Even the best investors make mistakes and Warren Buffett is no exception. Unlike many in the financial world, he is refreshingly candid about his errors and often discusses them openly in his annual shareholder letters.
Buffett understands that failure is an integral part of investing. His ability to acknowledge mistakes, analyse what went wrong and apply those lessons to future decisions has been instrumental in his long-term success. His errors, while costly, have helped shape his investment philosophy and reinforce core principles such as patience, discipline and staying within his circle of competence.
By studying Buffett’s biggest investment mistakes, investors can gain valuable insights into the importance of due diligence, risk management and long-term thinking. Understanding these failures not only helps avoid similar pitfalls but also provides a roadmap for making better investment decisions.
MAJOR INVESTMENT MISTAKES BUFFETT HAS ACKNOWLEDGED
Dexter Shoe Company: Overpaying and using Berkshire stock as currency
One of Buffett’s most infamous investment blunders was his 1993 acquisition of Dexter Shoe Company, a Maine-based footwear manufacturer. At the time, Dexter seemed like a solid investment – it had a history of profitability, strong brand recognition and a competitive market position. However, Buffett made two critical errors in this deal:
- He overestimated Dexter’s competitive advantage: Buffett believed that Dexter had a durable moat, but he underestimated the impact of foreign competition. As cheap imports flooded the US market, Dexter’s cost structure became uncompetitive, leading to its rapid decline.
- He paid using Berkshire Hathaway stock: Instead of paying in cash, Buffett used $433m worth of Berkshire Hathaway shares to acquire Dexter. The true cost of this mistake became apparent years later – had he held onto those shares, they would be worth billions today due to Berkshire’s growth.
In hindsight, Buffett described this deal as one of his worst, stating in a shareholder letter: "To date, Dexter is the worst deal that I’ve made. But I’ll make more mistakes in the future – you can bet on that."
Lesson for investors
- Competitive advantages must be carefully analysed. A strong brand alone is not enough if external forces (such as globalisation) erode profitability.
- Always assess industry risks. Even well-established companies can lose their edge due to shifts in competition, technology or consumer behaviour.
- Avoid using valuable assets to buy declining businesses. Buffett has since preferred using cash rather than stock for acquisitions, preserving Berkshire Hathaway’s long-term value.
Tesco: Misjudging a declining business
Buffett has often spoken about his admiration for strong brands and businesses with predictable earnings. That thinking led him to invest in Tesco, the UK’s largest supermarket chain. Initially, the investment seemed promising – Tesco had a dominant market share and strong customer loyalty. However, Buffett failed to recognise several red flags:
- Growing competition: Discount retailers like Aldi and Lidl were gaining market share rapidly, eroding Tesco’s pricing power.
- Management failures: Tesco's leadership engaged in questionable accounting practices to inflate profits, ultimately leading to a scandal and loss of investor confidence.
- Declining fundamentals: Buffett held onto Tesco even as its financial position weakened, only selling his stake in 2014 at a significant loss of around $444m.
In his 2014 shareholder letter, Buffett admitted his mistake, writing: “An attentive investor, I’m embarrassed to report, would have sold Tesco shares earlier. I made a big mistake with this investment by dawdling.”
Lesson for investors
- Management integrity is crucial. Even a strong business can falter if leadership engages in unethical or misleading practices.
- Stay alert to industry changes. A dominant market position does not guarantee future success if disruptive competitors gain momentum.
- Don’t be afraid to cut losses. Buffett held onto Tesco longer than he should have, demonstrating that even experienced investors can struggle with knowing when to exit.
Airlines: Investing despite an unfavourable long-term outlook
Buffett has had a complicated relationship with the airline industry. For decades, he avoided airline stocks, famously stating that they were poor investments due to high capital costs, unpredictable fuel prices and cyclical downturns. However, in 2016, he reversed course and invested heavily in four major US airlines – American Airlines, Delta, Southwest and United.
Initially, these investments performed well, benefiting from industry consolidation and rising travel demand. However, when the Covid-19 pandemic hit in 2020, airline stocks plummeted. Buffett quickly sold his entire airline portfolio at a significant loss, acknowledging that the industry’s long-term outlook had changed fundamentally.
Buffett later remarked: "We made that decision in terms of the airline business. We took money out of the business basically even at a substantial loss. We will not fund a company that... where we think that it is going to chew up money in the future."
Lesson for investors
- Beware of industries with high fixed costs and volatility. Airlines require significant capital investment but operate with thin profit margins, making them vulnerable to economic downturns.
- A temporary improvement in an industry does not mean the fundamental risks have disappeared. Buffett’s initial success in airlines blinded him to their long-term challenges.
- Be willing to admit when circumstances change. Rather than holding onto his airline stocks in hope of a recovery, Buffett acted decisively to exit the position.
KEY TAKEAWAYS FOR INVESTORS
Why thorough due diligence is crucial
One of Buffett’s biggest lessons from these mistakes is the importance of rigorous research. While he is known for his deep understanding of businesses, even he has underestimated risks or overvalued companies. Investors must carefully evaluate competitive dynamics, industry trends and management quality before committing capital.
Due diligence should involve more than just looking at financial statements. Investors should consider external factors such as technological disruption, regulatory changes and shifts in consumer behaviour that could impact a company's future prospects.
The dangers of overconfidence and deviating from core principles
Buffett’s biggest mistakes often stemmed from overconfidence – believing a company’s past success would guarantee its future performance. He has acknowledged that when he strayed from his core principles (such as staying within his circle of competence or prioritizing strong economic moats), he made costly misjudgements.
For individual investors, this serves as a warning against chasing trends, making impulsive investments or assuming that past performance alone ensures future success. It is essential to remain disciplined and focus on fundamentals.
How Buffett’s mistakes shaped his future investment approach
Every mistake Buffett has made has contributed to refining his investment philosophy. After Dexter Shoe, he avoided using Berkshire Hathaway stock for acquisitions. After Tesco, he became more cautious about management credibility. After airlines, he reaffirmed his belief in avoiding capital-intensive industries.
Buffett’s ability to acknowledge his mistakes and adapt has been a crucial factor in his long-term success. Rather than dwelling on losses, he treats them as learning experiences and moves forward with a more refined strategy.
For investors, the key takeaway is that mistakes are inevitable, but how you respond to them determines your long-term success. Learning from errors, making adjustments and staying true to a well-defined investment strategy can help navigate the markets more effectively.
This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.