Like all investors, Warren Buffett has made mistakes. In recent years he recorded major losses with ConocoPhillips and also with Tesco. Both of these events are likely to have helped him become a better investor. However, there is one event which seems to have had a profound impact on the way the Sage of Omaha analyses companies. In fact, it could be said that this one failure was a key reason why he has ended up being such a successful investor.
A problematic company
Towards the beginning of his investment career, Buffett bought a share of a gas station. He is said to have taken an active role in the running of the business, working weekends and even cleaning cars. Despite this, he ended up losing money on the venture, which at the time amounted to around 20% of his net worth. A rival gas station nearby proved to be more popular for whatever reason and Buffett walked away poorer in a monetary sense, but richer for having experienced it.
Lessons learnt
The key lesson that Buffett seems to have learned from the gas station is that a company’s management can work 24 hours a day and provide a great quality product and service, but if a rival is better than them then ultimately the business will fail. That’s exactly what happened to him and it is likely that from this Buffett learned to focus on the competition as much as the company itself. In other words, when buying a stake of a business it is necessary to consider the competitive advantage or economic moat which it has versus rivals.
In addition, Buffett is likely to have learnt that adopting a direct management style does not always work out. If success in business was due to hard work, his gas station would have probably made money. However, he learned that a passive management style and more thought rather than action can make a bigger impact on profitability.
Applying Buffett’s lesson
Of course, the idea of an economic moat is very simple. The most successful companies have some kind of advantage over their rivals which means that they can make more money, better survive downturns and provide greater growth in the long run. It could be argued that this is the most important aspect of investing, since a company with a wide economic moat usually performs well in the long run, even if it is purchased at a relatively high price.
While it is not known whether Buffett focused on economic moats because of his experience with the failed gas station, he built his subsequent investment success on the idea of competitive advantage. Although it is not always possible to accurately assess a company’s economic moat and mistakes are made, attempting to do so could provide your investment portfolio with even better returns in the long run.
