Warren Buffett (Trades, Portfolio) is widely regarded as one of the most successful investors of all time. As the CEO of Berkshire Hathaway Inc. (BRK.A, Financial) (BRK.B, Financial), he has generated 20% annualized returns for shareholders over the past 50 years. This remarkable track record has earned him nicknames like the "Oracle of Omaha" and the "Wizard of Investing."
However, despite all his success, even Buffett has made some poor investment decisions throughout his long career. At a lecture, he was asked about his biggest mistakes and what he learned from them. He explained, "The biggest mistakes I've made by far are mistakes of omission and not commission. I mean, it's the things I knew enough to do. They were within my circle of competence, and I was sucking my thumb... Those are the ones that hurt."
He said he probably cost Berkshire Hathaway at least $5 billion by not buying Federal National Mortgage Association (also known as Fannie Mae) (FNMA, Financial) 20 years ago when it was in trouble. So, yes, even the great Oracle of Omaha makes mistakes. No matter how outstanding his track record is, he is still human.
Let's look at some of Buffett's other errors and the lessons he learned along the way.
Buying Berkshire Hathaway
Ironically, Buffett's purchase of Berkshire Hathaway itself in the 1960s was one of his biggest mistakes. At the time, Berkshire was a struggling textile company, but its stock was trading below book value – a criterion Buffett's mentor Benjamin Graham taught him to look for. So he snapped it up.
Yet, as Buffett admits, "Staying with that kind of business is a big mistake." He should have shut down or sold the textile mills and redeployed the cash into more promising businesses. Instead, he held onto the deteriorating business for 20 more years. He estimates this mistake cost Berkshire Hathaway shareholders $200 billion in lost opportunity cost.
The lesson here is not to cling to struggling businesses with weak economics. As Buffett learned, it is better to focus capital on companies with durable competitive advantages that can thrive over time. Even if the price seems cheap, avoid businesses in highly competitive or declining industries.
Missing key opportunities
Buffett's biggest regrets are not what he bought, but what he missed buying. As he explained, "The biggest mistakes I've made by far are mistakes of omission and not commission."
For example, he passed up the chance to buy Fannie Mae when it was in trouble 20 years ago. He also admits missing the boat early on with tech giants like Amazon.com Inc. (AMZN, Financial), Alphabet Inc. (GOOGL, Financial) and Microsoft Corp. (MSFT, Financial) because they were outside his circle of competence at the time.
These errors of omission probably cost Berkshire Hathaway shareholders billions. "Those are the big, big mistakes," Buffett lamented. When high-quality companies fall into his investing sweet spot at attractive prices, he said you must "seize the opportunity when it comes up."
Do not let fear or limited expertise stop you from investing in a great business at a fair price. While you want to stay within your circle of competence, also widen that circle over time so you don't miss out on new opportunities.
Taking Too Much Risk
Another mistake was paying too high a price for ConocoPhillips (COP, Financial) in 2008. Buffett bought when oil prices were sky-high, betting prices would keep rising. But when oil plunged, he sold the stock at a multibillion-dollar loss.
The takeaway is not to get caught up in irrational market exuberance. As Buffett advised, "When investing, pessimism is your friend, euphoria the enemy."
Wait patiently for quality companies to trade at reasonable valuations. Tune out the market noise and stick to your own analysis. Do not sacrifice valuation standards, regardless of how exuberant others may be.
Stubbornly ignoring the warning signs
Buffett made a costly mistake by sticking with his large investment in Tesco Corp. (TESO, Financial) as the U.K. retailer's business deteriorated. By 2012, he had built up a $1.7 billion stake amounting to over 5% of the company.
But over the next two years, Tesco faced plunging sales, new competitors and an accounting scandal. Its stock price sank nearly 50%. Despite these obvious problems, Buffett delayed selling his shares. By the time he finally unloaded his position, it cost Berkshire Hathaway shareholders an estimated $444 million.
The lesson is that conviction is needed not just in buying, but also in knowing when to decisively sell. Do not let biases cloud your judgment - be willing to quickly admit mistakes rather than double down on them.
Straying from the circle of competence
In the late 1980s, Buffett picked up a large stake in USAir, believing the airline had enduring competitive advantages. But he was wrong – the industry was too challenging to earn excess returns over time. As profits plunged, Buffett admitted airlines fell outside his circle of competence.
This mistake taught him to stick with businesses he thoroughly understands, like insurance and consumer brands. Do not invest in complex or highly competitive industries unless you grasp them inside and out. Stay within your circle of competence where you have an analytical edge.
Clinging to sunk costs
Berkshire Hathaway's purchase of Dexter Shoe in the 1990s was a multibillion-dollar disaster. Buffett was attracted by its high returns on capital. But soon after acquiring it, cheap foreign imports crippled the domestic shoe industry.
Rather than shuttering plants, Buffett clung to the sinking business for far too long. He suggests investors should focus on future prospects, not past costs. Do not throw good money after bad or compound an error due to regret over sunk costs. Be willing to cut losses if the investment case has degraded.
Forgoing due diligence
In 2011, Berkshire Hathaway purchased Lubrizol Chemical based on a tip from a company insider. However, the executive had breached Buffett's trust – he bought Lubrizol stock right before recommending it, reaping millions without disclosing it.
This fiasco taught Buffett a valuable governance lesson. Have stringent processes in place for conflicts of interest and test recommendations through rigorous due diligence. Do not neglect risk controls, even when dealing with trusted insiders. Verify tips thoroughly before investing rather than relying on someone's word.
Mistakes of omission vs. commission
Despite his blunders, Buffett feels his biggest errors were mistakes of omission - missed opportunities.
Omission mistakes occur when an investor fails to act when they should have. Buffett's biggest omission regrets are not investing early on in technology companies like Microsoft, Amazon.com and Alphabet that were outside his circle of competence at the time. Another, as mentioned previously, was not buying Fannie Mae, which was within his circle of competence and he feels is an even more egregious error.
In contrast, errors of commission happen when an investor acts wrongly, like overpaying for stock or investing in a business they do not understand.
While both errors are costly, Buffett views omitted chances as more haunting. The next Microsoft may not come back around. But a commission mistake usually leads to contained losses and important lessons learned.
So be vigilant against missing out on opportunities and actively committing errors. Expand your circle of competence over time so you do not miss out on new opportunities, but also learn lessons from the mistakes you do make to reduce the likelihood of repeating them. Mastering both sides of this discipline is vital to investing greatness.
