Sunday, 26 February 2012

Warren Buffett Admits To 5 Big Mistakes

There are two big events each year for Berkshire Hathaway fans, the Annual General Meeting and the publishing of its year report with the accompanying letter of Warren Buffett. The last event happened yesterday and can be found here: here.

It is rather long (21 pages), a selection of the most important quotes can be found here.

Just a single $100 bill invested in Berkshire Hathaway in 1964 would have turned into $513,055, enough to buy a nice house in the US (especially since the recent crash in housing prices). All capital gains, since the company does not pay a dividend.

The good thing about Warren Buffett and Charlie Munger is that they openly admit their mistakes, something that is vey rare in those (and many other) circles:

The blunder: Buffett predicted in last year's letter that the U.S. housing recovery would begin within the next year and help fuel economic growth.
The explanation: Buffett doesn't mince words and says he was "dead wrong" about this one. But he says basic biology makes it unavoidable that the country will need more houses.
The quip: "People may postpone hitching up during uncertain times, but eventually hormones take over. And while 'doubling up' may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure."

The blunder: Buffett spent about $2 billion buying bonds offered by Texas utility Energy Future Holdings. But those bonds are now worth about $878 million, and he conceded Saturday that even that could be wiped out.
The explanation: Buffett comes right out and admits misjudging the company's prospects and the likelihood that natural gas prices would remain depressed.
The quip: "However things turn out, I totally miscalculated the gain/loss probabilities when I purchased the bonds. In tennis parlance, this was a major unforced error by your chairman."

The blunder: Some of the companies Berkshire Hathaway has bought don't add much to the company's bottom line. Buffett didn't single out the laggards in Berkshire's manufacturing, service and retail unit, but he acknowledged that a few produce poor returns.
The explanation: Buffett says he misjudged some of these businesses before Berkshire bought them partly because he didn't always listen to curmudgeonly Vice Chairman Charlie Munger.
The quip: "I try to look out 10 or 20 years when making an acquisition, but sometimes my eyesight has been poor. Charlie's has been better; he voted 'no' more than 'present' on several of my errant purchases."

The blunder: In 2008, Buffett more than quadrupled Berkshire's stake in ConocoPhillips when oil and gas prices were near their peak. It cost the company several billion dollars.
The explanation: Buffett said he didn't anticipate the dramatic fall in energy prices that happened later in 2008.
The quip: "During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt."

The blunder: Buffett has said that buying Berkshire Hathaway itself may have been his worst investment decision. It was a struggling New England textile mill when Buffett bought into it in the 1960s. He kept the mill running for 20 years before shutting it down.
The explanation: Buffett didn't recognize immediately that the textile business was doomed to continue losing money.

The quip: "The dumbest thing I could have done was to pursue 'opportunities' to improve and expand the existing textile operation — so for years that's exactly what I did," he said last year. "And then, in a final burst of brilliance, I went out and bought another textile company. Aaaaaaargh! Eventually I came to my senses, heading first into insurance and then into other industries."


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