IBM and Coke represent two of Berkshire Hathaway’s three biggest investments (the biggest being Wells Fargo).
However, disappointing earnings announcements at these companies cost Warren Buffett around US$ 2.5 billion in the week gone by.
These losses add to a recent rough patch for Buffett, who slashed Berkshire Hathaway’s stake in British retailer Tesco recently. He has described buying into the stock as a “huge mistake” after the company announced another earnings disappointment and, over that, a £ 250 m accounting scandal.
Few seats remain at my Value Investing Workshop in Bangalore on 1st Nov. (Saturday). To join, please register here – https://t.co/VoXkYaHm9q
— Vishal Khandelwal (@safalniveshak) October 27, 2014
The media is rife with these big “mistakes”, especially Tesco, and is surprised how the world’s best investor could commit them. But then, Tesco isn’t Buffett first mistake and it won’t be his last mistake either.
He started making mistakes with Berkshire Hathaway, the textile company he bought in the 1960s, and has built up a list over the years. So Buffett has…
- Bought a lousy business (Berkshire’s textile business)
- Bought a stock at the wrong price (ConocoPhillips)
- Confused revenue growth with a successful business (US Air)
- Invested in a company without a sustainable competitive advantage (Dexter Shoes)
- Misjudged the company’s prospects (Energy Future Holdings)
- Trusted the wrong people (Salomon Brothers)
It is easy to get carried away counting the mistakes, questionable decisions and blunders Buffett has made over the decades.
It should be kept in mind, though, that he is a billionaire many times over and that strongly argues that for whatever mistakes he has made, they are tempered by doing a lot of things right.
While Buffett, like each one of us, sometimes repeats prior mistakes, it is never too late to learn from them and try to avoid them in the future.
So, one of my biggest learning from the mistakes Buffett has made in the past is that…
It’s OK to Make Mistakes
In Janet Lowe’s book Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger, Munger addresses the issue of losing investments by saying…
I’ve been through a number of down periods. If you live a long time, you’re going to be out of investment fashion some of the time.
In his 2003 letter to shareholders, Buffett echoed Munger’s view, writing…
In buying businesses, I’ve made some terrible mistakes, both of commission and omission.
Munger and Buffett’s comments often remind me that mistakes should be taken in stride and shouldn’t distract from the bigger picture of long-term success.
I have been tempted in the past to toss aside proven strategies during market’s ups and downs, but have realized that staying focused on what works over time is always a better and highly profitable approach.
Of course, I have had my share of investing mistakes as well, like…
- Investing in businesses without sustainable moats (Arvind)
- Buying stocks without understanding underlying businesses (Hotel Leela)
- Selling good businesses too early (Page Industries)
- Avoiding great businesses just because their stock prices were slightly higher than my ‘comfortable’ buying prices (Asian Paints)
- Selling great businesses that did not seem to move for 2-3 years (Swaraj Engines)
The list is long, but let me not embarrass myself too much at one go. 🙂
However, thankfully, my mistakes have not deterred me from working on my investment process, to improve in such a way that I avoid repeating my mistakes from the past.
And that has helped me earn a satisfactory return on my investments over the past few years.
Investing is an Humbling Game
I recently shared the story of Socrates’ trial and execution and what the classical Greek philosopher taught the world about humility.
Humility is, in fact, one of the greatest assets for any stock market investor.
Knowing that you don’t know a lot of things, knowing that you will make a lot of mistakes, and knowing that you may be crucified for your mistakes…and accepting these as part of the game that must still be played, is what creates a successful investor.
I am not yet a successful investor, so I can say all this only through my readings and learning from other investors who have emerged successful in the past. And Buffett leads this list.
In the stock market, randomness can greatly impact your returns and especially in the short term.
When Indian cricket captain MS Dhoni makes a few ducks in a row, most people start to call for his head. That’s despite his wonderful track record over many years. Dhoni’s performance should be judged over a long enough period – say three or four test series – for any bad luck or temporary loss of form to take a back seat to his natural talent.
The same principle should be applied to investing. What matters is the performance of your portfolio over a long period (at least five years), not whether an individual stock has fallen 50% or risen 200% over the past week or month.
Coming back to Buffett’s investment in Tesco, it was not a mistake arising from a failure to understand its business. Tesco is the second-largest retailer in the world with an impressive 30% grocery market share in the UK.
Instead, Buffett’s mistake is the result of poor timing and mismanagement at Tesco’s highest levels. Yet, while those excuses lend plenty of cover, Buffett didn’t shy away from taking the blame.
In an interview after the accounting scam broke out, Buffett said…
I made a mistake on that one more than anybody else made a mistake … That was a huge mistake by me.
This willingness to take responsibility for buying Tesco ahead of its steep drop speaks volumes about Buffett’s character.
It also suggests that even if you follow a proven discipline such as buying great companies with competitive advantages that are selling at reasonable prices for the long term, sometimes you can still end up with duds.
Anyways, on Tesco, Buffett added…
I’m going to make mistakes, but I’m not going to make a mistake because I like to buy businesses I like as they go down in price. I’m just going to be wrong about the facts.
That’s ‘humility’ served on a platter for you and me!
And that’s indeed one of the greatest lessons you can learn from the world’s best investor – not just how to succeed in investing, but equally importantly, how to successfully fail, and learn from that failure.
Without mistakes, investing would be boring, right?
And by the way, if you don’t make mistakes, Safal Niveshak would cease to exist. 🙂
Vishal, I think in IBM he is not at all at loss. IBM has been buying back from market, and even WB has said many times that he would be more then happy if the prices remain lower than go high, 100 bucks market cap company if loses some points in rupees,, it makes up the same loss by increasing the holding of the investor due to reduction in outstanding shares.
I think Mr. Buffett is actually in positive position wrt IBM.
Buffett and Munger’s success is mostly from few concentrated investments.
Many of buffett’s smaller investments have been mediocre.
When he knows he’s right , he has made huge concentrated investments.
AXP in the 1960’s – over 40% of fund.
KO, geico, General Re, Burlington Northern Santa Fe.
Consider ibm. At 11 billion it represents less than 4% of berkshires market cap.
The point is, Buffett has never made a mistake on a concentrated investment.
i am surprised by the similarity of the topics between your blog and another new blog – superinvestorsofindia[dot]wordpress[dot]com
you seem to expand on the topics of this blog after few days they are originally published on this new blog.
i am a big fan of your blog and a follower plus observer of other blogs.
i am sure it is just a coincidence.
Vishal Khandelwal says
Hi Johar, I will be happy if you can share some examples. I have never heard about this blog earlier. Thanks!