Warren Buffett is one of the legends of stock market investing.
But that doesn’t mean he hasn’t made mistakes over the years. Anyone who has been investing for more than 50 years is bound to make mistakes, as even he freely admits in his annual letters.
In the past he has stated that fortunately most of his mistakes occurred in small positions that did not greatly affect the overall portfolio.
However, the goal is to learn from those mistakes to become a better investor.
And what mistakes are better to learn from than Buffett’s own?
Buffett’s Biggest Mistakes
1) Ignore bad news about the company or the sector
Unless you work in an industry, you may not always know the dynamics and spreadsheets don’t always tell the full story.
Buffett has often made bad decisions regarding companies. One of his biggest mistakes was with Tesco, the British supermarket retail chain.
In late 2012, Berkshire Hathaway spent $2.3 billion to buy 425 million shares, a significant position in Berkshire’s portfolio. But in 2013, Buffett began to have doubts about the direction.
He started by selling shares, but he sold only 114 million, which gave him a profit of $44 million. He didn’t sell fast enough. In 2014, management’s situation began to worsen and the stock fell even further. When Berkshire sold all of its shares, its after-tax loss on the investment was $444 million.
It ended up ranking as one of the top 4 biggest investment losses in Berkshire in the previous 50 years.
As Buffett said in the 2014 Annual Letter:
“In the business world, bad news often comes in series: you see a cockroach in your kitchen and, as the days go by, you meet its relatives.”
Lesson: If there is bad news about a company or industry, don’t ignore it. Sometimes, those who are quick to correct a mistake are the ones who are better off.
Keep going…
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2) Buy at the top
Warren Buffett is a value investor. He tries to buy assets when they are undervalued compared to the rest of the market.
However, Berkshire has occasionally paid a premium for an asset because Buffett saw the soundness of the business model going forward. One such case was the price paid for the Burlington Northern railroad.
It wasn’t cheap when Berkshire bought it, but the investment has paid off.
Other investments were not so lucky. In 2008 in particular, some big investment mistakes were made.
Without consulting Charlie Munger or anyone else, Buffett bought a large stake in energy giant ConocoPhillips just as crude oil prices were near their cyclical peak.
Berkshire ended up with a 5.7% stake in Conoco at a cost of $7 billion. At the time of the 2008 annual letter, that investment was worth just $4.4 billion, a loss of nearly $3 billion.
The price of crude oil had fallen to $40-$50 a barrel, wiping out most energy investments at the time.
Although Buffett believed oil prices would be higher in the future, he still blamed his poor timing for the losses.
He made the mistake of buying at the highest point.
Lesson: You have to be careful when buying into cyclical sectors, whether it’s energy, which is at the mercy of oil and natural gas prices, or semiconductors, which also experience wide swings in earnings due to supply and demand dynamics.
3) Popular large-cap stocks are not always good investments
Berkshire recently sold all of its remaining shares in technology giant IBM.
Berkshire, originally purchased in 2011, spent $10.7 billion, buying at an average price of $170 a share, to acquire a significant stake in the company.
But it never quite worked out. In 2016, the stock fell to $125.
Buffett dismissed this in interviews, saying the company had never lived up to expectations and was changing course.
What did he buy instead?
Apple.
And that investment has more than made up for the mistake of buying IBM.
Lesson: Sometimes an investment just doesn’t work out. It’s okay to change course and invest in another company, even in the same sector.
How can we avoid some of Buffett’s mistakes?
Know what you are buying and why. Be prepared to change course if industry or company conditions change.
For example, the direction you were confident in may not be the same forever. CEOs change. Strategy changes. Know the facts and be prepared to change with them.
Have a diversified portfolio. Berkshire Hathaway has been able to overcome most of its mistakes because it has many investments that can make up for the lack of them.
Don’t pay too much for a stock. Value investors should buy value stocks. Be patient and buy stocks at an attractive valuation.
How to make money from Buffett’s success
Let’s turn things around. Remember that, mistakes aside, Buffett is arguably the greatest value investor of his generation.
His essential secret? As he himself puts it: “Whether we’re talking about socks or stocks, I like to buy quality products when they’re on sale.”
I feel the same way, and that’s what drives a portfolio I manage called Zacks Value Investor.
We look for stocks with “discount” prices of 25%, 50% and more. Our strategy combines value metrics with the timeliness of the Zacks Rank to capture these hidden gems just as Wall Street begins to recognize their true value.
You see, it’s not enough to find stocks that are undervalued. We want to buy them when they start to rise and then ride them for months or years until they reach their full growth potential.
Thus we closed with gains of +167.8%, +89.5% and +142.8%.
Now would you like to look inside your portfolio and see what value stocks you recommend today?
You are welcome to do so and as a bonus you can also download Invest like Warren Buffett free. This special report reveals three key principles that guide the search for companies Buffett wants to buy. Better yet, it highlights five stocks to you Consider purchasing today.
Important: This unique opportunity ends Sunday, September 9th.
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Good investment,
Tracy
Tracey Ryniec, as Zacks Value Stock Strategist, leads our Value Investor Portfolio.
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