Warren Buffett – Biggest Mistakes

Warren Buffett top 5 mistakes

Warren Buffett Today we are going to take a look at the 5 biggest mistakes of Warren Buffett.

Also the mistake number 1 is going to shock you! So stay tuned to find out what is that mistake.

5. Opting not to buy Amazon stock

Investors are often advised to refrain from investing in stocks they don’t understand. The advice is not wrong, but it delivers a message which asks investors to close their eyes to business models they don’t understand.

The correct advice would be to focus on understanding the business models rather than ignoring them and then consolidating your position.

Investments made by Warren Buffett never include businesses he doesn’t understand, which has its pros and cons. Buying companies blindly is not a smart move, but shying away from can’t be considered wise, either.  

To make you understand the depth of this, we will give you a statistic, if you invested in 1000 USD in amazon in 1997, today, you would have an investment of 106,5254 USD today.

Warren Buffett in an interview stated that:

“Obviously, I should have bought it long ago, because I admired it long ago,” “But I didn’t understand the power of the model as I went along. And the price always seemed to more than reflect the power of the model at that time. So, it’s one I missed big time.”

4. Purchasing US Airways stock

Warren always says that, you must know the business you are buying. But does he practice what he preaches?

Most of the times, yes, but after all he is a human, and in the case of US airway, he made a mistake.

Buffett invested in US Air because it was an attractive stock. He believed it was possible for him to generate a lot of profit from this business. However, the airline industry as a whole continues to be far from attractive. US Airways didn’t join the ranks of failed Warren Buffett stocks, but he does regret his 1989 purchase of $358 million worth of shares in the now-consolidated airline.

Forbes in a report stated that Buffett likely got all his principal and dividends back. Buffett credited the airline’s rebound to both his and Munger’s exit from the board and the arrival of CEO Stephen Wolf.

The airline industry is not an easy to invest in industry. It has a high fixed cost and is a highly competitive industry.

You must research every investment before buying, whether you’re a beginner or a longtime pro.

The next point, should be an eye opener for every investor.

Point number three explains, one of the biggest mistakes of warren buffett as well as his biggest lesson.

3. He underestimated customer loyalty

What is the most important part of a business? Is it the management or the PR team?
If your answer is any particular business department then you’re probably wrong. It’s the customers.

Think about it, there are a lot of drinks in the market, but why does coca cola stands out?
What is it that makes Apple products look different than all other companies in the market? The answer you are looking for is Customer Loyalty.

At the age of 22,

Warren bought an Omaha gasoline station in partnership with his friend. It was opposite a Texaco gasoline station. The Texaco station consistently outsold his station.

The Texaco station was, in Buffett’s words, “very well-established and very well-liked and it had customer loyalty, a clientele, Nothing we could do to change that.”

During this time, Buffett was able to understand the concept of customer loyalty. The lesson he learnt was quite important, as he sought companies with the most pronounced customer loyalties in their industries, such as Coca-Cola.

2. Misunderstanding Value Investing

We learn a lot of things from our mentors. During this leaning process, we are often unable to create our own logical opinions.
There is one thing that people should figure out early in this game, and that is to think with an open mind. What is applicable for Warren Buffet may not be applicable for George Soros.
Benjamin Graham, was a great influence in the life of Warren Buffett. Warren, adopted his concept of value investing. Along with it, he also adopted the Cigar Butt method of investing. Here, Buffett was looking for stocks that appeared to him as underpriced. The idea behind buying these stocks is like finding a mostly smoked, discarded cigar. “Though the stub might be ugly and soggy, the puff would be free.” Buffett bought many companies that had one more puff left. He was buying fair businesses at wonderful prices.

However after meeting Charlie Munger, he moved towards buying wonderful businesses at fair prices. Berkshire Hathaway now believes and follows this policy. Buffett expressed his thoughts about this method, in his letter to Berkshire Hathaway shareholders. He said, “Once that momentary pleasure was enjoyed, however, no more could be expected.”

And now the mistake we mentioned at the beginning of the video. This mistake was surprising for me and I hope it is going to surprise you as well.

In the previous point, we discussed how Buffett used to buy companies that had one puff of profit left.

1. Berkshire Hathaway.

The year was 1962, Berkshire Hathaway was a flailing textile business, which still had a lot of mills open. The managers of the company started closing down some non-operative mills. Buffet had a feeling that the market was underpricing the stock. The company had a lot of tangible assets and so, he proceeded to buy a lot of Berkshire Hathaway stock.

Two years later, in 1964, Seabury Stanton, who ran Berkshire at that time, offered to buy back Warren Buffet’s minority stake for $11.500/share.

Both had agreed on the deal, as Buffet felt that there was no more steam left in the business. When the letter of offer came to Buffet, the price had been undercut to $11.325. This made Buffett angry. So, instead of selling his stake at the lower price, he went on a buying spree at much higher prices. Finally, he had a controlling stake in the company. He then went on to fire Seabury Stanton. Buffet was able to get his revenge, but he was now holding a poor textile company. Also, he ended up paying a huge premium for it.

Warren Buffett in his Letter

Buffett mentioned in his 1989 annual letter to his shareholders(
http://www.berkshirehathaway.com/letters/1989.html ),

“My first mistake, of course, was in buying control of Berkshire. Though I knew its business -textile manufacturing – to be unpromising, I was enticed to buy because the price looked cheap. Stock purchases of that kind had proved reasonably rewarding in my early years, though by the time Berkshire came along in 1965 I was becoming aware that the strategy was not ideal.”

There are two takeaways for every person from this mistake:

  1. Being emotional does not help in investing. You may have feelings for a stock, but stocks will never have any feelings for you.
  2. Learn how to handle your mistakes. Buffett made a mistake by buying Berkshire Hathaway, but he also knew how to handle it. Berkshire stock went from 11.5 USD in 1964 to 335,900 USD in 2018.


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