By Laura Woods
GOBankingRates.com
WWR Article Summary (tl;dr) Despite his investing prowess, Warren Buffett admits there have been a few mistakes over the years. Below he describes some of his investment missteps.
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Warren Buffett is quite possibly the greatest investor of all time. A stock market player since age 11, he has a lifetime of stock-picking experience that has served him well.
For decades, the Berkshire Hathaway CEO, nicknamed the “Oracle of Omaha”, has shown his ability to read Wall Street like a book. He has a net worth of nearly $75 billion, according to Forbes. That makes him one of the richest people on the planet.
Despite his investing prowess, there have been a few Warren Buffett mistakes over the years.
Unlike some executives who try to pass the blame to an underling, however, Buffett owns his errors and assumes full responsibility when he fails to deliver to shareholders.
If you’re trying to sharpen your investing game, you can glean a lot from both Buffett’s wins and losses. Take a look at five Warren Buffett failures to see what went wrong, and what you can learn from his hard-earned wisdom.
BUYING BERKSHIRE HATHAWAY
In a 2010 interview with Becky Quick on CNBC’s “Squawk Box,” Buffett said, “The dumbest stock I ever bought was, drum roll here, Berkshire Hathaway.”
Buffett explained that he first invested in Berkshire Hathaway in 1962, when it was a failing textile company. He thought he would make a small profit when more mills closed, so he loaded up on stock.
He met with company management and agreed on a price to tender stock. But later, the firm tried to chisel Buffett out of more money.
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Angry, a spiteful Buffett bought control of the company, fired the manager and tried to keep the textile business running for another 20 years. Buffett estimated this vindictive move cost him $200 billion. He would have been better off buying a good insurance company, he said.
The lesson is not to let emotions factor into investment decisions. Whether you’re feeling vengeful like Buffett was or have a soft spot for a sinking ship, money moves should always be based on facts, not emotions.
INVESTING IN TESCO
Berkshire Hathaway owned 415 million shares of the U.K.-based grocer Tesco at the end of 2012. The purchase price was $2.3 billion. By the end of 2013, Berkshire Hathaway had sold 114 million shares of the company, but still owned more than 301 million, which put the firm in a vulnerable spot.
In 2014, shares in the grocery chain tumbled more than 48 percent, when the organization overstated its profits. In his 2014 letter to shareholders, Buffett said concerns about Tesco management motivated his initial sale of stock. That move resulted in a $43 million profit. Unfortunately, he didn’t move fast enough on the remaining 301 million shares.
“Attentive readers will notice that Tesco, which last year appeared in the list of our largest common stock investments, is now absent,” Buffett wrote. “An attentive investor, I’m embarrassed to report, would have sold Tesco shares earlier. I made a big mistake with this investment by dawdling.”
He admitted the move cost the company a $444 million after-tax loss _ approximately one-fifth of 1 percent of the firm’s net worth. The lesson from this Warren Buffett failure is to make decisions promptly. If you know an investment isn’t right, get out instead of being part of a company’s downfall.
PURCHASING DEXTER SHOE CO.
In 1993, Warren Buffett purchased Dexter Shoe Co. for $433 million in Berkshire Hathaway stock. Initially, he thought the brand had a competitive advantage, but this faded a few years later.
In his 2007 letter to shareholders, Buffett explained the poor decision, admitting it cost investors $3.5 billion. At the time, this was 1.6 percent of Berkshire Hathaway’s net worth.
“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,” Buffett wrote.
Warren Buffett’s worst investment underscores a key lesson: A company is at its best if it has a viable competitive advantage. If there’s no solid reason for customers to continue patronizing the brand, like the brand offering good prices, unique products or second-to-none craftsmanship, they probably will not.
TAKING ON DEBT FROM ENERGY FUTURE HOLDINGS
In his 2013 letter to shareholders, Buffett wrote, “Most of you have never heard of Energy Future Holdings. Consider yourselves lucky; I certainly wish I hadn’t.” He explained that Energy Future Holdings was formed in 2007 “to effect a giant leveraged buyout of electric utility assets in Texas.”
The equity owners ponied up $8 billion, then borrowed a massive amount more. “About $2 billion of the debt was purchased by Berkshire, pursuant to a decision I made without consulting with Charlie,” Buffett wrote, referring to Charles Munger, Berkshire Hathaway vice chairman. “That was a big mistake.”
Buffett went on to predict Energy Future Holdings would file for bankruptcy in 2014, which it did. Buffett explained that Berkshire Hathaway had sold its holdings for $259 million in 2013. In total, Buffett divulged that his firm suffered an $873 million pretax loss. Next time, he said he’d be sure to consult Munger, who long has been Buffett’s right-hand man.
Warren Buffett mistakes can be costly. If you want to build a net worth like Buffett’s, acknowledge you don’t know everything. Run big moves by a business partner or another trusted confidant before diving in headfirst.
NOT BUYING THE DALLAS-FORT WORTH NBC STATION
Not all Warren Buffett failures involve losing money. One of his regrets is not buying the Dallas-Fort Worth NBC station for $35 million, which would’ve given him the chance to earn some major cash.
In his 2007 letter to shareholders, Buffett explained he passed up the chance to purchase the station around the time he bought See’s Candies in 1972. He turned down the offer despite wholeheartedly trusting the person who offered him the station, knowing there was excellent growth potential and it would require essentially no capital investment.
“Why did I say ‘no’? The only explanation is that my brain had gone on vacation and forgot to notify me,” Buffett wrote.
Reminiscing on the missed opportunity, Buffett pointed out that the station earned $73 million pretax in 2006 and at the time he wrote the letter, was valued at $800 million.
The moral of the story is that when opportunity knocks, take advantage of it. Conduct your own research prior to buying, but take advantage of the wealth opportunities trusted connections bring to you.
