We all know about Warren Buffett’s incredible successes in investing, like his investments in companies such as Coca-Cola, American Express, Apple, Bank of America, Moody’s, and Kraft Heinz. He’s widely respected as an investor, with a fortune exceeding $100 billion. But there’s more to Warren Buffett than just his investment expertise.
Beyond being a successful investor, he has shared his wisdom with millions around the world. One of his famous quotes emphasizes the value of learning from others’ mistakes.
Buffett’s words, “While learning from your own mistakes is valuable, gaining insights from the blunders of others is even more beneficial,” reflect this idea. So, following his advice, let’s look at seven significant investment blunders made by Warren Buffett himself, targeting to extract valuable lessons from each.
1. Dexter Shoe Company
In 1993, Warren Buffett’s Berkshire Hathaway acquired Dexter Shoe Company, a decision he later labeled as his biggest sorry. This acquisition wasn’t just one mistake; it involved multiple misjudgments.
The primary error was underestimating the challenges posed by cheap shoes from countries like China. Buffett admitted this oversight in 1999, recognizing the transformation of the shoe industry as domestic producers struggled against imported shoes, which made up 93% of purchases in the US.
Lesson: Investigate a company’s continuing competitive advantage before investing. Durability in competitiveness is now a necessity, not just an asset.
Another mistake was paying for Dexter Shoe Company with Berkshire Hathaway stock worth $433 million. Since then, the value of Berkshire Hathaway’s stock has skyrocketed, making the real cost of this venture a staggering $15 billion.
Lesson: Don’t give up successful ventures for risky attempts.
2. Tesco
Berkshire Hathaway’s ownership in the British supermarket chain Tesco exceeded 5% by 2012. But in 2013, signs of trouble emerged: sales dropped, competition increased, and an accounting scandal unfolded. Despite these warnings, Berkshire held on until reducing its stake to 3.7%, resulting in a $444 million loss due to a plummeting stock.
Lesson: Holding onto a stock requires strong belief and watchfulness. Selling decisions matter as much as buying decisions.
3. Energy Future Holdings
Buffett’s $2.1 billion investment in Energy Future Holdings bonds in 2007 resulted in a loss of $873 million. The bet was based on wrong predictions about natural gas prices, causing the company to declare bankruptcy in 2014. Buffett emphasized the lesson of seeking a second opinion before making significant decisions.
Lesson: Avoid overdependence on predictions, especially in commodities, and consider seeking counsel for important choices.
4. Lubrizol & David Sokol
In 2011, Berkshire Hathaway’s image was tarnished when it was revealed that executive David Sokol suggested the acquisition of Lubrizol while holding stock in the company. This went against Berkshire’s insider trading rules. Despite an internal investigation, the situation highlighted the need for careful decision-making and asking necessary questions.
Lesson: Employ carefulness, trust but verify, and follow ethical guidelines.
5. Amazon
Buffett’s mistake here was an exclusion. He tracked Amazon closely but didn’t invest, underestimating its potential. He learned the lesson of staying within his “circle of competence” but also the need to evolve that circle over time.
Lesson: Define your strengths but adapt to new possibilities.
6. Google
Buffett missed investing in Google despite it being linked to a Berkshire subsidiary. He regretted not understanding Google’s prospects better and emphasized the importance of comprehending new industries, even within your sphere of awareness.
Lesson: Continuously learn and adapt, even in familiar areas.
7. Berkshire Hathaway
Buffett’s most significant mistake was his early investment in Berkshire Hathaway itself. Acquiring a struggling textile company led to years of underperformance. Buffett admitted that if he had invested in insurance companies instead, Berkshire’s value could have doubled.
Lesson: Emotional decisions can be harmful; think strategically.
Conclusion
Warren Buffett’s journey is a testament to the fact that everyone makes mistakes. By examining his errors, we can gain valuable insights and hopefully avoid similar pitfalls in our own financial journeys.
