What Every Investor Can Learn From Warren Buffett's Biggest Investing Mistakes

Warren Buffett shares financial highlights from Berkshire Hathaway in his widely read annual letter to shareholders as well as investment philosophies and pearls of wisdom he has accumulated over the course of his 92 years.

‍

Investors have come back to the “Oracle of Omaha” year after year hoping to learn something from the massively successful career he has had as a money manager and to try to learn from his lessons. There was plenty of that to be had in the version of the letter that appeared on Saturday, which was dated 2022. But Buffett was quick to point out that he also had some shortcomings of his own.

‍

“There have been many mistakes I've made over the years. Consequently, our extensive collection of businesses is currently composed of a few enterprises that are truly extraordinary when it comes to economics, many that are very good economically, and a large number that is marginal economically," Buffett wrote in a letter to shareholders. “I have invested in other businesses along the way, but they have all failed due to a lack of market demand for their products.”

‍

The 58-year history of Berkshire Hathaway’s performance can be attributed to a dozen truly good decisions made over the course of that time period, Buffett writes in his article.

‍

It's probably a lot more than that. However, in an effort to be humble, let's take a look at three of Buffett's worst business decisions, as well as what investors can take away from them as a result.

‍

1. Buying Berkshire Hathaway                

‍

Buffett has described Berkshire Hathaway as “the dumbest stock” he has ever purchased in his life.

‍

Buffett had built up a stake in what was at the time a failing textiles company in 1962, however, he agreed to sell his stock back to Seabury Stanton for $11.50 a share in the following year. As it turned out, when Buffett received the offer letter from Berkshire, the price had changed from $11 3/8 to $11 37/80.

‍

It was then that Buffett sought retribution because he felt he had been chiseled. Rather than selling, he began to buy the stock, took control of the company, and fired Stanton as its president.

‍

Having sold the company, he may have taken the money from the sale and invested it into the insurance business - which would have been a move he would have made regardless, and one that would have launched his empire of businesses. Rather than reviving the textile holding, he had to spend countless hours and a lot of money trying to do so.

‍

"I had now committed a significant amount of money to a terrible business," Buffett said later. Approximately $200 billion was lost as a result of this mistake.

‍

There isn't a good chance you'll be able to buy a company out of spite, but you may find yourself making investment decisions based on internal emotions, whether it's exuberance over a risky investment you think will make you rich or fear of a falling market that will ruin your portfolio.

‍

It's important, in any case, to step back from the day-to-day fluctuations of the market and realize that investing is a long-term game and not one that's played in the midst of day-to-day fluctuations within the market.

‍

"Being a good investor is about learning to control your emotions and not letting them destroy the fortunes of your portfolio," says CFRA's chief investment strategist Sam Stovall.

‍

2. A ‘world record’ mistake: Buying Dexter Shoe

‍

Buffett purchased the American shoe company Dexter Shoe in 1993, without taking into consideration the fact that the company had been under pressure from foreign manufacturers. Buffett wrote in a letter to shareholders in 2007 that what he had believed to be a durable competitive advantage had vanished within a few years.

‍

Furthermore, Buffett compounded his mistake by paying $443 million in Berkshire stock for the company, rather than cash, which added to the mistake. It is estimated that the shares would be worth north of $12 billion if they were traded today.

‍

“As a financial disaster, this one is worthy of a place in the Guinness Book of World Records,” Buffett wrote in a letter he sent to his shareholders in 2014.

‍

It's possible that you do not own stock in your own profitable company that you could trade, but you probably do own a core portfolio of low-cost, well-diversified funds that you can trade. There are some investors who believe that diverting a substantial portion of your assets from your core investments in order to take a chance on an unknown quantity could be a dangerous move.

‍

By not sticking to the plan, you will not only lose your investment, but you will also miss out on the gains you could have made.

‍

Having said that, that does not mean that if you like a certain investment, you should not take a chance on it. It is advisable never to let a holding like this dominate the portfolio of a client, according to Kenneth Lamont, senior manager research analyst at Morningstar who specializes in passive strategies. A good rule of thumb is that if you're going to invest in something like, e.g., a trendy thematic ETF, you shouldn't be putting in cash that you cannot afford to lose.

‍

3. ‘Dawdling’ before selling Tesco

‍

It is estimated that Berkshire had 415 million shares of UK grocer Tesco by the end of 2012 - an investment of $2.3 billion. It was then, he explained in his 2014 shareholder letter, that Buffett began to "sour" on the firm over the following year, and he sold 114 million shares as a result.

‍

By buying great companies and holding on to them over the long run, Buffett has built a reputation (and made billions of dollars) as an investor. The problem with Tesco was that it was gradually revealing itself as a not-so-great company over time.

‍

“As the year progressed, Tesco's problems worsened with each passing day. There was a decline in the company's market share, a contraction in its margins, and accounting problems as well," Buffett wrote. “There are times when bad news surfaces serially in the business world. You see a cockroach in the kitchen; as the days go by, you meet his relatives. Such is the way of the world.”

‍

In the end, Berkshire sold its remaining stake in the company and took a loss of $444 million as a result of doing so.

‍

“In my opinion, an attentive investor would have sold Tesco shares earlier if he had been paying attention. As a result of my dawdling with this investment, I made a very costly mistake," Buffett admits.

‍

But even attentive investors can have difficulty selling struggling stocks they once liked, irrespective of how much they like them now. Scott Nations, president of the investment volatility analytics firm NationsShares and author of the book "The Anxious Investor," explains that "anchoring" is one of the cognitive biases that almost every investor struggles with. 

‍

“It can be hard to disabuse yourself of the notion that an investment is worth X if you bought it at X price, and now it is worth 20% less.” He says, pointing out that it is hard to disabuse yourself of that belief.

‍

In order to avoid reevaluating the investment and possibly selling it, you tend to stay on and, well, dawdle rather than reevaluate it. Nations recommend that if you hold such an investment, you sell a portion of your holding and see if that doesn't help you think more clearly in the future. Buffett did exactly the same thing: go ahead and sell a chunk of your holding.

‍

In order to take a more clear-eyed view of the long-term prospects of your failing investment, you will need to mentally reset its value of it in order to take it into account. The bottom line is that Buffett made a good decision here. It was just not fast enough for him to be happy.

‍