Last weekend at the Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) annual meeting, on more than one occasion Warren Buffett (Trades, Portfolio) admitted to investing mistakes he had made in the past.
Just like any other investor, Buffett is only human, and he has made mistakes over his career. The two biggest mistakes he admitted last weekend are not getting involved in Alphabet (Google) and Amazon (AMZN).
Discussing these misses, Buffett confessed that the team at Berkshire had looked at Alphabet but, "We've looked at it. I made the mistake in not being able to come to a conclusion where I really felt that at the present prices that the prospects were far better than the prices indicated."
And when it comes to Amazon, Buffett said he merely "underestimated" Amazon founder Jeff Bezos. "I think what Jeff Bezos has done is something close to a miracle ... The problem is when I think something will be a miracle, I tend not to bet on it," he said.
The talk of these two mistakes, got me thinking; how many other mistakes has Buffett made over his career and how big of an impact have they had on his wealth creation?
Learning from Buffett's mistakes
The most prominent mistake in recent years is Buffett's decision to get involved with IBM, a position he almost entirely sold out of during the first quarter of this year. I have previously estimated that Berkshire made a small (5%) total profit on this investment over its entire holding period. Not a horrific result, but when you consider the fact that over the same holding period the S&P 500 returned more than 100%, it was a relative disaster for Buffett.
Another recent disaster was U.K. retailer Tesco. At the end of 2012, Berkshire Hathaway owned 415 million shares in the group. Even though the Oracle of Omaha initially liked the business and where management was taking the firm, he soon soured on management selling some stock to realize a profit of $43 million.
Unfortunately, Buffett didn't sell enough stock fast enough. In 2014 the company admitted that it had been overstating profits and the stock tumbled. Berkshire dumped the shares, realizing a loss of $444 million. "An attentive investor, I'm embarrassed to report, would have sold Tesco shares earlier. I made a big mistake with this investment by dawdling," Buffett later wrote in a letter to investors.
Another sizable loss was booked in a few years after Tesco when Buffett was forced to sell $2 billion of Energy Future Holdings' debt at an $873 million pre-tax loss. The company was acquired in 2007 for $45 billion in the largest leveraged buyout on record. The utility filed for bankruptcy, wiping out debt owners, although a few years later (2017) Berkshire agreed to pay $9 billion in cash for the utility operator.
Going back to the financial crisis, while Berkshire did eventually make billions of dollars from its crisis-era bets as a lender of last resort to Goldman Sachs, Mars and Bank of America, it also lost billions in 2008 when the value of a substantial holding in ConocoPhillips plunged in value due to falling oil prices from $7 billion to $4.4 billion. In his 2008 shareholder letter, Buffett wrote, "Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year."
The total loss after selling is estimated to have been several billion.
The final major mistake I'm going to outline here is Buffett's purchase of General Reinsurance. This has since been transformed into a fantastic business, but when initially acquired Buffett failed to notice that the company didn't have enough in reserve to pay losses from old policies, and it had made pricing mistakes on other policies. In 2001, Berkshire took an $800 million ($1.3 billion today) loss, on this investment as it fixed outstanding issues. The blow was cushioned by the fact Buffett issued new stock to finance the deal (something he later said was "a terrible mistake").
Put together, all of these mistakes have inflicted several billion dollars of losses on Berkshire shareholders, but none of them have been terminal. And I think that is the crucial lesson for investors. Buffett has made plenty of mistakes over his career, but none of these mistakes have been terminal because he has acted quickly to stem losses and, in comparison to core holdings, these bets have been relatively small.
Unlike Berkshire's core holdings such as American Express (AXP, Financial) and Coca-Cola (KO, Financial), which the conglomerate has held for decades and has profited exceptionally well from, positions that do not work out are dumped quickly, freeing up cash for Buffett to move on to the next opportunity. He knows he does not have to be right 100% of the time to be successful, but those times where the odds are skewed in his favor, it pays to hold on for years.
Disclosure: The author owns no share mentioned.
