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Justin Cannon

Is it the Jockey or the Horse?

Buffett has mentioned several times in the past that even a great management would find it difficult to bring order back to a business with poor economics, like the textile business, or commodity or airline businesses.

So, while Buffett had a great manager in the form on Ken Chase at Berkshire’s textile business, the business still floundered and was sold off in 1985.

Here are things Buffett has written over the years on why even good managers cannot turn around bad businesses…

  • In some businesses, not even brilliant management helps I’ve said many times that when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. (1989)
  • Good jockeys will do well on good horses, but not on broken-down nags. (1989)
  • When an industry’s underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance. (As a wise friend told me long ago, “If you want to get a reputation as a good businessman, be sure to get into a good business.”) (2006)
  • My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad). (1985)
  • Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks. (1985)

As per Buffett’s estimates, had he never invested a dollar in the textile business and had instead used his funds to buy a business with a better economics, his returns over the course of his career would have been doubled.

Like for Buffett, a gruesome business is not just a terrible investment for you, but also a major distraction that would cost you in terms of opportunity cost.

Lessons Learned

What lessons can we learn from Buffett’s textile endeavours? Well, there are two, in Buffett’s words.

One, “If you get into a lousy business, get out of it.”

Two, “If you want to be known as a good manager, buy a good business.”

Also, if you own the best business in a bad industry (like textiles, airline, commodities, and retailing), please note what Buffett wrote in 1985…

“A horse that can count to ten is a remarkable horse – not a remarkable mathematician. Likewise, a textile company that allocates capital brilliantly within its industry is a remarkable textile company – but not a remarkable business.”

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