- Despite being one of America’s most successful investors throughout history, Warren Buffett has made several mistakes that have cost him dearly.
Although people don’t usually learn from someone else’s head, it is worth taking into account the mistakes other people make in order to try to avoid them. Especially when our financial health is at stake. Here we offer you the 7 biggest investment mistakes made by Warren Buffett and what we can learn from them.
Buffett has one of the most successful investment portfolios in the world and wealth in excess of $100 billion. His investments in companies such as Apple, Coca-Cola, Moody’s, American Express or Kraft Heinz have earned him hundreds of millions of dollars. That is why he is one of the most revered investors among traders and his advice is always well received.
But not everything this talented American investor has touched has turned to gold. The truth is that he has been wrong many times and those mistakes have cost him dearly. The respected businessman likes to share his failures and successes with many people in conferences and interviews during his brilliant career.
“While it’s good to learn from mistakes, it’s better to learn from other people’s mistakes,” Buffett maintains. Here are seven of the biggest investment mistakes he made and what can be learned from them.
1. Buying the Dexter shoe company
Buffett considers it the worst deal he ever made. His company Berkshire Hathaway acquired the Dexter Shoe Company in 1993. Buffett made a wrong projection about the company’s outlook. While he bought it at the time because of its high return on capital, what followed was failure.
The astute investor failed to take into account the threat posed by competition from China and other countries, which were manufacturing shoes at lower cost and flooding world markets with their products.
So in 1999 Buffett realized that it was very challenging to compete on advantageous terms with foreign products. About 93% of the nearly 1.3 billion pairs of shoes purchased by the United States were made overseas.
Lesson learned: before investing in a business, verify its long-term competitive advantage over other companies. The other mistake was not buying Dexter Shoe Company for cash.
Instead, Buffett sold Berkshire Hathaway shares for USD 433 million. At that time Berkshire’s Class A shares were priced at about USD 15,000. And they are currently valued at about USD 517,000.
So the cost to Berkshire shareholders of acquiring Dexter’s shares was not just $433 million. The financial mistake was much bigger, costing Buffett’s parent company shareholders around $15 billion. The lesson is that you can’t sacrifice a winning stock or a risky bet.
2. Buying Tesco
In 2012 Berkshire Hathaway owned 5% of the business of Tesco, the British supermarket chain. A year later, the company was showing signs that the company’s finances were not well. Already Berkshire had decreased its stake to 3.7% but still held an investment of approximately USD 1.7 billion….
Tesco’s share price continued to fall in the following months, and the company lost about 50% of its value. This decline was due to a fall in sales as competition in the discount retail market increased.
In addition, an accounting scandal was uncovered at the company which contributed to tarnishing its image. Tesco was under investigation by UK financial regulators.
Lesson learned: instead of selling when it was due, Buffett inexplicably delayed the sale of Tesco shares. Even though all the company’s financial readings pointed to a disaster on the horizon. The result of this miscalculation resulted in a loss to Berkshire of $444 million.
The lesson is to sell when you have to sell. Whether to buy or to sell, sell when the signals are right, not before or after.
3. Buy Energy Future Holdings Corp. bond
In 2013 Warren Buffett made another mistake, but this time it was for not consulting his financial advisors. Before making a trade, Buffett usually consults Charlie Munger, the vice chairman of Berkshire Hathaway.
The investor purchased Energy Future Holdings Corporation bonds valued at more than $2.1 billion. This unfortunate mistake cost him a whopping $873 million. The company produced and distributed electricity from coal-fired power plants.
Buffett had bought the high-yield bonds of Energy Future Holdings Corp. in 2007, thinking that in the future the price of natural gas would rise in price. So the coal-fired electricity business would become more competitive and profitable.
But this did not happen. The price of natural gas fell in the following years. The result was a monumental loss for Energy Future. So much so that the company in 2014 had to file for bankruptcy. After selling the bonds worth USD 2.1 billion, Berkshire incurred a net loss of USD 873 million.
Lesson learned: it was clear that Buffett had grossly miscalculated the probabilities of profit and loss when making the deal, as he later humbly admitted. The investor then advised to always try to seek a second opinion before investing from a business partner or a trusted person.
The other lesson is that when making predictions there is always a risk involved. More so when dealing with such volatile commodities as oil, natural gas, gold or copper and any other commodity. Another recommendation is the risk of buying high-yielding “junk” bonds, which for a small investor can turn into a total disaster.
4. Buying Lubrizol
Despite the obvious ethical misconduct, in 2011 David Sokol, a former partner of Warren Buffett, induced Berkshire to buy Buffett Buffett Lubrizol Corporation, a chemical manufacturer. Of course, the executive had a personal interest in that company as he owned a stake in it.
Only Sokol did not tell Buffett that he owned stock in that company which violated Berkshire’s insider trading rules. By buying Lubrizol for approximately $9 billion, David Sokol made a $3 million profit on the transaction.
An internal Berkshire investigation later concluded that Sokol deliberately concealed information about his Lubrizol stock holdings. The executive did not disclose this detail until after the meeting with the bankers who presented the acquisition proposal.
For Buffett, it was a matter of basic ethics. Of course, this did not come to public light until much later when the investor admitted what had happened and after having said that no one was to blame for this legal incident.
Lesson learned: the mistake was made by Warren Buffett and David Sokol. The former for trusting and the latter for abusing trust. Sokol was considered Buffett’s sure successor at Berkshire. So, before a business deal, always ask all the relevant questions. Everything must be clear.
5. Not buying Amazon stock
This was a mistake in reverse, i.e. for not investing when he should have. In 2017, the American billionaire admitted that despite having tracked Amazon.com for several years he never made the decision to invest in the mega tech company.
“I was too dumb to realize it. I didn’t think Jeff Bezos could succeed on the scale he has,” Buffett said. The investor underestimated Amazon’s success in two key sectors: e-commerce and cloud services through Amazon Web Services.
Lesson learned: Amazon was not compatible with Warren Buffett’s traditional investment approach. First of all, techs have not been in Buffett’s business orbit. For another, neither have stocks of companies that have a price-to-earnings ratio as high as Amazon’s.
It is true that Amazon was not in Buffett’s traditional investment sector, but not having invested in this company that showed year on year exponential growth was a very questionable error of omission. Sometimes it is necessary to expand the radius of action and evolve into other investment sectors.
6. Google shares
Here again, Warren Buffett made another regrettable mistake. And all because the Berkshire Hathaway portfolio does not include any shares of Alphabet – Google. Although the company had already attracted the attention of the powerful investor through GEICO, one of its Berkshire subsidiaries.
The auto insurance company, regularly advertises on Google to attract customers. But Buffett didn’t quite understand Google’s business and its future prospects. Having been limited to industry sectors outside Big Tech prevented the investor from clearly seeing the burgeoning business.
Lesson learned: keep an open mind to new opportunities.
7. Investing in Berkshire Hathaway
Although it may seem paradoxical, this is one of Warren Buffett’s biggest investment mistakes. The textile company acquired by Buffett in 1962 was bankrupt at the time. But after conducting a financial evaluation of the company, the investor considered it to be a good business.
The young Buffett began acquiring parcels of Berkshire stock until he owned a considerable number of shares. In 1964, the then owner of the company, Seabury Stanton, made an offer to buy the shares at a price of $11.50.
After agreeing to buy and sell the shares, Stanton changed his mind. He offered to pay $11.32 per share and not the agreed price, which infuriated Buffett. He then decided to buy a larger stake to keep control of the company. After that, he fired Stanton from Berkshire Hathaway.
Buffett had gotten his revenge but paid the price. He was acquiring a bankrupt company. Some time later, Buffett acknowledged that it was one of his dumbest decisions. For more than 20 years, he had to hold the reins of a troubled company, which generated many financial losses for him.
If instead of investing in the textile business he had invested in other businesses such as insurance and food companies, he would have made much more money. Buffet’s mistake cost him some 200 billion dollars, according to his own calculations.
Lesson learned: in business, reason counts, not emotion.
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