In today’s world, everybody knows Warren Buffett, renowned chairman and chief executive of Berkshire Hathaway, Inc. (BRK-A), as one of, if not the greatest investor of all time. Thanks to his vast expertise, Berkshire Hathaway has become a giant among listed investment holding companies, with a market capitalization of approximately USD 885 billion as of mid-March 2024. Given this remarkable success, it's common for many to perceive Buffett as infallible in his investment endeavors. That said, history reveals that this perception doesn't actually align with reality.
Nobody Is Perfect: When Warren Buffett Got It Wrong & What Are the Lessons to Learn
Mar 2024Purchasing Berkshire Hathaway – the most media-covered yet not the biggest mistake
Unparalleled success was not always the case for Berkshire Hathaway. When Buffett acquired control of the company in 1965, it was a struggling textile business. Those operations continued to falter for the next twenty years, right up to when Buffet finished liquidating them in 1985. Reflecting on this period in an interview with CNBC in 2010, he called Berkshire “the dumbest stock I ever bought” and claimed that many investments he made over the years would, at that time, have been worth twice as much if he had not bought them through the company, where the failing textile operations diluted the early returns on its successes.
The— the dumbest stock I ever bought— was— drum roll here— Berkshire Hathaway. [...] the truth is I had now committed a major amount of money to a terrible business.
— Warren Buffett
In the same interview, the so-called Sage of Omaha said he learned several lessons from this mistake, but the most important was that “it’s much better to buy something that’s good at a fair price, than something that is cheap at a bargain price”.
2, 3, 4 – has Buffett actually been mistaken that much?
Another misstep came in 1989 with the acquisition of preferred stock in USAir Group Inc. because of the company’s impressive track record. However, like many airlines, the company required significant investment in new aircraft to sustain its performance. Without that, its revenues failed to cover the cost of dividends due on the preferred shares.
Thankfully, when a new CEO was appointed, the company's fortunes improved, and, in 1998, Buffett’s USD 358 million holding of preferred stock was repaid with common stock that he sold for USD 574 million. By then, he had also collected no less than USD 240 million in dividends.
The printed article about the Buffett USAir stock acquisition
Source: The New York Times Magazine
So, why was a total return of +127.4% perceived as a mistake? Well, first off, Buffett would have done far better if he’d simply invested in the US equity market. The S&P 500 index returned +347.5% over approximately the same period. Secondly, he described the investment in USAir as “a big, dumb decision”, but “we then got very lucky”. What one can learn from this is that investments must be based on research, not supposition. Luck should have nothing to do with it.
We did make a decision that’s a very tough management decision to make… Our airline position was a mistake. Berkshire is worth less today because I took that position than if I hadn’t.
— Warren Buffett
Neither of these errors – if they can really be called that way – matched Berkshire Hathaway’s loss on its investment in oil major ConocoPhillips. Buffett admitted to being swayed by market euphoria over rising oil prices when he bought the shares, leading to a loss of nearly USD 2 billion when they were sold in 2015. The lesson was clear: never invest in something just because it’s currently ‘hot.’
There were other errors – for instance, USD 444 million was lost on the UK supermarket chain, Tesco and lesser amounts on Irish banks. However, the most significant failure in Berkshire's history up to now was its 1993 acquisition of Dexter Shoe Company.
Purchasing Dexter Shoe Company – the biggest yet often overlooked mistake of Buffett
Unusually, Berkshire paid for the acquisition with its own shares, swapping USD 433 million of ‘A’ stock for all of Dexter’s equity. At the time, Buffett described the Maine-based shoemaker as a “business jewel”, with a strong competitive edge in the industry and outstanding business management. He was aware that cheap imports from low-wage countries were a threat to the entire American industry, but remained convinced that Dexter’s highly competent management would overcome that challenge.
For a short time, Buffett's confidence seemed justified and, in 1994, Berkshire’s two investments in the shoe-manufacturing business, Dexter and H.H. Brown, together produced USD 85 million in pre-tax income, exactly as forecast.
However, this success was short-lived. As cheap imports gained an increasing market share, Berkshire’s shoe revenues rapidly faded, and, by 1999, were down to just USD 17 million. In that same year, around 93% of the US market was taken over by cheap foreign shoes and boots. In 2001, H.H. Brown and Dexter made combined losses of USD 46 million, with Dexter being the main contributor to this desolating total.
Warren Buffett testifies before a House Commerce subcommittee on Capitol Hill in Washington, D.C.
Source: Shutterstock
In 2002, there was a brief recovery, during which shoe companies contributed USD 24 million to Berkshire’s profits. However, this uptick proved to be merely a blip in an otherwise steep downtrend. Dexter ultimately ceased all production, with the remnants of the company absorbed into H.H. Brown, resulting in a complete loss on the investment.
That USD 433 million deficit was, however, just the tip of the iceberg. Much greater was the loss caused by the use of Berkshire Hathaway’s shares to buy Dexter. Had cash been used instead, Berkshire would have retained the 25,203 shares issued to Dexter’s shareholders, which are now valued at some USD 14 billion.
As big as it might seem, this is merely one facet of the overall cost. At least as great, but also virtually impossible to measure in cash terms, was the damage to Warren Buffett’s reputation as a careful and prescient investor.
As a financial disaster, this one deserves a spot in The Guinness Book of World Records.
— Warren Buffett in his 2014 special letter to shareholders
Moreover, this catastrophe left 1,600 workers in a small New England town out of a job, with many of them being too old to retrain for other work. As Buffett rued: “We lost our entire investment, which we could afford, but many workers lost a livelihood they could not replace.”
Key takeaways from the Dexter acquisition ‘blunder’
The Dexter Shoe disaster offers two major lessons that every investor should take note of. Firstly, no investment should be examined in isolation from its macroeconomic and industry background. As noted earlier, Buffett knew of the threat from foreign competition but grossly underestimated the challenge. As he often emphasizes, investors must be skeptical, always questioning assumptions, always looking for what could go wrong.
The second lesson is that selling shares in one investment in order to buy another makes the true value of the deal hard to quantify seeing as share prices are constantly changing. The shares sold may outperform those acquired, making the latter a subpar investment in comparison. Additionally, there’s also the opportunity cost that comes with reducing exposure to the better-performing asset.
When considering all of Warren Buffett’s investing blunders, there is an overall lesson to be learned that transcends any of the individual ones outlined yet: be diffident about your successes, recognizing the contribution of others, but also acknowledge your failures loudly, taking all the blame upon yourself. This broader lesson seems to be applied by Buffet in his personal investment journey, proving crucial to his success.
Ultimately, whether experiencing triumphs or setbacks, the imperative remains unchanged: never stop learning.
