Warren Buffett (Trades, Portfolio) is widely considered to be the greatest investor of all time. However, that doesn't mean that he has not made mistakes. Throughout his career, Buffett has made quite a few mistakes, both in terms of losing money for his investors and in terms of missed opportunities.
I enjoy looking at these mistakes because we can learn an awful lot from where the Oracle of Omaha went wrong. In doing so, hopefully we won't repeat the same errors.
Looking back at mistakes
Buffett's most costly mistakes have been well covered in the past. These mistakes are what he has called "the mistakes you see," such as his decision to invest in UK retailer Tesco and US Air preferred stock several decades ago.
The mistakes you can't see have cost Berkshire Hathaway's (BRK.A) (BRK.B, Financial) investors much more in money terms.
Buffett highlighted some of these mistakes as part of a talk to MBA students at Florida University in 1998:
"And so we have passed up things where we could have made billions and billions of dollars from things we understood, forget about things we don't understand. The fact I could have made billions of dollars from Microsoft doesn't mean anything because I never could understand Microsoft. But if I can make billions out of healthcare stocks, then I should make it. And I didn't when the Clinton health care program was proposed and they all went in the tank. We should have made a ton of money out of that because I could understand it. And didn't make it. I should have made a ton of money out of Fannie Mae back the mid-1980s, but I didn't do it. Those are billion dollar mistakes or multi-billion dollar mistakes that generally accepted accounting principles don't pick up."
The Oracle of Omaha went on to admit another big mistake, which was his decision to invest 20% of his net wealth into a Sinclair Service Station back in the first decade of his career. The young investor lost 100% of his investment. He put the opportunity cost of that money at "about $6 billion right now," in 1998.
Lesson learned
But here's the thing, even though Buffett's decisions to avoid some of the biggest investment trends of the past few decades have cost him and his investors tens of billions of dollars in lost profits, he will never let these losses dominate his thinking.
That's the lesson the CEO of Berkshire tried to impart on the students in 1998:
"We never look back. We just figure there is so much to look forward to that there is no sense thinking of what we might have done. It just doesn't make any difference. You can only live life forward. You can learn something, perhaps from the mistakes, but the big thing to do is to stick with the businesses you understand. So if there is a generic mistake outside your circle of competence like buying something that somebody tips you on or something of the sort. In an area you know nothing about, you should learn something from that which is to stay with what you can figure out yourself."
Investing is an art, not a science, and investors will always make mistakes. It is just part of the business. The key is to make sure you learn as much as possible from these mistakes and move on. That way, you can turn a detrimental error into a positive one. What you don't want to do is become bitter and try and get revenge on the market, because you won't win. Doing so will only exacerbate your losses and the extent of the mistake.
Selling up, taking the loss, and moving on might seem painful, but it is, without a doubt, the best decision for long-term investment success.
Disclosure: The author owns shares of Berkshire Hathaway.
Read more here:
- Seth Klarman: 'What I've Learned From Buffett'
- Seth Klarman's Most Important Lessons for Investors
- Charlie Munger's Makers of a Good Business
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