In his legendary annual letters to Berkshire Hathaway shareholders, Warren Buffett often talked about his biggest investment mistakes. Here are 5 of his mistakes that teach valuable investment lessons.
Warren Buffett is considered one of the most successful investors of all time. The Berkshire Hathaway CEO, often called the “Oracle of Omaha,” is the fifth-richest person in the world with a fortune of $107 billion, according to the Bloomberg Billionaires Index. Although he is known for his ability to read Wall Street like a book, the billionaire admitted to making a few investment mistakes over the years. In his legendary annual letters to Berkshire Hathaway shareholders, Buffett often talked about his biggest investment mistakes.
Five Warren Buffett mistakes that teach valuable investment lessons
1. Let your emotions fuel your 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 initially invested in Berkshire Hathawayin 1962, when it was a failed textile company. At the time, he believed he would profit when more factories closed, so he bought the stock. However, the company later tried to squeeze additional money out of Buffett. Instead of thinking rationally, an angry Buffett bought control of the company, fired the manager, and tried to keep the textile business alive for another 20 years. The billionaire estimated that this emotional step cost him 200 billion dollars. So, the lesson to be learned from this is not to let emotions influence your financial decisions.
2. Not taking into account the competitive advantage:In 1993, Warren Buffett purchased Dexter Shoe Co for $433 million in Berkshire Hathaway stock. Buffett’s investment in Dexter Shoes turned out to be a disaster, as he saw in Dexter a sustainable competitive advantage that quickly disappeared. According to Buffett, “what I valued as a long-term competitive advantage disappeared within a few years.” In his 2007 letter to shareholders, Buffett said, “Dexter is by far the worst deal I’ve ever done. But I’ll be making more mistakes in the future, you can bet on that.” The billionaire investor said the botched decision cost investors $3.5 billion. The lesson investors can take from this is that a company is at its best if it has a viable competitive advantage. So, you should check a company’s long-term competitive advantage before investing in it.
3. Allocation of resources for wild card bets:In his 2014 letter to shareholders, Buffett admitted that he once again regretted buying Dexter Shoe Co. At the time, instead of giving the sellers cash, Buffett used Berkshire stock to finance the purchase. At that time, these shares were valued at 5.7 billion dollars. “As a financial disaster, it deserves a place in the Guinness Book of Records,” the billionaire wrote in a letter to shareholders. While not everyone buys and sells million-dollar companies like Buffett, the lesson investors can learn from this mistake is to always make sure your resources are properly allocated. If your current portfolio is performing well, don’t pull money from solid investments to take a wildcard risk.
4. Confusion of income growth with a successful business: Warren Buffett bought US Air’s preferred stock in 1989, attracted by the high revenue growth it had achieved up to that point. However, the investment quickly fell through because US Air did not generate enough revenue to pay the dividends due on the stock. The stock has never appreciated, but after weathering the turmoil, Forbes reported that the big investor is likely to have returned its principal and dividends. He attributed the airline’s recovery to his and Munger’s exit from the board and the arrival of CEO Stephen Wolff. He praised the latter for saving what could have been a very expensive investment.
Buffett noted in his 2007 letter to Berkshire shareholders that sometimes companies look good in terms of revenue growth, but they need heavy capital investment along the way to deliver that growth. He said: “Investors have poured money into a bottomless pit, attracted by growth when they should have been pushed away from it. The lesson for investors from this mistake is to research every investment before buying so you know exactly what you’re getting into.
5. Ignorance is not always happiness: in a 2017 interview, Warren Buffett was asked why he never bought stocks Amazon . He admitted that he had been keeping an eye on Amazon.com for a long time, but had never decided to invest in it. “I was too stupid to understand. I didn’t think Jeff Bezos could reach this scale,” he said. Buffett went on to say, “Obviously, I should have bought it a long time ago because I admired it a long time 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 the time. So that’s something I really missed.”
Warren Buffett’s investments often never involve businesses he doesn’t understand, which turned out to be a bad decision in this case. The lesson investors can take from this is that blindly investing in an unknown company is not a smart move, but avoiding them is also not smart. So, you can partner with someone whose strengths are different from yours so that you don’t miss out on great investment opportunities.
Author: Konstantin Kryvopust
