Warren Buffett's Biggest Mistakes

Warren Buffett is widely regarded as one of the most successful investors of all time but he's willing to admit that even the best investors make mistakes, himself included. Buffett's legendary annual letters to his Berkshire Hathaway (BRK.A, BRK.B) shareholders tell tales of his biggest investing mistakes.

There's much to be learned from Buffett's decades of investing experience, and yes, from his regrets.

# 1 ConocoPhillips

Warren Buffett bought a large stake in the stock of ConocoPhillips (COP) in 2008 as a play on future energy prices. This turned out to be a bad investment because Buffett bought in at too high a price, resulting in a multibillion-dollar loss to Berkshire Hathaway.

The difference between a great company and a great investment is the price at which you buy stock. Crude oil prices were well over $100 per barrel at the time so oil company stocks were at high levels, leaving little room for price appreciation in the investment in ConocoPhillips.

Lesson Learned

It's easy to get swept up in the excitement of big rallies and buy in at prices that, in retrospect, you should not. Investors who control their emotions can perform a more objective analysis. A more detached investor might have recognized that the price of crude oil has always exhibited tremendous volatility and that oil companies have long been subject to boom and bust cycles.

# 2 U.S. Air

Buffett bought preferred stock in U.S. Air in 1989, no doubt attracted by the high revenue growth it had achieved up until that point. The investment quickly turned sour on Buffett because U.S. Air didn't achieve enough revenues to pay the dividends due on the stock. With luck on his side, Buffett was later able to unload his shares at a profit. But despite this good fortune, he realizes that this investment return was guided by lady luck and the burst of optimism for the industry.

Lesson Learned

As Buffett pointed out in his 2007 letter to Berkshire shareholders, sometimes businesses look good in terms of revenue growth but they require large capital investments along the way to enable this growth. This is the case with airlines because they generally require additional aircraft to significantly expand revenues.

The trouble with these capital-intensive business models is that they're heavily laden with debt by the time they achieve a large base of earnings. This can leave little left for shareholders and it makes the company highly vulnerable to bankruptcy if business declines.

# 3 Dexter Shoes

Buffett bought a shoe company called Dexter Shoes in 1993. His investment in the company turned into a disaster because he saw a durable competitive advantage in Dexter that quickly disappeared. According to Buffett, "What I had assessed as a durable competitive advantage vanished within a few years." He claims that this investment was the worst he has ever made, resulting in a loss to shareholders of $3.5 billion.

Lesson Learned

Companies can only earn high profits when they have some sort of a sustainable competitive advantage over other firms in their business area. Walmart (WMT) has incredibly low prices. Honda (HMC) has high-quality vehicles. These companies can maintain high profit margins as long as they can deliver on these things better than anyone else. The high profits attract many competitors that will slowly eat away at the business otherwise and take all the profits for themselves.

# 4 Google

Buffett has candidly admitted that skipping over the opportunity to invest in Google was one of his major gaffes. This is especially the case when you consider that he had something akin to "insider knowledge" of the importance of Google's capabilities. Berkshire Hathaway already owned GEICO insurance and GEICO was and is heavily dependent on Google as an advertising tool to lure in more customers. Buffett nonetheless passed on the opportunity to invest here.

Lesson Learned

Passing over Google was an error of omission. Buffett's technical knowledge wasn't his strongest suit and he admits that he didn't devote enough time and effort to analyzing Google's business and come to a logical conclusion regarding buying in. But you can't catch a fish unless you drop some bait into the pond.

# 5 Berkshire Hathaway

Buffett is on record as saying in a 2010 appearance on CNBC that Berkshire Hathaway was "the dumbest stock I ever bought." He said it was a $200 billion blunder, regardless of how it ultimately turned out.

Buffett was initially planning to sell his stock in Berkshire Hathaway because the textile company was failing. Then something happened in the process of the sale to make him believe that the deal on the table was unfair. He bought up the company's stock instead...and yes, he put the existing owner out of work. He'd originally planned to invest in the insurance business with the money he'd have earned by selling the stock instead.

It took Buffett some considerable time to recoup his investment, much longer than it would have taken had he stuck with his original idea of buying into the insurance business.

Lesson Learned

As in the case of ConocoPhillips, leave the emotion out of it when you're considering buying or selling stock. Admittedly, that $200 billion included lost opportunity. It wasn't all cold hard cash. Nonetheless, Buffett let another opportunity get away because his temper got the best of him.

The Bottom Line

Making mistakes with money is always painful, but paying a few "school fees" now and then doesn't have to be a total loss. You might very well make the money back eventually if you analyze your mistakes and learn from them. Warren Buffett acknowledges that mistakes will be made along the way. Investors must remember this and use mistakes as an opportunity to learn and make better decisions in the future.