depth data analysis shows that Leo hasn’t dated anyone past the age of 25. There were lots of memes. Many are too low-brow for the esteemed SatPost publication…so I’ve selected two tasteful tweets to share:
“Become ungovernable” LOLOLOLOL
Long-time SatPost readers will know I have a special place in my heart for Linkedin insanity (if you’re new here, please read “Why is Linkedin so cringe?”). On a very related note, the internet recently discovered the greatest Linkedin profile ever: it belongs to Len Markidan, who takes trolling job accomplishments to ungodly heights.
Buffett's $18B miss on Disney
What did he do w/ the proceeds and what was the IRR on that? Kind of important, I think.