What are Warren Buffett's greatest investment mistakes?

Warren Buffett’s most famous quote is: “Rule No.1 is never lose money. Rule No.2 is never forget rule number one”, which suggests that the Oracle of Omaha has never made an investment that has lost him money. But this could not be further from the truth.

Indeed, Buffett is only human, and just like the rest of us, he has made multiple mistakes over his career. However, it’s his capacity to deal with those mistakes and move on, that has helped him to become one of the world’s wealthiest and most respected investors. In the words of George Soros “I’m only rich because I know when I’m wrong…I basically have survived by recognizing my mistakes.”

A huge mistake

Buffett’s most recent mistake was Tesco. After details emerged of an accounting scandal at the UK grocery chain, Buffett conceded in a CNBC interview: "I made a mistake on Tesco. That was a huge mistake by me." Less than two weeks later, it was revealed that his Berkshire Hathaway conglomerate had cut its holding in the retailer from around 3.97%, to under 3%.

Berkshire began buying shares in Tesco in 2006, and at its peak owned just under 5% of the company. It’s said that Buffett had struck up a strong relationship with Sir Terry Leahy and was impressed by his plans to help Tesco achieve world domination. Click here to read more about Buffett's rules for judging management. Two years after Sir Terry’s departure, in October 2013, Buffett started to cut his holding from 4.98% to 3.98% by offloading derivatives that represented 80m of the voting rights in the company.

Still, even at its peak, the Tesco holding was never going to be a game-changing bet for Buffett. Five percent of Tesco at 2006 prices amounts to an investment of just over $2 billion, (around £1.3 billion). By comparison, Berkshire currently has an excess cash balance of more than $40 billion.

Let your winners run

Aside from Tesco, Buffett has made many other mistakes over his career, although not all of them have resulted in him losing money. For example, between 1978 and the early 1990s, Buffett make a huge mistake by ignoring one of the key rules of trading; let your winners run.

Capital Cities Communications, or Cap Cities was an American media company, which Buffett owned, but sold between 1978 and 1980 at $4.30 per share. The Oracle of Omaha found himself buying shares of Cap Cities once again during 1986 at $17.25 per share, a year after the company had paid $3.5 billion to acquire the much larger ABC television network. Seven years later, Buffett sold once again at $63 per share during 1993. Disney eventually acquired Cap Cities for around $124 per share in 1996. Buffett’s premature sale had cost him around $600 million.

Market euphoria

Perhaps Buffett’s biggest trading mistake was made during 2007. Swept up in the euphoria of rocketing oil prices, which at one point reached over $140 per barrel, Buffett spent $7 billion buying shares in oil major ConocoPhillips. At the time, it was the single largest investment he had ever made.

The Conoco trade was not only the single largest investment Buffett had ever made, it was also the most confusing. It went against everything Buffett stood for. At its peak, the Conoco holding amounted to 15% of Berkshire’s assets, acquired at an average of $85 per share, which was about $5 off Conoco’s all-time high.

No one really knows why Buffett acquired the Conoco stock in the first place. Some have speculated that this was actually the first time that the revered investor had got caught up in the wider market euphoria. Buffett himself has been unable to explain the decision.

But in a cruel twist of fate, it’s also difficult to work out how much Buffett lost. For example, Buffett’s acquired the holding at an average price of around $85. Conoco’s shares hit a low of $32 during 2009, after the price of oil crashed. Buffett was offloading Conoco shares throughout 2009 (another strange move on his part as he acquired the shares only months before).

Berkshire’s latest filing shows that its ConocoPhillips holding had fallen to around 1.4 million shares. However, on a split adjusted basis, Conoco’s shares have surpassed their 2008 high, while Phillips 66, the downstream part of Conoco which was spun off during 2012 has seen its share price triple since the spin. Overall, it’s possible that Buffett has been able to break even on Conoco.

Private equity mistake

In another energy deal, struck at the peak of the financial crisis, Buffett bought $2 billion worth of bonds issued by private equity groups to fund the leveraged buyout of Energy Future Holdings.

In total, $45 billion was raised to fund the deal, making it the largest leveraged buyout in history. In theory, it should have been a relatively safe bet, utilities are usually a great investment due to their defensive nature.

However, a combination of low natural gas prices and high debt levels crippled Energy Future after the buyout. The company finally filed for bankruptcy earlier this year. Buffett recorded a loss on his investment of around $873 million including interest payments.

The biggest mistake of all

By his own admission, the biggest mistake of Buffett’s career was buying Berkshire Hathaway. Berkshire was originally one of Buffett's deep value "work-out" situations but after becoming displeased with the company’s management, Buffett took control.

According to this Forbes article, Buffett actually took control of Berkshire in order to fire its CEO who he had fallen out with. In an attempt to show that he could do better, Buffett tried to turn Berkshire around, pumping millions into the failing textiles business. But after years of poor results, Buffett finally gave up on Berkshire and went into the insurance business. He calls Berkshire his $200 billion mistake.

Learning from mistakes

Charlie Munger, Warren Buffett’s first lieutenant, once said: “There’s no way you can live any adequate life without making many mistakes. In fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke.”

This is a great way to approach investing. Warren Buffett has made multiple mistakes over his career but his ability to admit his mistakes and move on, has helped him get to where he is today. Stockopedia tracks the performance of investing strategies that are inspired by the approach of Warren Buffett - you can click here to see them.

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