For most investors, Warren Buffett (Trades, Portfolio) is a figurehead. The "Oracle of Omaha" can do no wrong, and every year thousands of Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) shareholders make the pilgrimage to Omaha to hear him speak. Almost all beginner investors will come into contact with Buffett and his investing philosophy early in their careers, and his wisdom has shaped thousands of investors’ views of the market.
With Buffett’s success consistently touted, it is difficult to believe he has ever made a mistake. Indeed, by looking at the constant stream of financial commentary on the Berkshire Hathaway chairman, you could be forgiven for thinking he has never put a foot wrong and everything he touches turns to gold.
But that belief could not be further from the truth. Today, the size of Berkshire Hathaway and Buffett’s reputation means it is hard for him to make any investing mistake as any company that receives his blessing is instantly bid up by the rest of the market. During Buffett’s early career, however, there were several events which could have changed the course of history if it were not for his charisma and a large slug of luck.
Making the best of a bad deal
Buffett’s first real bad deal was with one of his early investments, Dempster Mill. Dempster was a net-net situation, which Buffett acquired thinking it was a simple value investment. Time passed, and the company continued to fail to unlock value. So Buffett decided to turn activist, parachuted in a new CEO and began to cut costs aggressively. There was an enormous public backlash against these actions, a backlash which prompted Buffett to swear he would never again undertake such an aggressive restructuring.
In monetary terms, the deal was a grand winner for Buffett and his investors. And thanks to his decision to ensure such a slash-and-burn situation would never occur again, it has been widely forgotten. If he had not changed his attitude, his reputation could be very different today.
The second major mistake of his career was acquiring a controlling stake of Berkshire Hathaway, getting into a fight with management and taking over the business. Berkshire’s legacy textile business was dying, and there was nothing Buffett could do about low-cost competition taking market share. Fortunately, he quickly realized his mistake and siphoned cash out of the business to buy more productive assets rather than reinvest in the company’s failing operations.
The third most significant error has to be Buffett’s run-in with the SEC in the late '70s. By this point, Buffett had a number of businesses he controlled, and they all began buying shares in financial services company Wesco. When Wesco received a takeover offer, he convinced the board to turn it down, sending the stock price plunging and allowing him to buy more at a lower price. These actions, coupled with the complex ownership structures of the businesses owned by Buffett, sent alarm bells ringing at the SEC. After a long battle (which nearly turned ugly), Blue Chip Stamps, then a Buffett-owned company, settled with the SEC for $115,000 and Buffett was not named by regulators – saving him an enormous reputational blow. After this scenario, Buffett decided to simplify his corporate structure and take extra effort to show his dealings were above board.
News problems
The fourth-largest mistake in Buffett’s early career was the purchase of newspaper Buffalo Evening News. The newspaper was a huge risk for Buffett as he devoted nearly 50% of his net wealth at the time to this one paper, and initially, it turned out to be a catastrophe. Buffett bought the paper believing it could dominate its home market by putting its only competitor out of business.
Unfortunately, the paper’s competitors and local residents were willing to fight against the will of free markets and a court soon slapped legal constraints on Buffett and his news team when they tried to launch a brand new Sunday edition. The stalemate lasted for two years, during which Buffett lost millions of dollars. He persevered and when the legal constraints were eventually lifted, the Evening News came to dominate the market (after a fight with the unions) and its rival soon went out of business. Within two years, Buffett had recouped his initial investment, but not until after he had been made to sweat.
Conclusion
These early mistakes reveal a lot about Buffett's character. In all cases, he came out a better investor in terms of both money and knowledge. On each occasion, he learned from his mistakes and moved on. In the case of the Evening News, he did not let anything stand in his way on the journey to profit.
Disclosure: The author owns no stock mentioned.
