Warren Buffett in his legendary annual letters to Berkshire Hathaway shareholders has often talked about his biggest investing mistakes. Here are 5 of his mistakes that teach valuable investment lessons.
Warren Buffett has said, “While it’s good to learn from your mistakes, it’s better to learn from other people’s mistakes.” (Image Reuters)
Warren Buffett is widely regarded as one of the most successful investors of all time. The Berkshire Hathaway CEO, often called the ‘Oracle of Omaha’, is the world’s fifth richest person, with a net worth of $107 billion, according to the Bloomberg Billionaires Index. Despite being known for his ability to read Wall Street like a book, the billionaire has admitted to making several investing mistakes over the years. Buffett in his legendary annual letters to Berkshire Hathaway shareholders has often talked about his biggest investing mistakes.
Five of Warren Buffett’s mistakes that teach valuable investment lessons
1. Letting emotions fuel investments: In an interview with CNBC in 2018, Warren Buffett said the dumbest stock he ever bought was Berkshire Hathaway. Shocking right? Buffett explained that he first invested in Berkshire Hathaway in 1962 when it was a failing textile company. At the time, he believed that he would make a profit when more mills closed, so he loaded up on the stock. However, the company later tried to chisel Buffett out of more money. Rather than thinking rationally, a spiteful Buffett bought control of the company, fired the manager, and tried to keep the textile business running for another 20 years. The billionaire estimated that this emotion-fuelled move cost him $200 billion. So, the lesson to take from this is to not let emotions factor into financial decisions.
2. Overlooking competitive advantage: In 1993, Warren Buffett purchased Dexter Shoe Co for $433 million in Berkshire Hathaway stock. Buffett’s investment in Dexter Shoes turned into a disaster because he saw a durable competitive advantage in Dexter that quickly disappeared. According to Buffett, “What I had assessed as a durable competitive advantage vanished within a few years.” In his 2007 letter to shareholders, Buffett said, “To date, Dexter is the worst deal that I’ve made. But I’ll make more mistakes in the future – you can bet on that.” The billionaire investor has said that this poor decision cost investors $3.5 billion. The lesson that investors can take away from this is that a company is at its best if it has a viable competitive advantage. So, you must check a company’s durable competitive advantage before investing in it.
3. Allocating resources to wild card bets: Buffett has admitted to one more regret in regards to buying Dexter Shoe Co In his 2014 letter to shareholders, he expressed frustration over how he paid the $433 million purchase price. At the time, rather than giving the sellers cash, Buffett used Berkshire shares to fund the purchase. At the time, those shares were valued at $5.7 billion. “As a financial disaster, this one deserves a spot in the Guinness Book of World Records,” the billionaire wrote in the letter to shareholders. While not everyone is buying and selling million-dollar companies like Buffett, the lesson that investors can learn from this mistake is to always ensure that your resources are properly allocated. If your current portfolio is performing well, don’t pull money from solid investments to take a chance on a wild card.
4. Confusing revenue growth with a successful business: Warren Buffett bought preferred stock in US Air in 1989, attracted by the high revenue growth it had achieved up until that point. However, the investment quickly turned sour, as US Air did not achieve enough revenues to pay the dividends due on the stock. The shares never appreciated, but after weathering turmoil, Forbes reported that the ace investor likely got his principal and dividends back. He credited the airline’s rebound to both his and Munger’s exit from the board and the arrival of CEO Stephen Wolf. He praised the latter for saving what could’ve been a very costly investment.
Buffett in his 2007 letter to Berkshire shareholders pointed out that sometimes businesses look good in terms of revenue growth, but they require large capital investments all along the way to enable this growth. He said, “Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it. The lesson for investors from this mistake is to research every investment before buying, so you know exactly what you are getting into.
5. Ignorance is not always bliss: In a 2017 interview, Warren Buffett was asked why he had never bought stock in Amazon. He admitted he had followed Amazon.com for a long time but never chose to invest in it. “I was too dumb to realize. I did not think Jeff Bezos could succeed on the scale he has,” he had said. Buffett went on to say, “Obviously, I should have bought it long ago, because I admired it long ago,” he said. “But I didn’t understand the power of the model as I went along. And the price always seemed to more than reflect the power of the model at that time. So, it’s one I missed big time.”
Warren Buffett’s investments often never include businesses he doesn’t understand, which turned out to be a bad decision in this case. The lesson that investors can learn from this is that investing blindly in an unknown company is not a smart move, but shying away from them isn’t wise, either. So, you can partner with someone whose strengths differ from yours to avoid missing out on great investment opportunities.