Lessons to Learn from Warren Buffett’s mistakes

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October 29, 2021

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Strategic Alpha

Every investor, including legendary investors, makes mistakes. Warren Buffett, the legendary investor, has quoted ‘It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.’ Some of Warren Buffett’s mistakes and the investing lessons are as follows:

Investing in Tesco

Warren Buffett bought Tesco, a British retailer, in 2006 and kept on increasing his holding. At that point in time, it was expanding rapidly across the globe.  However, its US business closed down. Due to this, it had to suffer a loss of 1.8 billion pounds. However, Buffett made the mistake of increasing his stake even after that rather than decreasing it. He increased his stake to more than 5%. In 2013, he sold off some shares. But, he was slow in selling off the shares.

However, things didn’t go well and Tesco became embroiled in an accounting scandal. It admitted that it overstated its profits by 250 million pounds. More problems came in with Tesco with its sales and margins declining. Warren Buffet said, ‘In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives.’ Warren Buffett himself admitted in one of his letters to the shareholders about this mistake. According to Buffett, Tesco’s mistake cost Berkshire Hathaway an after-tax loss of $444 million.

The investing lesson that you learn from Warren Buffett’s Tesco mistake is not to be slow in exiting a stock when the story changes. Also, in such a case, you should not average out your losers.  

Investing in Dexter Shoes

Warren Buffett bought Dexter Shoes in 1993. He bought the shares by paying through Berkshire Hathaway’s shares. His investment thesis was that there is no business like show business as it is a simple business and everyone needs shoes. He was pleased with the way the business was performing in 1994.

However, he underestimated the impact of cheap foreign imports which adversely affected Dexter Shoes. 1n 1999, around 93% of the pairs of shoes purchased in the country came from abroad. Hence, the profits of the company kept on plummeting. Here too he admitted this mistake in the 2014 letter to shareholders which stated, ‘As a financial disaster, this one deserves a spot in the Guinness Book of World Records.’ The Berkshire Hathaway shares through which he funded Dexter shoes would have been worth a multitude of times more. 

The lesson to learn is that when the durable competitive advantage on the basis of which you have bought the stock goes away, exit the stock early.

Missing out on technology companies or investing late in them

Warren Buffett largely stayed away from technology companies as he did not understand them. This was an error of omission. Many of these tech companies in the USA created tremendous wealth for the shareholders. He was a customer of Google’s advertising business. They were charging a high rate as compared to their competitors, implying that the advertisement business had a moat. Yet, Warren Buffett did not invest in Google. Google has delivered extraordinary returns of more than 25% CAGR in the last 17 years.

Warren Buffett invested in Amazon very late in 2019 when it had already become a multi-bagger. In 17 years prior to the investment, Amazon delivered superb returns of 33% CAGR. Similarly, prior to 14 years of investing in Apple, Apple delivered 34% CAGR returns. He also missed out on investing in Facebook and Netflix.

The lesson from this mistake is to study sectors that you don’t understand and once they fall within your circle of competence, you can invest in them.

Buying US Air

In 1989, Warren Buffett bought preferred stock with a 9.25% dividend from US Air, an airline company. Its terms were mandatory redemption in 10 years along with the right to convert it into common at $60 per share. The company was showing stellar revenue growth up to then. However, US air approached bankruptcy and did not have enough revenue to pay dividends. However, Warren Buffett was able to sell the stock at a small profit later. But, since the profit was small, this investment had an opportunity cost.

The airline business is a difficult business to be in because of competitive intensity and cost pressures. Hence, the lesson is that the airline business rarely makes money if you are a long-term investor. Thus, you should avoid certain sectors as sector dynamics make it difficult for them to earn money.

Investing in ConocoPhillips

ConocoPhillips was a multinational energy conglomerate. Warren Buffett bought a large stake ($7 billion) in ConocoPhillips at peak valuation in 2008. He believed that oil prices would continue to rise. However, oil prices were above $100 a barrel in 2008. Then, there was a dramatic fall in oil prices.  He lost roughly $2 billion on this stock. He called it a mistake of commission. He sold almost half of the stake in 2010 at a significant loss.

The lesson is that you should not buy stocks at peak valuation like Warren Buffett did in this case. Also, since oil prices were too high, the mean reversion was on the cards. Mean reversion is an important concept in investing. One of the other lessons to learn is that even great investors make mistakes and are not infallible. 

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The author of the blog Mr.Suyog Dhavan is a Full-time Investor / Value Trader and Value investing/Trading Mentor. His style of Investing is inspired by Mohnish Pabrai, Peter Lynch, and Porinju Veliath. He is the founder of Strategic Alpha Wealth, A Premier stock market mentorship firm with a mission to touch the lives of 1Lakh people through its mentorship program.

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