Photograph by Stuart Isett/Fortune Most Powerful Women

Warren Buffett and Charlie Munger address the issue of gambling.

Source: The Financial Review

Reporter’s Question

Hi i’m Susie Taylor from Lincoln Nebraska. By way of explaining, we wrote down the value of U.S. air reflecting our investments current market value you had a good explanation in your report as to why the economics of the business are unattractive and I presume given the choice we wouldn’t do it over again. 

Warren Buffett

I think that’s a fair assumption, and I should mention, anybody wanting to ask about US Air we put them in the other room just so you know, but I’m watching you, I can see you on the monitor. (Laughter breaks out)

Reporter’s Question

And quoting from your profound statement “you don’t have to make it back the way you lost it” wouldn’t be a good idea to put that 89 million and something you are really behind as opposed to US Air?

Warren Buffett

Well that’s a very good question because it is true that a very important principle of investing is you don’t have to make it back the way you lost it and it’s usually a mistake to try and make it back the way you lost it. When we ride an investment down as we did with U.S. Air at 89 million we probably think it’s worth something more than that but we tend to want to be on the conservative side but it’s worth a whole lot less than we paid and the nature of that preferred as well as other private issues we’ve bought usually makes it quite difficult to sell that’s one of the things we know going in when we bought preferred some people thought that we were getting unusually favorable terms, I haven’t heard from them lately on US Air but one of the considerations in that is that if you buy 100 shares of a preferred that’s being offered through as Securities firm from the same issuer you can sell it tomorrow and we are restricted in some ways legally and another way simply by the way that markets work from disposing of of Holdings like that and we know that there’s an extra cost involved to us if we should try to sell or maybe impossible and that that’s not a great importance with us because we don’t buy things to sell some importance and we are not in the same position owning our series A preferred of US Air as we would be if we bought a thousand shares or 5,000 shares of the series B preferred I believe it is the trades on the New York Stock Exchange that would be very sale-able and are preferred could well even be sale-able at a price modestly above what we carry it for, but it would assuming we could do it at all, we could probably get a little bit more money for it. Charlie and I are on the board that complicates things, we always know something just by being on the board that the public doesn’t know so that that complicates things and in the end we’d usually find by dealing with anything where we’ve got fiduciary obligations is maybe not practical of all and if it is it’s probably more trouble than it’s worth. Charlie?

Charlie Munger

Well it’s certainly been an interesting experience the US Air experience. You know i’d like to repeat that business about not having to get it back the way you lost it. That’s the reason so many people are ruined by gambling, they get behind and then they feel they have to get it back the way they lost it. It’s a deep part of human nature and it’s very smart just to lick it by will and well little phrases like that are very useful. 

Warren Buffett

You know, one of the important things in stocks is that the stock does not know that you own it. You know you have all these feelings about it, you remember what you paid, you remember who told you about it at all these little things you know? It doesn’t give a damn, it just it just sits there. A stock at $50 you know somebody paid $100 they feel terrible and somebody else paid 10 they feel wonderful, they have all these feelings and it has no impact whatsoever so it’s as Charlie says gambling is the classic example someone builds a business over the years and that they know how to do and then they go out someplace and get into a mathematical game starts losing it and I think they’re going to make it back not only the way they lost it but that night and it’s a grave mistake.

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