Warren Buffett's Worst Trade & Biggest Mistake ~ market folly

Tuesday, October 19, 2010

Warren Buffett's Worst Trade & Biggest Mistake

Investors always remember their worst trade or biggest mistake. Warren Buffett is no different. However, Buffett's biggest mistake might surprise you. In an interview with CNBC, the Oracle of Omaha admitted that the worst trade of his career was buying Berkshire Hathaway (BRK.A). Imagine that. But if you dig deeper into his account of the story, you'll see that while his worst trade might have been buying Berkshire Hathaway, his biggest mistake was letting emotion get the better of him.

Embedded below is the video where Buffett talks about his worst trade in Berkshire Hathaway (email readers will have to come to the site to watch the video):

Extracting the transcript, here is the relevant commentary where Buffett tells his story:

"So I started buying the stock (Berkshire). And in 1964, we had quite a bit of stock. And I went back and visited the management, Mr. (Seabury) Stanton. And he looked at me and he said, 'Mr. Buffett. We've just sold some mills. We got some excess money. We're gonna have a tender offer. And at what price will you tender your stock?' And I said, '$11.50.' And he said, 'Do you promise me that you'll tender it $11.50?' And I said, 'Mr. Stanton, you have my word that if you do it here in the near future, that I will sell my stock at $11.50.'

I went back to Omaha. And a few weeks later, I opened the mail and here it is: a tender offer from Berkshire Hathaway- that's from 1964. And if you look carefully, you'll see the price is $11 and three-eighths. He chiseled me for an eighth. And if that letter had come through with $11 and a half, I would have tendered my stock. But this made me mad. So I went out and started buying the stock, and I bought control of the company, and fired Mr. Stanton. Now, that sounds like a great little morality tale at this point. But the truth is I had now committed a major amount of money to a terrible business."

So out of anger from being ripped off, Buffett made what at the time was perhaps an irrational decision in buying control of a fledgling textile company. While he eventually bought a good insurance company for Berkshire and altered his fate, things could have turned out much differently.

This just goes to show that when it comes to financial markets, you have to take emotion out of the equation. Human emotion and irrationality often lead to market folly as investors are driven by the typical fear and greed. Buffett's story, though, illustrates that other emotions not named fear or greed can take hold of an investor and lead to knee jerk reactions. Lucky for Buffett though, his emotional mistake didn't cost him dearly; he was able to turn a negative situation into a positive one.

The stock market is a game of mistakes. You make them, you pay for them, you learn from them, and you try not to make them again. Those who minimize the losses associated with their mistake(s) live to invest another day. Even the best investors in the world make mistakes and Buffett is a prime example.

So what was Buffett's biggest mistake? It wasn't necessarily buying Berkshire Hathaway; that was his worst trade. Instead, his biggest mistake was letting emotion get the better of him. And in the aftermath of Buffett's revelation, we can't help but wonder what would have happened to Buffett if he had received the full $11.50 offer and tendered his Berkshire Hathaway shares.

To learn more from the most successful investor of our generation, head to Warren Buffett's recommended reading list as well as our compilation of the top 25 Warren Buffett quotes.

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