Warren Buffett: The Biggest Investment Mistake of My Life | Terry Leadership Speaker Series 2001

[Transcript]

AUDIENCE MEMBER: Good morning, I know you’re famed for your success, but I was curious is there were any particular moments in your life that are mistakes or failures that you’ve made that were particularly memorable, what you may have learned from them, and if you have any particular advice for the students here in dealing with the— discouraging circumstances?

WARREN BUFFETT: What I've made—I’ve made a lot of mistakes. Biggest mistake—well, not biggest—necessarily the biggest. But buying Berkshire Hathaway itself was a mistake because Berkshire was a lousy textile business. And I bought it very cheap.

I had been taught by Ben Graham to buy things on a quantitative basis. Look around for things that are cheap. And—that I was taught that in, say 1949 or ’50, it made a big impression on me.

So I went around looking for what I call used cigar butts of stocks. And the cigar butt approach to buying stocks is that you walk down the street, and you’re looking around for cigar butts and you find on the street this terrible-looking, soggy, ugly-looking cigar with one puff left in it. But you pick it up and you get your one puff—disgusting—you throw away. But it’s free. I mean, it’s cheap. And then you look around for another soggy, you know, one-puff cigarette.

Well, that's what I did for years. It’s a mistake—although you can make money doing it, but you can’t make it with big money. It’s so much easier just to buy wonderful businesses. So now, I’d rather buy a wonderful business at a fair price than a fair business at a wonderful price.

But, in those days, I was buying cheap stock—and Berkshire was selling below its working capital per share. You got the plants for nothing, you got the machinery for nothing, you got the inventory and the receivables at a discount. It was cheap, so I bought it.

And—Twenty years later, I was still running a lousy business and that money did not compound.

You really want to be in a wonderful business because time is the friend of the wonderful business. You keep compounding, it keeps doing more business, and you keep making more money. Time is the enemy of the lousy business.

I could have sold Berkshire, perhaps liquidated it, and made a quick little profit. You know, one puff, but staying with those kinds of businesses is a big mistake. So you might say I learned something out of that mistake.

And I would have been way better off taking—what I did with Berkshire was I kept buying better businesses. I started with the insurance business, See's Candies, the Buffalo News, and all kinds of things. I would have been way better doing that with a—with a brand-new little entity that I would set up rather than using Berkshire as the platform.

Now, I’ve had a lot fun out of it. I mean, everything in life seems to turn out for the better, so I don’t have any complaints about that, but it was a dumb thing to do.

I went into USAir, I bought a preferred stock in 1989. As soon as my check cleared, the company went into the red and never got out. I mean, it was really dumb. I mean it—I’ve got an 800 number I call now whenever I think about buying an airline stock. I call them up, any hour, fortunately I can call them at 3 in the morning, I just dial and I say, “My name’s Warren and I’m an air-aholic, you know, and I’m thinking about buying this thing,” and then they talk me down.

(Laughter)

It takes hours sometimes, but it’s worth it. Believe me. If you ever think about that airline—buying an airline stock, call me and I’ll give you the 800 number because you know, you don’t want to do it.

But we got lucky in terms of how we eventually came out on it, but it was a dumb, dumb decision. All mine.

And I've done biggest—in terms of opportunity cost, eventual costs, I bought a half-interest in a Sinclair Oil Corporation filling station when I was about 20 with a guy who I was in the National Guard with. I had about $10,000 then and I put $2,000 in and I lost it all.

So that was 20% and that means that the opportunity cost is now $6 billion for that filling station, which is a big price to pay for, you know, getting to wipe a few windows and a few windshields and things like that.

So, actually, I like it when Berkshire goes down because it reduces the cost of that mistake on an opportunity cost.

(Laughs)

But the biggest mistakes we’ve made, by far, I've made, not we've made—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. And that is really—those are the ones that hurt.

They don’t show up any place. I’ve probably cost Berkshire at least $5 billion, for example, by sucking my thumb twenty years ago, or close to it, when Fannie Mae was having some troubles. We could have bought the whole company for practically nothing.

And—I don’t worry about that if it’s Microsoft, because I don't know it was—Microsoft isn’t in my circle of competence. That's why I—I don’t have any reason to think that I’m entitled to make money out of Microsoft or out of cocoa beans or whatever.

But I did know enough to understand Fannie Mae and I blew it. And that never shows up under conventional accounting. But the cost—I know the cost of it. I know—you know, I passed it up.

And—those are the big, big mistakes, and—I’ve got plenty of them. And you—unless I tell you about them in the annual report—and I resist the temptation sometimes—unless I tell you about them in the annual report, you're not gonna know it because it doesn’t show up under conventional accounting.

But omission is way bigger than commission.

There are big opportunities in life have to be seized. We don’t do very many things, but when we get the chance to do something that’s right and big, we’ve got to do it. And even to do it on a small scale, is just as big as a mistake almost as not doing it at all. I mean, you've really got to—you've got to grab it when they come.

Because they—you’re not going to get 500 great opportunities.

You would be better off if, when you got out of school here, you got a punchcard with 20 punches on it—and every big financial—every financial decision you made, you used up a punch.

You’d get very rich because you’d think through very hard each one.

I mean, If you went to a cocktail party and somebody talked about a company, you didn’t even understand what they did or couldn’t pronounce the name. But they had made some money last week on another one like it—you wouldn’t buy it if you only had 20 punches on that card.

There’s a temptation to dabble, if—particularly during bull markets, in stocks, it’s so easy, you know. It’s easier now than ever because you can do it online. You know, just—you click it in and maybe it goes up a point and you get excited about that and then you buy another one the next day and so on.

You can’t make any money over time doing that.

But if you had a punchcard with only 20 punches—you weren’t going to get another one in the rest of your life. You would think a long time before every investment decision. And you would make good ones, and you would make big ones.

And you probably wouldn’t even use all 20 punches at the—in your lifetime, but you wouldn’t need to.

Source: https://youtu.be/2a9Lx9J8uSs?si=hvfkap4Rvr_pCtVY

 

[YAPSS Takeaway]