In his 1989 shareholder letter, Warren Buffett (Trades, Portfolio) said some of his biggest blunders were not ones readily visible but rather purchases whose virtues he readily understood yet didn’t make. Those opportunities that were essentially served on a platter became costly missed opportunities due to hesitation. Other times, however, the investor’s mistakes become headline news.
On Oct. 13, Warren Buffett (Trades, Portfolio) reduced his stake in Tesco (LSE:TSCO, Financial)(TSCDY, Financial), the world’s third-largest supermarket chain, after the company announced it overstated its forecast first half profit.
As of December 2013, Buffett owned 301,046,076 shares of Tesco, which is 3.7% of shares outstanding. Buffett reduced his stake to less than 3%, selling shares worth at least $232 million at Monday’s market price. Buffett purchased the total stake for about $1 billion, meaning the shares were sold at a huge loss.
According to Buffett’s 2012 shareholder letter, Berkshire Hathaway increased its shares of Tesco from 291,577,428 in 2011 to 415,510,889 in 2012. He then cut the number to 301,046,076 in 2013.
Buffett began buying Tesco shares in 2005, but the British supermarket chain struggled to compete against other discount grocery competitors like Aldi and Lidl. In September, Tesco warned that profits were overstated by ÂŁ250 million due to accounting irregularity, which was related to incorrect reporting of the timing of payments to Tesco from suppliers.
Buffett admitted he made a huge mistake in investing in Tesco. Just like any other investor, Buffett has made plenty of mistakes in the past and has made it clear in his shareholder letters that he will make more mistakes in the future.
And just today, IBM’s (IBM, Financial) stock price plunged about 12% to $169.68. The Dow Jones Industrial average dropped about 100 points after the opening bell — IBM alone accounted for about 85 points of the plunge. Buffett owns more than 70 million shares, constituting 11.8% of his portfolio.
IBM’s quarter earnings report was weak, and the company abandoned its 2015 operating earnings target. IBM cited a marked slowdown in September in client buying behavior. The stock fell to its three-year low, which is a blow to Berkshire, but it’s too early to tell whether there will be long-term struggles for IBM.
A definite mistake was ConocoPhillips (COP, Financial), an energy corporation that Buffett has been gradually selling off for at least five years now. Buffett originally owned 85 million shares worth almost $7 billion; the investor now owns less than 1.5 million shares. The average price of shares sold is $50.02, far less than the original $82 share price, amounting to a loss of at least $1 billion in the investment.
ConocoPhillips has had negative revenue growth over the past 10 years at -9.6%. Buffett bought the stocks in 2008 when oil prices were at their highest levels.
Another blunder that Buffett has been open about was buying $2 billion in bonds offered by Texas utility Energy Future Holdings. Buffett sold the bonds last year for only $259 million, leaving Berkshire Hathaway with an $873 million loss. Buffett said he misjudged the likelihood that natural gas prices would remain depressed. Natural gas prices ended up plummeting, causing losses at the company’s coal-fired plants.
The bonds were used to finance a pre-financial-crisis deal in which energy giant TXU was bought out by private equity firms KKR, TPG Capital and Goldman Sachs’ private equity arm for $45 billion. TXU was then renamed Energy Future Holdings.
Interestingly enough, Buffett’s biggest mistake may have been purchasing Berkshire Hathaway itself, according to his 2010 interview with CNBC. When Berkshire was a struggling textile mill in its early days, Buffett would purchase the company’s stock when it sold off an underperforming mill, then sell it back in the share repurchase for a profit.
Then, when Buffett received an offer price that was an eighth of a point lower than previously agreed upon, the investor took it as an insult. He proceeded to take a controlling interest in Berkshire in order to fire the CEO. Buffett called the move a “200-billion-dollar mistake.”
In 1967, Buffett bought an insurance company for Berkshire, which should have been the company’s new venture from then on, Buffett said. Unfortunately, Buffett continued with the textile industry until 1985 when Berkshire’s last remaining textile operations were shut down. Had the focus shifted to insurance back in 1967, Buffett estimated Berkshire would be worth twice as much as it is today.
Despite Buffett’s initial blunder and bad investments throughout his career, his success is a clear result of learning from his mistakes. Berkshire’s current total assets amount to about $485 billion as of 2013 and Buffett’s personal wealth is a little more than $67 billion. The investor has made far more right moves than wrong.
