Warren Buffett’s Investing Mistakes: Part 2

Warren Buffett’s track record makes him one of the investing community’s all-time greats. From 1965 to 2016, he generated an incredible annual return of 19%. But you may be surprised to know that even Buffett makes mistakes.

In Buffett’s 1989 letter to his shareholders, he shared a number of investing mistakes he committed in his first 25 years of investing. It’s always valuable to learn from the mistakes of others. And given Buffett’s stature, learning from his errors is even more valuable.

This article is the second of a few articles that looks at the mistakes Buffett detailed in his 1989 letter. The first article can be found here. [Editor’s note: A third and fourth article on Buffett’s mistakes have been published. They can be found here and here.]

A big mistake: Betting too much on management

In his 1989 letter, Warren Buffett wrote that “Good jockeys will do well on good horses, but not on broken-down nags.” He gained his lesson on the limitations of even world-class management teams from his experience purchasing a textile manufacturer and department store company Hochschild Kohn. Both companies had “able and honest people running them” according to Buffett.

(Buffett invested in the textile manufacturer and Hochschild Kohn because he thought they were statistically cheap. Investing in stocks with cheap valuations that also have lousy long-term business prospects was a Buffett-mistake I described in my first article in this series.)

But, he soon realized that no matter how good a management team was, they would not succeed in a business with poor economics. Buffett sums this up very nicely in his 1989 shareholders’ letter:

“I’ve said many times that when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

If a business does not have good economics, it is unlikely to give investors superior returns even if it was run by the best managers That’s not to say that the quality of management does not matter.  A business with poor economics would probably be crippled at a faster rate under a lousy management team, while a business with good economics would likely not achieve its fullest potential.

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