What We Can Learn From 3 Of Warren Buffett’s Investing Mistakes

The Oracle of Omaha, Warren Buffett, is widely known as one of the world’s best investors. But despite his investing prowess, he too is not immune to making big blunders.

Groucho Marx once said, “Learn from the mistakes of others. You can never live long enough to make them all yourself.” In that spirit, let’s go through three mistakes that Buffett has made in his investing lifetime so that we can learn from them.

1. Cities Service

Buffett’s investments in companies like Coca-Cola and the Washington Post are the stuff of legends because they’re constantly being used as examples on why long-term investing is the way to go. On the other hand, Buffett’s very first investment – made at the tender age of 11 – is a mistake that’s not very well-known.

Back then, being confident that it was undervalued, Buffett purchased three shares of a company called Cities Service at US$38 per share. The stock quickly dropped to US$27 over the next few months but he held on tenaciously and eventually managed to sell them for a small profit when the price moved to US$40.

But years later, the still-young Buffett could only stare in disbelief as Cities Services had soared to US$200 a share. Buffett’s original investing rationale had been vindicated, but it was too late as he had already sold the share.

The LessonHaving patience and the “guts” to stick to what you believe in can potentially reward you over the long-term.  Like Buffett says, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

2. Tesco PLC

On 3 October 2014, Buffett made a public declaration that his investment in UK-based supermarket operator Tesco had been a huge mistake and that he had been paring down his stake in the firm. Buffett first bought Tesco’s shares in 2006 when it was expanding rapidly worldwide and had opened new stores in the U.S. called “Fresh and Easy.”

In 2012, Tesco actually released a profit warning and in that year, shares of the supermarket outfit had traded at valuations as low as 8 times its trailing earnings. But even while other investors were bailing, Buffett actually increased his stake in Tesco. Berkshire Hathaway, Buffet’s investment vehicle, actually owned almost 5% of Tesco at one point in time – that’s strong faith from Buffett that Tesco will return to strength.

But, his conviction did not materialize. On top of a series of disappointing results, Tesco was thrown deeper into crisis as it admitted last year to have overstated its profits by £263m. Amid a full-scale investigation into Tesco by regulators in the UK, eight senior executives of the company have already been suspended over the scandal.

The LessonJust like what my colleague Stanley Lim wrote recently, “Although the general idea of investing into cheap shares is sound, investors should still be aware of the risks involved.” Tesco was available for a cheap valuation in 2012, but it eventually turned into a value trap. Cheap shares can continue to become even “cheaper” if their business fundamentals are deteriorating.

3. Berkshire Hathaway

By his own admission, the biggest mistake Buffett ever made in his career was buying the very investment holding company he’s controlling today – Berkshire Hathaway!

According to a CNBC interview, Buffett actually amassed huge stakes in Berkshire in the early 1960s and took control of it in order to fire its then-CEO who he had fallen out with. Back then, Berkshire was just a textile manufacturer. In an attempt to show that he could do better, Buffett tried to turn Berkshire around, pumping millions into the failing textiles business.

But after years of poor results, Buffett finally gave up on Berkshire’s textile business and went into the insurance business. He calls Berkshire his $200 billion mistake.

The LessonAlthough the purchase of Berkshire was a blessing in disguise, we cannot argue on the fact that Buffett had allowed his anger to dictate his investment decision. More often than not, emotions like greed and fear, much like anger, can result in poor investing results.  A disciplined approach to investing will help to improve your performance dramatically.

Foolish “mistake”

As you can see, not even the legendary Buffett is good enough to not make an investing mistake in his career. But that hasn’t stopped him from achieving success. As Winston Churchill once wisely quipped, “Success is not final, failure is not fatal; it is the courage to continue that counts.” Do not be put off by your investing mistakes. Learn from them (as well as from the mistakes of others) and you would be able to gradually become a better investor.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.