When investors speak of billionaire Warren Buffett, it is often in a tone of awe. His stock market track record is one of remarkable, outstanding success.
In this year’s letter to shareholders in his company Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), Buffett noted that “During the 2019-23 period, I have used the words ‘mistake’ or ‘error’ 16 times in my letters to you. Many other huge companies have never used either word over that span”.
Buffett is not afraid to admit his mistakes. Here are three I try to avoid.
Mistake one: buying the right business at the wrong time
In the letter, Buffett pointed to what many people may think is a very odd thing for him to call a mistake. In fact, though, he has previously described it as his biggest mistake.
“Sixty years ago, present management took control of Berkshire,” writes Buffett. “That move was a mistake – my mistake – and one that plagued us for two decades. Charlie, I should emphasize, spotted my obvious error immediately: Though the price I paid for Berkshire looked cheap, its business – a large northern textile operation – was headed for extinction.”
The mistake here had two elements.
The first was that Warren Buffett was walking into a classic value trap. Berkshire had had a storied past but its marketplace had changed. It was essentially in inevitable decline, but Buffett did not see that.
Berkshire had been a great business – but not by the time Buffett bought it. Since then, the company has transformed and its businesses now span multiple areas with resilient demand.
The second mistake was subtle. There was an opportunity cost to tying up capital in Berkshire. That money could not be used to invest in far better opportunities.
That is why Buffett describes buying Berkshire as such a costly error, despite its massive profitability now. Used elsewhere, the money paid for it could have produced far better results, much quicker, as Buffett later showed with Berkshire’s investments in some brilliant businesses. Given its business model, poor capital allocation remains a risk for Berkshire.
Mistake two: ignoring clearly understood great opportunities
Warren Buffett has said that many of his most costly mistakes were mistakes of omission, not commission.
In other words, the mistake was not what he actually did (as in buying Berkshire) but what he failed to do.
An example is Alphabet.
Buffett has said he should have realised how brilliant its business model was, since Berkshire was spending lots of money to advertise on Google. But, even though Alphabet was well known to Buffett, he did not invest in it.
Mistake three: not acting fast enough on known concerns
As Warren Buffett’s longtime partner Charlie Munger put it when discussing Berkshire’s GEICO insurance operation, “We could see at GEICO how well Google advertising worked and we sat there sucking our thumbs“.
Munger abhorred what he called thumb-sucking: putting off a painful decision when there is already enough indication it ought to be made.
Speaking of his decision to sell a stake in Tesco slowly after an accounting scandal came to light, Buffett wrote in his 2014 shareholders’ letter: “My leisurely pace in making sales would prove expensive. Charlie calls this sort of behaviour ‘thumb-sucking.’ (Considering what my delay cost us, he is being kind)”.
