Warren Buffett’s 5 Biggest Investing Mistakes: What Can We Learn?
Warren Buffett, also known as the Oracle of Omaha, is widely regarded as one of the most idolized and revered investors globally. According to Forbes, he has a net worth of nearly $97 billion, making him the seventh-wealthiest person on the planet.
investor, Buffett has shared his learnings with millions of people around the world. And despite his investing competency, Buffett is willing to admit that even the best investors make mistakes. In his 2021 letter to Berkshire Hathaway shareholders, Buffett said, "I make many mistakes." And one of his famous quotes is about learning from the mistakes of others. Buffett says that while it is good to learn from your mistakes, it is better to learn from other people's mistakes. Buffett's mistakes guide us in investing and it also helps in making a good investment strategy. Here are five of Warren Buffett's biggest mistakes and lessons learned from them.
Buying a large amount of ConocoPhillips stock without Consulting;
In 2008, Buffett bought a large stake in the stock of ConocoPhillips to add to his Berkshire Hathaway portfolio due to rising gas and oil prices. At its peak in mid-2008, oil was around $150 a barrel, so it can be easy to see why it was a good idea for Buffett to invest in the sector. However, this turned out to be a bad investment, prices fell, and the stock followed the oil market down, resulting in a multibillion-dollar loss for Berkshire Hathaway.
In his 2008 shareholders letter, Buffett wrote that without consulting Charlie or anyone else, I bought large amounts of ConocoPhillips stock at a time when oil and gas prices were at their peak. By no means did I anticipate a dramatic drop in energy prices in the latter part of the year.
Warren Buffett's mistakes like this one emphasize the importance of consulting people you trust before making a major investment. Sometimes, getting a different viewpoint is the finest way to see the big picture. The second lesson we can gather from Buffett’s mistake is the risk of predicting, especially something like the price of natural gas or oil or gold or even an individual stock.
Investing in a business without a Sustainable Competitive Advantage
In 1993, Warren Buffett bought the Dexter Shoe Company for $433 million in Berkshire Hathaway stock. Buffett called it the worst investment ever, resulting in a loss to shareholders of $3.5 billion. According to Buffett, "What I had assessed as a durable competitive advantage vanished within a few years." To be specific, Buffett made more than one big mistake by buying out the Dexter Shoe Company. The first mistake was a miscalculation about Dexter's options. Berkshire buys Dexter due to the high return on capital employed. But he did not attribute the competitive threat posed to the company by cheap shoes coming from countries like China.
Therefore, the first lesson is that you must check a company’s sustainable competitive advantage before investing in it. Companies can make high profits only if they have some sort of sustainable competitive advantage over other firms in their business area. Wal-Mart has incredibly low prices. Honda has high-quality vehicles. As long as these companies can outperform anyone else on these things, they can maintain high-profit margins... If not, the high profit attracts many prospects that will gradually move away from the business and take all the profits for themselves.
Not taking a prompt decision to sell Tesco’s shares;
Tesco is a UK-based grocery chain. Buying shares in this company is another mistake Buffett made as an investor. As of 2012, Berkshire Hathaway owned 415 million shares of the business. By 2013, it was becoming increasingly clear that something was wrong with Tesco. And Berkshire had reduced its stake from 5% to 3.7%, representing an investment of about $1.7 billion. In his 2014 letter to investors, Buffett wrote that 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 regretted not selling more of it sooner. Over the next few months, Tesco's stock price continued to decline. It fell nearly 50% due to Berkshire Hathaway eventually getting completely out of its Tesco position, but Buffett estimated a $444 million loss by not selling sooner.
Buffett's fault was that he delayed the sale of Tesco's shares. And he did so despite reading disturbing signs. He admitted the move cost the company a $444 million after-tax loss. The lesson from this piece of Warren Buffett's history is to make decisions promptly. Here we learned that Conviction is the key to selling, just as you don't invest without confidence, don't hold any stock if you lack conviction.
Opting Not to Buy Amazon Stock
In 2017, Buffett admitted that he had followed Amazon.com for a long time, but never chose to invest in it. This mistake from Buffett qualifies more as an error of omission. In his own words, he said: "Obviously, I should have bought it long ago, because I admired it long ago, 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 that time. So, it's one I missed big time." Buffett had underestimated Amazon's performance in two industries. One is the company's dominance in e-commerce. And second, its success in the cloud with its web services.
Warren Buffett's investments don't include businesses he doesn't understand. And because of his incompetence in the tech sector, Buffett turns a blind eye to technology companies, which is both good and bad. Supporting companies blindly is not a wise move, but running away from them is also not wise either. Partnering with someone whose strengths and skills differ from yours can help keep you from missing out on great opportunities. Therefore, it is important to have a circle of competence.
Missing his chance to invest in Google
Buffett's Berkshire Hathaway portfolio doesn't include stock from Alphabet or Google, and that's something he deeply regrets. Google first caught Buffett's interest because of GEICO, a subsidiary owned by Berkshire. It is in the auto insurance sector. Therefore, it depends a lot on Google's advertising platform to acquire customers. At the 2017 Berkshire Hathaway annual shareholders meeting, he told investors he had made a mistake years ago by not buying shares in tech giant Google.
Buffett has shied away from tech stocks in the past because he doesn't understand their model. Still, he acknowledges that he should have built a better understanding of Google's business and outlook over the long term. Buffett's limited technical knowledge contributed to the missed opportunity. In this case, we can learn from this mistake not to overlook investment opportunities right under our noses.
Warren Buffett is a human being like all of us. And they've had their fair share of mistakes. All investors, even Warren Buffett, admit that mistakes can happen along the way. If you analyze your mistakes and learn from them, then you can earn good money next time.