Warren Buffett (Trades, Portfolio) is the most celebrated investor alive today. Over the years, he has made tens of billions of dollars for himself, and shareholders of Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), by investing in stocks.
With this record behind him, you could be forgiven for thinking Buffett has never made any mistakes during his long and illustrious career. The "Oracle of Omaha" has had his fair share of failures, however. He has just learned to control the losses that stem from these misplaced bets.
Even though many investors would consider Buffett's investment in International Business Machines Corp. (IBM, Financial) as his most recent failure, it has been a relative success compared to other losses.
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The most significant losing position in recent years has been Buffett's involvement in U.K. food retailer Tesco (LSE:TSCO, Financial). Before a string of profit warnings and accounting irregularities, which began in 2014 and carried on to around 2016, Buffett was Tesco's third-largest shareholder. He eventually bailed out in 2015, admitting his "thumb sucking" had cost Berkshire shareholders $444 million.
This is not the only sizeable loss Berkshire has taken in its history.
- Buying Berkshire Hathaway. Estimated loss: $200 billion.
- Purchasing Dexter Shoe Co. Estimated loss: $433 million.
- Energy Future Holdings' debt. Estimated loss: $873 million.
- Issuing extra shares of Berkshire Hathaway to buy General Reinsurance. Estimated loss: $800 million, plus 21% shareholder dilution.
- ConocoPhillips (COP, Financial). Estimated loss: $3 billion.
- U.S. Airways in 1989. Estimated loss: nil, but still considered a bad buy.
Now here's an interesting question supporters of Buffett and shareholders of Berkshire Hathaway might not have considered: what could be Buffett's next mistake?
Part of investing
Mistakes are part of investing; everybody makes them, including Buffett. It is unlikely his portfolio will never suffer another loss; there could even be a position that will ultimately turn out to be a loss for Buffett in his portfolio today.
The possible loss candidates are numerous. The problem is, you never know which position is going to turn into a loser until it does. If you know beforehand, investing would be much easier.
This brings me to the topic of airlines. Buffett’s airline trade has attracted plenty of criticism due to comments he has made about the sector in the past. The same situation occurred with IBM (and look how that turned out). Additionally, it appears as if his initial thesis for the sector is starting to wear thin.
Original plan
According to Buffett himself, Berkshire’s airline holdings are not a bet on a single carrier, but the industry as a whole as “[it] has been operating for some time now at 80% or better of capacity – meaning available seat miles – and you can see what delivery is going to be.” He went on to say, "[The railroad industry] was a terrible business for 80 years...but they finally got down to four big railroads, and it was a better business. And something similar is happening in the airline business."
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Consolidation, rational pricing and a more accountable industry are the reasons why Buffett believes airlines can take off. Recent figures from United Continental Holdings Inc. (UAL, Financial), however, throw this whole thesis into doubt.
On United’s third-quarter earnings conference call, analysts pressed CEO Oscar Munoz and President Scott Kirby on how they planned to deal with rising costs and falling pricing power. The duo failed to provide any answers, instead noting, “We have dug ourselves in a hole from a competitive perspective, and the team that we’ve gathered to get out of here is about regaining that competitive advantage.”
This seems to hint at the fact the airline industry, after a brief period in the sun, is starting to struggle again.Ă‚ Further, rumors are circulating there could be further change at the top of United now that the company is beginning to struggle again.
Regardless, there is no evidence to indicate with any certainty this could be Buffett’s next losing trade. This is just some idle speculation and observation.
Disclosure: The author owns no stocks mentioned.
