Many consider Warren Buffett to be the most successful share investor of all time.
He is the fourth wealthiest person on the planet, so it's hard to disagree.
But you may be surprised to learn that Warren Buffett considers buying his investment company Berkshire Hathaway Inc. (NYSE: BRK.A) the biggest mistake of his life.
Where did it all begin?
Buffett started purchasing shares in Berkshire in 1962, eventually taking a controlling stake by 1965.
At the time, the company was a textile manufacturer, losing money in a sector that was in steep decline in 20th century United States.
"Though I knew its business – textile manufacturing – to be unpromising, I was enticed to buy because the price looked cheap," Warren Buffett said in a letter to shareholders in 1989.
The idea is that if you buy something at a bargain price, any sort of temporary jolt in the company's fortunes allows the shareholder to sell at a profit.
However, the problem with that is that unprofitable companies in unprofitable sectors will bleed money before that opportunity comes along.
"Unless you are a liquidator, that kind of approach to buying businesses is foolish," Buffett said.
"In a difficult business, no sooner is one problem solved then another surfaces. Never is there just one cockroach in the kitchen… Second, any initial advantage you secure will be quickly eroded by the low return that the business earns."
The gift of diversification
Buffett was forced to pivot Berkshire Hathaway into other sectors, such as insurance. This diversification has taken it to where it is today, where it acts as a holding company for its own investments.
These days, Warren Buffett and his right-hand man Charlie Munger do things differently.
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price," he said.
"Charlie understood this early – I was a slow learner. But now, when buying companies or common stocks, we look for first-class businesses accompanied by first-class managements."
He's done okay.
Berkshire Hathaway has gone from a share price of US$7,100 in June 1990 to about US$318,000 this month. That's a 44-fold increase in 30 years.
