Buffett’s success stories have been widely circulated. Today, let’s talk about the investment mistakes Buffett made. Except for some Versailles ” acquisition of Berkshire Hathaway was the biggest mistake “. If you want to improve your investing skills, you can probably learn a lot from Buffett’s investment losses.
Mistake 1: Waumbec Textiles 1975 Purchase Buffett 45
Despite regretting his failed 1962 acquisition of textile company Berkshire Hathaway, Buffett did the same 13 years later when he bought another New England textile company, Waumbec Mills.
“Based on the assets we have received and the expected synergies with Berkshire’s existing textile business, the purchase price is a bargain,” Buffett wrote in his 2014 shareholder letter.
Buffett acknowledged his mistake and revealed that his decision to buy Waumbec was a poor one because the plant had to close shortly after Berkshire bought it in 1975. The main lesson of Buffett’s poor investment in Waumbec is not learning from previous mistakes . So when it comes to investing, if you don’t succeed at first, you have to move to a new strategy.
Mistake 2: Salomon Corporation 1987 Buffett was 57 years old
Investment process: In 1987, Buffett invested US$700 million to purchase convertible preferred shares. The coupon rate was 9%, and the annual interest income was about 63 million, accounting for about 15% of Salomon’s profits. The stock price converted into common shares was US$38. In the end, the interest and principal were cashed out; but halfway through, Salomon was on the verge of bankruptcy due to illegal manipulation of national debt, and Buffett was exhausted in trying to save Salomon. Buffett said: For the return of 9%, it is not worth the loss to pay such a great experience.
October 19, 1987 was the famous Black Friday in history. There was no sign and no bad news. On that day, the Dow Jones Index fell by 22%, and the stock price of Salomon also plummeted. The bad things happened one after another. Salomon’s main business is the underwriting of Treasury bonds issued by the Federal Reserve. In the 1980s, there was a violation of the hoarding of national debt. It was not until August 1991 that Buffett knew about it. The Ministry of Finance and the Federal Reserve wanted to severely punish Salomon. In order to save the defeat, Buffett served as the chairman of the company. The company was saved. Buffett himself was exhausted physically and mentally. This incident caused him a lot of trouble. Many media attacked him and his reputation was damaged . In 1995, part of the preferred shares were repurchased by Salomon Corporation. In 1997, Salomon Corporation was acquired by Traveler Group. Buffett announced his withdrawal and returned to his hometown of Omaha.
Buffett: “It takes a lifetime to build a good reputation, but five minutes to ruin it!”
Mistake 3: Being Attracted by High Growth in an Unknown Industry: American Airlines 1989 Purchase Buffett 59
US AIRWAYS US Airways, a well-known company we are familiar with. This company used to be the largest in the Northeast of the United States and the sixth largest airline in the world. However, in the mid-to-late 1970s, due to the rapid expansion of the business and the lack of effective management integration, the company received nicknames such as USeless Air.
In the 1980s, the company began to reposition its brand, and the first thing to adjust was the aircraft supplier. After they failed to discuss the DC-9 upgrade plan with McDonnell Douglas, the company single-handedly gave birth to the Boeing 737 and became the first users of the 737-300. The 737’s strong endurance and as many as 150 seats have further improved the operating efficiency of airlines.
In the early 1980s, as the impact of the oil crisis waned, airline profit margins began to recover. At this time, US Air already had a certain amount of cash reserves, so in the mid-to-late 1980s, it began to actively expand through mergers and acquisitions. It successively acquired two regional airlines located in San Diego and North Carolina, expanding its business to the Midwest. With the growth of M&A business, the company also began to seek financing channels. It was at this time that Buffett began to pay attention to this US Air.
In 1989, the opportunity provided by US Air to Buffett was preferred equity: an investment opportunity of $358 million. For a company that is clearly the leader in a booming industry with rapid growth and rising profit margins over the past 10 years, this is a great opportunity where you just can’t say “no”. Besides, for a billionaire, buying one or two airlines is a matter of course.
However, at the beginning of this transaction, Buffett was quite critical of this investment. The biggest reason is that this company spends almost all of its profits on mergers and acquisitions and the purchase of new aircraft, while its dividends to shareholders are so stingy that there is almost nothing. For asset-heavy industries, this is obviously normal: business expansion is carried out either through mergers and acquisitions of other company assets, or through the purchase of new assets, which is not significantly different from the current steel industry, cement industry, and media industry—— Previous The two are tangible asset acquisition models, and the latter is an intangible asset acquisition model.
However, a company without dividends is a bad company. This was an unchanging truth in the U.S. market at the time, and Buffett insisted on this principle even more. So regarding the lack of dividends, his comment at the time was “the airlines don’t make money at all”. In the 1990s, after the outbreak of the Gulf War, oil prices rose sharply again and quickly returned to the level in the mid-1980s. The airlines that had expanded rapidly before were obviously put on a layer of shackles, and their stock prices began to decline significantly. So the result of the transaction is what we are familiar with. In 1995, Buffett lost 75% of his investment.
Regarding the aviation industry, Buffett at the time left a famous curse: “If there was a capitalist there at that time, he should have killed Wilbur Wright. This would be one small step for mankind, but it is capitalism.” A giant step forward for doctrine.”
(“If there had been a capitalist down there, the guy would have shot down Wilbur,” Buffett said. “One small step for humanity, and one huge step for capitalism.”)
Buffett’s Berkshire Hathaway posted a net loss of nearly $49.7 billion in the first quarter of 2020, largely due to a decline in the value of its investments. Buffett said he had exited investments in the four largest U.S. airlines. The four companies are American Airlines , Delta Air Lines , Southwest Airlines and United Airlines. Buffett said: “When we sell a stock, it is often our entire holding, we don’t just reduce the position.”
Buffett’s 30-year “resentment and enmity” with aviation stocks did not find any “cheapness” in the end.
Mistake 4: (Dexter Shoe) Dexter Shoe acquired Buffett in 1993 at the age of 63
There is no general winner in the investment world, even Buffett is no exception. Asked about the biggest mistake he’s ever made, Buffett said “as a financial disaster, this one deserves a place in the Guinness Book of World Records ,”
In a 2014 letter to shareholders, he expressed disappointment at the $433 million he paid for Dexter in 1993. Instead of giving the seller cash, he used Berkshire shares to finance the purchase. As he wrote the letter, he disclosed that the shares were worth $5.7 billion.
At the beginning of 1993, Buffett met with Alfond, the owner of Dexter, at the suggestion of Brown Shoe Company Chairman Lu Ni. Buffett offered cash on the spot, but Alfond was unwilling to pay capital gains tax, so he asked Buffett to use Berkshire’s stock trading.
A few months later, when Berkshire’s stock was at an all-time high, Buffett met with Alfond again, and with no lawyers, accountants, or investment bankers present, they struck a deal quickly and simply. .
In Buffett’s own words, the company has a “durable competitive advantage.” This competitive advantage seems to be in line with Buffett’s preference: just like Coca-Cola , DQ ice cream, shoes are indispensable in people’s daily life, and it is an industry that will not decline.
However, what he did not expect was that the low-priced “Made in China” products swept the US retail market in just a few years, and the market advantage of Dexter produced in the US quickly disappeared.
“In 1999, almost all of our manufacturing, retail and service businesses achieved excellent results, the only exception being Dexter Footwear. However, this is not a matter of company management. In terms of management skills, ability and dedication, Dexter manages The layer is comparable to other companies. But most of our shoes are produced in the United States, and it has become very difficult for domestic manufacturers to compete with foreign manufacturers. Of the 1.3 billion pairs of shoes consumed in the United States in 1999, about 93 % are imported products, and very cheap foreign labor is the decisive factor.”
In 2001, Buffett had to admit his mistake: “Dexter was a few years before our acquisition, and in fact a few years after our acquisition. Despite the brutal competition from overseas shoe companies, the business was still very prosperous. At that time, I thought Dexter should be able to continue to successfully deal with The issue of international competition, it turned out that my judgment was completely wrong.”
It can be said that in Buffett’s investment career of more than 60 years, his biggest setback was losing to “Made in China”.
Mistake 5: Issuing additional Berkshire Hathaway stock to buy General Re in 1998 Buffett at age 68
The acquisition of General Reinsurance (Gen Re) in 1998 was not initially the best move for Warren Buffett’s investment strategy. Buffett turned things around, but he does have some regrets.
In his 2001 shareholder letter, he offered more insight into why Berkshire Hathaway was hit so hard in the early days of the acquisition. This included persistent underwriting losses, ignoring the possibility of a terrorist attack, and failing to realize that Gen Re didn’t have enough reserves to cover losses on older policies. Berkshire Hathaway lost $800 million from the latter in 2001.
“After some early problems, General Re has become a quality insurance business that we admire,” Buffett wrote in his 2016 letter to shareholders. “However, I issued 272,200 Berkshire shares to purchase General Re was a terrible mistake, an act that increased our outstanding shares by 21.8%. My mistake caused Berkshire shareholders to pay far more than they far from a blessing).”
The lesson here is to scrutinize the numbers and run them with a few trusted advisors. You should always know what the worst-case scenario could cost you.
Mistake 6: (NYSE: COP) ConocoPhillips bought Buffett in 2006 at age 76
Buffett started buying ConocoPhillips in 2006 , when crude oil prices climbed to the $70 platform at a historic moment. And Buffett also believes that the rapid warming of the world economy can drive the price of crude oil to continue to rise, so he continued to increase his holdings of ConocoPhillips until early 2008.
Crude oil prices: reached the previous peak at the end of September 2008. The current highest peak occurred in April 2011.
Buffett’s holding price for ConocoPhillips was only about US$65 at the beginning, and by the beginning of 2008, the cost of increasing his holdings once reached above US$90.
According to the final statistics, Buffett’s cost of holding COP is 72.68. His reasons for increasing his holdings on COP are simple:
1. The price of crude oil is the “value” of COP. If crude oil does not fall, the stock price of oil companies will never be expensive;
2. The subprime mortgage crisis broke out in 2007, and the ensuing economic slowdown will inevitably prompt the government to introduce loose policies, which will further push up oil prices.
But things backfired. The volatility of the stock market is much greater than that of the spot market. Before crude oil reached a new high, the market had already shown its willingness to withdraw from oil companies—it was completely normal, because the impact of the financial crisis far exceeded the expectations of most investors. What comes is not just a slowdown in economic growth, but the collapse of some industries. The market quickly turned from one irrationality to another irrationality: the huge selling pressure caused the stock price of ConocoPhillips to quickly fall below $50 after crude oil hit a new high as expected, far exceeding the decline in crude oil prices.
Buffett’s perception after a huge loss of 2.6 billion US dollars: “For investment, pessimism is your friend, and excitement is your enemy.”
Mistake 7: IBM bought Buffett in 2011 at age 81
In 2011, investing in IBM was Buffett’s attempt to expand his circle of competence. Berkshire Hathaway announced in 2011 that it had started building a position in IBM and became the company’s largest shareholder.
When buying IBM’s stock, Buffett once emphasized that the investment in IBM’s over 10 billion US dollars is a long-term investment in the company’s transformation. Like other established technology companies, under the leadership of CEO Rometty, IBM is trying to adapt to the transformation of the technology industry from the PC to mobile and cloud computing.
However, IBM’s transformation did not improve the company’s performance. This led to Berkshire’s set-up for five years, and it was not until early 2017 that it was briefly released. But the good times didn’t last long, and IBM’s stock price began to fall again, which made Buffett lose confidence in IBM.
In May 2017, Buffett said that Berkshire had sold one-third of its IBM stock in the first and second quarters. In February 2018, Berkshire disclosed in the document that it reduced its IBM stock holdings by 35 million shares to 2 million shares in the fourth quarter of last year. In the second quarter of 2018, Berkshire finally cleared IBM completely and cut the meat out.
Buffett underestimated the power of technological change to destroy user stickiness. Building a strong brand moat in traditional industries has strong continuity, but the technology industry is changing very fast, and Moore’s Law is powerful. No matter how strong customer stickiness and industry status are Industry changes are often easily subverted quickly.
Mistake 8: (TESCO) Tesco 2012 Buffett 82 years old
Berkshire Hathaway owned 415 million shares in British grocer Tesco at the end of 2012. The company has sold some stock but remains heavily invested. In 2014, the grocer inflated profits and its stock price plummeted.
In his 2014 letter to shareholders, Buffett said concerns about Tesco’s management prompted him to sell shares for the first time, resulting in a profit of $43 million. Unfortunately for the rest he didn’t move quickly.
“A careful investor, I’m embarrassed to report, would have sold Tesco sooner. I made a big mistake fooling around with this investment,” Buffett wrote. He acknowledged the move cost the company $444 million in after-tax losses. The lesson of this history for Warren Buffett is to make decisions quickly.
Mistake 9: Taking on debt from energy futures holdings 2013 Buffett at age 83
In his 2013 letter to shareholders, Buffett explained his failure with Energy Future Holdings. Equity owners contributed $8 billion and borrowed more.
“Berkshire Hathaway purchased approximately $2 billion in debt based on decisions I made without consulting Charlie,” Buffett wrote, referring to Berkshire Hathaway vice president Chairman Charles Munger.
Buffett correctly predicted that Energy Future Holdings would file for bankruptcy. Berkshire sold its stake for $259 million in 2013, but suffered a pretax loss of $873 million before that, he said. The lesson of this Warren Buffett failure is to always leave the big decisions to a business partner or trusted confidant before jumping in.
Mistake 10: Heinz Heinz 2013 Buffett at 83
Berkshire and private equity firm 3G Capital bought HJ Heinz Co. for $23.2 billion in 2013, and Heinz bought Kraft Foods Group for $54 billion two years later. For several years, shares of Kraft Heinz Co. have closely correlated with the S&P. Then, after hitting an all-time closing high above $93 in February 2017, it began a long decline.
In 2019, Berkshire took a $3 billion writedown on its investments, while Kraft Heinz took a $15 billion writedown on its Kraft and Oscar Mayer brands. In February, even before the market sell-off began, Fitch Ratings and S&P Global Ratings downgraded Kraft Heinz to junk status. Meanwhile, in 2018 and 2019, 3G sold millions of shares in Berkshire’s holdings (still holding a large stake). Berkshire’s Kraft Heinz stock was worth about $8 billion as of March 31, about $2 billion less than what it paid for it.
The mistakes made by Buffett are actually not worth mentioning in terms of his achievements. The old man also completely emptied the airline stocks that have been entangled for 30 years; In exchange for painful lessons, as a follower of value investing, only by understanding the mistakes made by the old man can we better understand the real Buffett.
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