Learning From Buffett’s Mistakes
With Warren Buffett stepping down as CEO of Berkshire Hathaway after sixty years, there have been numerous articles discussing his legendary tenure as one of the greatest investors of all time.
Under his leadership Berkshire Hathaway’s compounded growth rate was nearly 20% per year, while the market did approximately 10% annually over the same period.
That means $10,000 invested for sixty years, growing at 10% per year, grows to $3 million. Very nice.
However, under Buffett’s skillful watch, $10,000 growing at 20% per year, skyrockets to an astounding $563 million! That is the power of compounded growth over decades.
As I shared this with a client, Tom said, “Thanks for the Buffett articles. However, does he talk about mistakes he made?”
It is a great question. With Buffett’s track record, one would think everything he touched turned to riches. Although the long-term track record is accurate, it is not without numerous mistakes. Furthermore, Buffett has been very transparent on mistakes, using them as teaching tools to show what he learned to help others.
Buffett categorizes mistakes into two piles: those of omission (missed opportunities) and commission (bad investments).
Mistakes of commission caused Berkshire Hathaway to lose significant capital or were purchased for the wrong reasons.
Ironically, buying Berkshire Hathaway itself was a huge mistake. In 1962, Buffett began buying stock in the failing textile company out of spite after a bad negotiation with management. Buffett called this emotional decision the “dumbest stock” he ever bought, estimating the decision to divert capital from the insurance business cost over $200 billion in potential gains.
Buffett called his acquisition of Dexter Shoe Company in 1993 his “worst deal” and a “financial disaster” that belongs in the Guinness Book of World Records. The business failed due to foreign competition. He compounded the error by using Berkshire stock to pay for it. Those shares would be worth billions today, making the opportunity cost immense.
Berkshire acquired aerospace-parts maker Precision Cast Parts in 2016 for $35 billion. However, due to the pandemic’s impact on air travel and an overestimation of the company’s prospects, Berkshire took a $10 billion write-down in 2020. Buffett admitted he “paid too much for the company”.
In 2008, Buffett bought a large stake in oil and gas company Conoco Phillips when prices were near their peak, expecting them to rise further. He misjudged the dramatic fall in energy prices that followed, resulting in a multibillion-dollar loss for Berkshire. Attempting to judge the fortunes of companies that sell commodity products is incredibly tough.
Buffett was slow to sell Tesco, the U.K. grocer, after concerns about management and accounting problems surfaced in 2014, leading to a $444 million after-tax loss. He admitted he “made a big mistake with this investment by dawdling”.
In 1989, Berkshire purchased preferred shares in United Airlines. Buffett has discussed this mistake many times, acknowledging that while he eventually recouped his principal and dividends, it was more due to luck than a sound business model. He later famously joked he uses an 800 number to talk himself out of buying airline stocks.
Although errors of commission were significant, Buffett considers his errors of omission even greater because the potential gains lost far exceed the actual dollar losses from bad picks.
Buffett and his late partner Charlie Munger long admired Google but stayed away because they felt technology companies were outside their “circle of competence”. He later admitted he “blew it” and “didn’t understand the power of the model”, despite Berkshire’s subsidiary GEICO being a major advertiser on Google.
Buffett also missed early opportunities in Microsoft, despite being close friends with Bill Gates and Gates being a Berkshire’s board member. Similarly, it took Buffett decades to buy Apple, though Berkshire eventually made a highly successful investment in the company in 2016.
Buffett’s partner, Charlie Munger served on the board of Costco. Despite the strong competitive advantages that served Costco, Buffett never pulled the trigger thinking it was too expensive.
Buffett made his fair share of mistakes, but they didn’t wipe him out. Instead, he just kept studying the hallmarks of great businesses looking to maximize return on capital.
Buffett has always known investing is a game of patience and discipline. More than 95% of Buffett’s net worth has been accumulated after age 65.
The best investment plan is the one allowing you to compound earnings for the longest time frame. Don’t be in a hurry to trade.
Dave Sather is a Certified Financial Planner and the CEO of the Sather Financial Group, a fee-only and fiduciary strategic planning and investment management firm.
