One of the biggest mistakes Warren Buffett (Trades, Portfolio) has ever made was his decision to buy International Business Machines Corp. (IBM, Financial) instead of Apple Inc. (AAPL, Financial).
There is nothing that can be done about this now, and I am not going to criticize him for making the wrong decision at the time. He decided to buy IBM based on the information and knowledge he had available to him at the time.
Buffett explained his logic in 2012 at the Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) annual meeting of investors:
"The chances of being way wrong in IBM are probably less, at least for us, than being way wrong with Google or Apple. But that doesn't mean that those — the latter two companies —aren't going to do, say, far better than IBM. But we wouldn't have predicted what would happen with Apple 10 years ago. And it's very hard for me to predict, you know, what will happen in the next 10 years. They're certainly — you know, they've come up with these brilliant products. There's other people trying to come up with brilliant products. I just don't know how to evaluate the people that are out there working, either in big companies or in garages, that are trying to think of something that will change the world the way they have changed it in recent years."
Buffett believed that IBM had a better chance of changing with the times and reinventing itself than its tech sector peers. There was no reason to doubt this at the time. The company was founded long before the birth of computers, and it has reinvented itself several times.
Despite this seemingly apparent competitive advantage, the company did struggle to compete with competitors like Apple and Alphabet Inc.'s (GOOG, Financial)(GOOGL, Financial) Google. If Buffett had gone against his own advice and taken a risk acquiring Apple, he would have made tens of billions of dollars more for Berkshire investors.
When the facts change
It is not important that Buffett made a mistake. That happens to everyone at some point in the market; it is just the nature of the world and the business environment.
What is important is how he reacted when he realized he made a mistake. Rather than holding onto the position and trying to fight the market, the Oracle of Omaha switched his view and decided to reverse his investment into a company that he did not understand before but had made efforts to understand.
Just like IBM, Buffett has had to reinvent himself several times over his investing career. He started as a deep-value investor and then moved on to a sort of growth at a reasonable price style. Throughout this transition, he has had to learn about different sectors and industries and develop as the world has developed.
There is no other way to succeed as an investor in the long term. The only constant in this world is change, and investors who do not realize this are going to be left behind by the market and the economy. Change affects every company and every industry (and every investor), and investors cannot do anything about it. All we can do is try to continually improve our knowledge and understanding of different sectors, industries and the global economy.
Buffett has been doing just that over the past couple of decades as technology has taken over the world. Rather than trying to avoid this shift, he has tried to ride the wave by improving his knowledge.
The results of these efforts are clear to see today. Berkshire's Apple investment is now the biggest in its history and its most profitable (ignoring the wealth creation of private holdings). This position is possibly the world's most remarkable example of why it is so crucial for investors to keep learning and to build their knowledge.
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