What was Buffett’s biggest mistake?
Do you guys know what was the dumbest stock Warren Buffett ever bought?
Drum roll, please…
The stock of his own company, Berkshire Hathaway!
Berkshire was a textile business when Buffett bought it in 1962.
The reason he bought it? It was a bargain!
If you follow Buffett, you know what’s his secret recipe for investing success.
You need 4 things:
- a company you understand
- a company with excellent business economics
- able and honest management
- a cheap price!
The Berkshire business was both cheap and easy to understand.
But excellent business economics was missing from Buffett’s recipe!
At the time Buffett bought Berkshire in Nebraska most northern textile plants had closed.
Buffett thought he could revive the business by optimising operations and appointing good managers. Ken Chace, a long-time employee and his successor Gary Morrison did a great job.
The business improved, generated profits until 1980 but consumed huge amounts of cash.
It was not only Berkshire which was struggling. 250 textile mills had closed by the time Buffett decided to close down textile operations in 1985.
And how wouldn’t have when foreign textile businesses used to pay their workers a fraction of the US minimum wage?
Good management can only slow the rate of decline of a business with poor economics.
Buffett would later say: “Good jockeys will do well on good horses, but not on broken-down nags.”
Lessons from Buffett’s mistake:
- For all of you guys that you do stock picking, you need to check all Buffett’s points before you buy individual stocks.
- As the markets have become more and more efficient, an attractive price is no longer enough. You need to buy a company at a very attractive price.
- Address a problem and avoid losses as soon as possible. I’m not saying dump your stocks when everybody seems pessimistic for no reason. Buffett writes in his 1999 shareholder letter: “We made few portfolio changes in 1999. As I mentioned earlier, several of the companies in which we have large investments had disappointing business results last year. Nevertheless, we believe these companies have important competitive advantages that will endure over time.”
And as I love making associations between investing and life itself, let me say that it’s much easier for someone to excel by building on strengths rather than weaknesses. I can’t recommend Peter Drucker’s book On Managing Oneself which is all about knowing thyself and capitalising on one’s strengths. The worst thing in life is to get good at the wrong thing. Ken Chace and Garry Morisson got good at the wrong thing and it took them and Buffett years to realise they were on the wrong boat. Berkshire textile operations would never be a good earner no matter how brilliant the management was. Exceptional results happen when you optimise on the right things. As Buffett said in another letter: “If you want to get a reputation of a good businessman, be sure to get into the right business”.
