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.

Glenn Greenberg on His Approach to Investing ~ Quote of the Week

Market Folly's quote of the week this time around comes from Glenn Greenberg of Brave Warrior Capital (formerly of Chieftain Capital). His quotation addresses his approach to investing which he's practiced for over 25 years:

"We are looking for good businesses where the fortunes of those businesses don't turn on slight changes in GNP statistics, where there is substantial free cash generated and put into the hands of extremely capable managements which will not go out and spend that money foolishly by over-expanding plant capacity, or paying too much for an acquisition to get into somebody else's difficult business. We look for people who have a vision of building something, building their company into a great business."

~ Glenn Greenberg

For more words of wisdom from top hedge fund managers, scroll through all of our previous quotes of the week.

Joel Greenblatt on Risk & Investment Timeframe ~ Quote of the Week

Joel Greenblatt is quite a prevalent value investor. He founded hedge fund Gotham Capital, is an adjunct professor at Columbia University's Business School, has founded the Value Investors Club and more. Most recently, he has focused on Magic Formula Investing, a strategy that seeks to buy good companies with high earnings yield and a high return on invested capital.

Market Folly's quote of the week from Greenblatt centers on the topic of how to invest when you can't handle a 40% drop in the market:

"So, what should you do? The answer is annoyingly simple. I believe the stock market is a great place to make money over the long term. Despite the last decade's poor returns for the broad market averages (and including the knowledge that you are not forced to buy the average stock, but can follow a strategy like Formula Investing to buy a portfolio of above average companies at below average prices), I firmly believe almost everyone should have a significant portion of their assets in stocks. But here it comes - few people should put ALL their money in stocks. Whether you choose to place 90% of your assets or 40% of your assets in stocks should be based largely on how much pain you can take on the downside. As painful as it might be, if you put only 40% of your money in stocks and the market falls 40%, the simple math says you'll only be down 16% (though it depends on where the rest of your assets were at the time!)

However, and most importantly, once you've chosen an amount you can handle, every time the market drops, hopefully you will no longer be tempted to sell all your stocks, put on your feety pajamas and roll up into a little ball. Over the long term, despite significant drops from time to time, stocks (especially an intelligently selected stock portfolio) will be one of your best investment options. The trick is to GET to the long term. Think in terms of 5 years, 10 years and longer. Do your planning and asset allocation ahead of time. Choose a portion of your assets to invest in the stock market-and stick with it! Yes, the bad times will come, but over the truly long term, the good times will win out-and I hope the lessons from 2008 will help get you there to enjoy them."

~ Joel Greenblatt

For more market insight from this value investor, check out Greenblatt's book: You Can Be A Stock Market Genius (a book we might add that is recommended by none other than Seth Klarman).

George Soros ~ Quote of the Week

Market Folly's quote of the week this time around comes from the founder of the legendary Quantum Fund, George Soros:

"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."
~ George Soros

The global macro aficionado's quotation quickly brings to mind the old adages of, "let your winners run" and "cut your loses quickly." He hints that some of the best attributes of successful traders/investors are those who can recognize their winners and losers. It doesn't matter if you're "wrong." Everyone has been wrong before. Successful traders and investors recognize when they've made a mistake, admit their error, swallow their pride, and cut their losses quickly.

George Soros' portfolio is profiled in our brand new quarterly newsletter: hedge fund wisdom by market folly. You can also check out his insight in his book, The Alchemy of Finance.

Lee Ainslie of Maverick Capital ~ Quote of the Week

Continuing our 'quote of the week' series here at Market Folly, we turn this time to Lee Ainslie of hedge fund Maverick Capital on the topic of buy/sell/hold:

"There are no 'holds.' Everyday you're either willing to buy more at the current price, or, if you aren't, you should redeploy the capital to something you believe does deserve incremental capital."

~ Lee Ainslie

The topic of incremental capital is one Ainslie has repeatedly focused on over the years. Essentially, he wants Maverick to always be allocating capital to investments trading at compelling prices. Ainslie will be presenting investment ideas on October 12th at the Value Investing Congress in New York City. You can save on registration by clicking here. Also, if you want to take an in-depth look at Maverick Capital's portfolio, we've detailed their positions in our brand new quarterly newsletter: hedge fund wisdom.

Warren Buffett on Holding Cash ~ Quote of the Week

Warren Buffett is one of the best sources for financial market quotations and rightly so. In fact, we've even compiled Buffett's top 25 quotes. For Market Folly's quote of the week, we turn this week to the Oracle of Omaha's stance on holding cash:

"The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time. But good businesses are going to become worth more over time. And you don’t want to pay too much for them so you have to have some discipline about what you pay. But the thing to do is find a good business and stick with it. We always keep enough cash around so I feel very comfortable and don’t worry about sleeping at night. But it’s not because I like cash as an investment. Cash is a bad investment over time. But you always want to have enough so that nobody else can determine your future essentially."

~ Warren Buffett

To view a complete summary of Buffett's latest investments as well as the portfolios of prominent hedge fund managers, head to our brand new publication: hedge fund wisdom by market folly.

Seth Klarman ~ Quote of the Week

For Market Folly's quote of the week this time around, we turn again to legendary investor Seth Klarman. To put this quotation in context, keep in mind that Klarman often holds a large amount of cash on hand for when opportunities arise. Below, he touches on the battle between human emotion and rational thinking:

"The overwhelming majority of people are comfortable with consensus, but successful investors tend to have a contrarian bent. Successful investors like stocks better when they’re going down. When you go to a department store or a supermarket, you like to buy merchandise on sale, but it doesn’t work that way in the stock market. In the stock market, people panic when stocks are going down, so they like them less when they should like them more. When prices go down, you shouldn’t panic, but it’s hard to control your emotions when you’re overextended, when you see your net worth drop in half and you worry that you won’t have enough money to pay for your kids’ college."

~ Seth Klarman

Since he brings up the notion of consensus views and so we want to make sure everyone had a chance to read this great piece outlining consensus versus variant perceptions in today's market. For more from the Baupost Group manager, check out Seth Klarman's recommended reading list as well as an in-depth profile of Klarman.

Gordon Gekko ~ Quote of the Week

Continuing the weekly compilation of quotes here at Market Folly, we give you a classic from the movie Wall Street. While everyone always quotes Gordon Gekko's notable line, "Greed is good", we wanted to highlight an equally compelling tidbit. Given the fact that the movie's sequel, Wall Street 2, is coming out in a few months, we found this quotation to be quite timely:

"The most valuable commodity I know if is information. Wouldn't you agree?"

~ Gordon Gekko

And for those of you wanting to hear it directly from the man himself, here's an embedded audio clip you can press play to hear:

Most Valuable Commodity is Information sound bite Economics sound bites

For more on the infamous Gordon Gekko, be sure to watch the DVD of the classic movie, Wall Street (and on Blu-ray here) to brush up before the new movie. For more on the upcoming sequel, head to the Wall Street 2 trailer.

Mark Cuban ~ Quote of the Week

Continuing the Market Folly quote of the week, we give you something recent from Mark Cuban, owner of the NBA's Dallas Mavericks, entrepreneur, and active individual investor. Our previous quotes have included those from Warren Buffett as well as wisdom from Seth Klarman. Here's Cuban's response when asked about the best investing advice he could give:

"Unless you think you've done more research and have better insight on a stock than a multibillion-dollar hedge fund, why are you trading? Know why others are buying when you're selling and vice versa ... When I started trading, I tended to become attached to stocks rather than doing the work to ensure I had enough information to make a good decision."

~ Mark Cuban


Our past coverage of Cuban includes his stake in Lions Gate Entertainment, which he has since tendered to Carl Icahn.

Top 25 Warren Buffett Quotes

When reading Berkshire Hathaway's annual letters or hearing him speak, one can always take away a few great quotes from value investor extraordinaire Warren Buffett. It should come as no surprise that he is so good at dishing out words of wisdom. After all, he is known as the Oracle of Omaha. We thought it would be prudent to assemble some of his best advice in one cohesive post.

In no particular order, here are 25 insightful investment sayings from legendary investor Warren Buffett:


1. "Rule No.1: Never lose money. Rule No.2: Never forget rule No.1"

2. "In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond."

3. "The fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable."

4. "Be fearful when others are greedy. Be greedy when others are fearful."

5. "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

6. "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact."

7. “You only find out who is swimming naked when the tide goes out.”

8. "Risk comes from not knowing what you're doing."

9. "If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that."

10. "Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down."

11. "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will."

12. "Price is what you pay. Value is what you get."

13. "I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over."

14. "If a business does well, the stock eventually follows."

15. "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."

16. "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well."

17. "The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands."

18. "Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks."

19. "Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."

20. "Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid."

21. "I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out."

22. "We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely."

23. "In the business world, the rearview mirror is always clearer than the windshield."

24. "The investor of today does not profit from yesterday's growth."

25. "Someone's sitting in the shade today because someone planted a tree a long time ago."


Great investing advice as always from Warren Buffett. And, in spirit of the market crisis, we wanted to toss this nice bonus quote in as well: "When you combine ignorance and leverage, you get some pretty interesting results. " Some of the investment banks (and even Warren himself) should have listened to that sound advice.

To learn more about Buffett and his investing ways, we highly recommend perusing the following reads:

- The Essays of Warren Buffett by the Oracle himself: Lessons from Warren Buffett over the years.

- The Warren Buffett Way by Robert Hagstrom: Outline of Buffett's tenets for investing.

- The Intelligent Investor by Benjamin Graham. If you had to own one book about value investing, this would most likely be it. Benjamin Graham was a legendary investor who helped pioneer the ways of value investing and taught Warren Buffett a lot of what he knows today.

- Security Analysis by Graham & Dodd (a staple on our fundamentals recommended list): Hands down THE book on fundamental analysis. Also authored by Buffett's mentor.

- The Snowball: Warren Buffett and the Business of Life by Alice Schroeder. She was hand picked by Buffett to be his biographer.

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As far as our coverage on Buffett goes, we touched on some of his recent moves in our hedge fund / market guru update. Additionally, we covered Berkshire Hathaway's Annual Report. We'll continue to track the Oracle of Omaha's latest moves so stay tuned for future updates.

Bill Ackman Quote (Pershing Square Capital)

After getting his ass handed to him thus far in his Target (TGT) position, Ackman had these instrospective words of wisdom which we wanted to share as they can be applied to any investor in the world. Ackman said,

“The investment business is about being confident enough to know that you’re right and everyone else is wrong. Yet you have to be humble enough that you recognize when you’ve made a mistake. Earlier in my career, I think I had the confidence part pretty solid. But the humbleness part I had to learn.’’

Links, Charts, Data, and a Quote

Mark Cuban is going long, if that means anything at all to you.

EarningsBreakout posts up Mastercard (MA) consumer spending data. And, as expected, the numbers are down.

Contrarian Profits thinks the only safe oil investment is tanker ships. (I have slightly different thoughts and will have a post about oil plays coming later on).

Energy analyst Gregor Macdonald points out that the Energy Sector Bullish Percent Index is at its lowest reading in 10 years:

(click to enlarge)

Steve Puri says the charts say buy:

(click to enlarge)

and appropriately, I leave you with a quote from Warren Buffett:

"Be greedy when others are fearful and fearful when others are greedy."

Quotes From Hedge Fund Manager Paul Tudor Jones

Paul Tudor Jones is one of the most successful global macro fund managers out there. He manages in excess of $17 billion at his hedge fund, Tudor Investment Corp. Although these quotes are older (taken from around 2000), they are very generalized and still serve as great advice for any investor/trader.

"I'd say that my investment philosophy is that I don't take a lot of risk, I look for opportunities with tremendously skewed reward-risk opportunities. Don't ever let them get into your pocket - that means there's no reason to leverage substantially. There's no reason to take substantial amounts of financial risk ever, because you should always be able to find something where you can skew the reward risk relationship so greatly in your favor that you can take a variety of small investments with great reward risk opportunities that should give you minimum draw down pain and maximum upside opportunities."

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"And then at the end of the day, the most important thing is how good are you at risk control. Ninety-percent of any great trader is going to be the risk control."

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Q: Let's play a word association game. I'll say a word and you say whatever comes to mind.

Q: Technical analysis

Paul Tudor Jones: Made well over half the money that I've made in my lifetime.

Q: Fundamental Analysis

Paul Tudor Jones: Made the rest.

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Source:
http://chinese-school.netfirms.com/Paul-Tudor-Jones-interview.html