Consider 2 companies: A and E. One of the companies lost its investors more money than virtually any business in the world. The other made its owner more money than virtually any company in the world.

Company A had thousands of MBAs working for it. Company E had none. Company A had all kinds of employee benefit programmes, stock options, pensions, the works. Company E never had stock options.

Company A had thousands of patents. Company E never invented anything. Company A’s product improved dramatically in this period, Company E’s product just sat.

Does anybody have any idea of which company was the great success, and why?

Both companies make products used everyday. They started as necessities, highly useful, nothing esoteric about either one.

Well, Company A was known as Company A because it was in agony. Company E was Company Ecstasy. Company A is American Telephone and Telegraph. At the end of 1979, it was selling for US$10 billion less than the amount the shareholders had either put in or left in the business.

If shareholder’s equity was X, the market value was X minus $10 billion.

Company E is Thompson Newspapers. It owns about 5% of the newspapers in the US, but they are all small ones. Its owner, Lord Thompson, started with US$1,500.

The telephone company had one problem: It kept tossing and plunging more money into the business. Lord Thompson, once he bought the paper in Council Bluffs, never put another dime in.

The newspapers just mailed him money every year. In fact, it was going to say on his tombstone that he bought newspapers in order to make more money in order to buy more newspapers. The idea was that essentially, he raised prices and raised earnings every year without having to put in more capital.

One is a marvellous business, the other is a terrible business.

Excerpted from a lecture by Warren Buffett at Notre Dame University in 1991. Source: http://www.tilsonfunds.com/BuffettNotreDame.pdf

Editor’s note: Wouldn’t it be nice if your tombstone says, “I bought e-books, software and websites in order to resell to make more money in order to buy more e-books, software and websites”?

On the other hand, if everyone’s so smart at selling, who’s going to create?