Charlie Munger, Warren Buffett’s long-time partner, is quoted as saying he made a big mistake several decades ago in not selling some of his assets to buy more shares of Belridge Oil*. By examining the events surrounding Belridge Oil at the time in question, perhaps we can apply some of the learnings from this incident to our current investment decisions.

While Munger did purchase 300 shares of the thinly traded stock of Belridge Oil for $115 in the late 1970s, he was offered 1500 more shares at this price but chose to pass it up. Despite recognizing that the stock was “ridiculously underpriced”, he couldn’t bring himself to sell any of his other holdings, even though he could have easily afforded to. That decision ended up costing him over $5 million, as Belridge Oil sold for $3700 per share just two years later!
Belridge Oil was selling for a market cap of about $110 million and a book value of $177 million when Munger declined to add to his holdings**. The real value in this company lay in its proven oil reserves, however. Underneath land it owned in California, it had assets of 380 million barrels of oil***. That means the market was valuing each barrel of oil at 29 cents per barrel, while the going rate was $5-6 per barrel! The value was realized two years later when Shell purchased the company for a price representing about $8/barrel.
Many elements of the teachings of value investors are embedded in this story. Firstly, one shouldn’t be afraid to buy a small cap stock or a stock that is thinly traded if it is indeed undervalued (i.e. buy as if markets will be closed for the next several years). Second, companies deemed more undervalued than others should represent a larger holding in one’s portfolio. Third, it’s easy to get caught up in comparing companies by their earnings, but don’t ignore the value of a company’s assets. Fourth, the presence of an immediate catalyst is not always neccessary. By buying businesses that the market is undervaluing, superior returns will accrue over the long term.
*** Big Deal, by Bruce Wasserstein.