The big investing news of the week, and perhaps the year, is the revelation that Warren Buffett will be leaving his decades-long post as CEO of Berkshire Hathaway Inc (NYSE: BRK.A)(NYSE: BRK.B) at the end of the year.
As we've extensively discussed here at the Fool, this is a monumental changing of the guard, and represents the end of an era for the investing community. Warren Buffett has led Berkshire Hathaway for more than six decades, and is an inspiration to investors all over the world.
Buffett, together with long-time partner Charlie Munger, transformed Berkshire from an ailing textiles manufacturer in the early 1960s to one of the largest and most successful businesses on earth, which is now valued at an eye-watering US$900 billion.
Buffett's investing successes, which have averaged almost 20% per annum on a compounded basis since the 1960s, have become the stuff of legend. Earlier today, we looked at some of his biggest wins.
However, no investor, even Buffett, is perfect. Although his wins far outweigh his losses, Buffett has indeed made many high-profile misses in his long career. In his trademark humility, he is usually upfront about the mistakes that he has made. So today, let's dive into some of Buffett's biggest mistakes.
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Warren Buffett: The worst investment decisions
Buffett himself has admitted that one of the worst decisions he ever made was buying Berkshire Hathaway itself back in the 1960s. As we mentioned above, Berkshire was, at the time, a failing New England textiles company. Buffett, at that time running the Buffett Partnership Ltd (BPL), had been offered shares at a set price. But the owner subsequently came to Buffett with a lower price than what was agreed. Buffett, himself acknowledging "childish behavior", was incensed and subsequently bought out the original owner.
As he said himself in the 2014 letter to shareholders, "I found myself with more than 25% of BPL's capital invested in a terrible business about which I knew very little. I became the dog who caught the car".
Buffett tried in vain to make something out of Berkshire's textiles operations, but ended up closing the last mill in 1985.
In 2010, Buffett stated this on the mistake of buying Berkshire:
The dumbest stock I ever bought was – a drum roll, please – Berkshire Hathaway…
But the truth is I had now committed a major amount of money to a terrible business. And Berkshire Hathaway became the base for everything pretty much that I've done since. So in 1967, when a good insurance company came along, I bought it for Berkshire Hathaway. I really should— should have bought it for a new entity.
Because Berkshire Hathaway was carrying this anchor, all these textile assets. So initially, it was all textile assets that weren't any good. And then, gradually, we built more things on to it. But always, we were carrying this anchor. And for 20 years, I fought the textile business before I gave up. As instead of putting that money into the textile business originally, we just started out with the insurance company, Berkshire would be worth twice as much as it is now.
Not taking his own advice
Before 2016, Buffett was famous for his disdain of airline companies. He made this well-known observation in his 2007 letter:
The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.
The airline industry's demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.
Yet Buffett seemingly ignored his own advice when he purchased stakes in all four major American domestic airlines in 2016. He built up these stakes in subsequent years for a combined total of just under US$8 billion.
Then, the pandemic hit. Like many exposed industries, airline shares were smashed following the COVID-19 outbreak. With demand collapsing overnight and with uncertainty about government assistance, Buffett judged that the risks were too high and quickly offloaded all four at huge losses.
These weren't the largest losses of Buffett's career. But, given how he contradicted his own strong advice, they are arguably some of the most grating.
Warren Buffett ignored tech to his peril
One of Buffett's most consistent pieces of advice to investors is to stay within their 'circle of competence'. He has often advised investors that they need to have a complete understanding of a business and the environment in which it operates, if they want to own its shares. Buffett has always followed this advice himself, which is why most of his holdings are in his wheelhouse of consumer staples stocks and financial shares.
It's understandable that Buffett, who was already 70 years old at the turn of the century in 2000, struggled with valuing technology companies. But his reluctance to invest in what would turn out to be the engine room of the US economy still cost Berkshire shareholders dearly.
Buffett made almost no investments in technology until 2016. As we covered earlier today, his investment in Apple Inc (NASDAQ: AAPL) in that year would turn out to be his best ever buy.
But he has admitted to seeing the potential successes of Amazon.com Inc (NASDAQ: AMZN) and Google-owner Alphabet Inc (NASDAQ: GOOG)(NASDAQ: GOOGL), and staying on the sidelines. In 2017, he said this about Amazon:
I don't have a good answer… Obviously, I should've bought it long ago because I admired it long ago, but I didn't understand the power of the model.
He also passed on investing in Microsoft Corporation (NASDAQ: MSFT), despite a friendship with Bill Gates.
And here's what Buffett's long-term partner, Charlie Munger, said about not investing in Alphabet a few years ago:
I feel like a horse's ass for not identifying Google. I think Warren feels the same way. We screwed up.
Foolish takeaway
It is a testament to Buffett's sheer skill and his steadfast tendency to stick to what has worked for him that these mistakes have not prevented the runaway success story of Berkshire Hathaway.
What is perhaps even more remarkable is the complete lack of ego that Buffett displays when humbly owning up to said mistakes. It is a rare quality to find on Wall Street, and one that will be sorely missed when Buffett steps down.
