Buffett's Biggest Mistake

It doesn't happen often, but it does happen. Once in a blue moon, even the great Warren Buffett makes a mistake.

In his latest annual letter to his Berkshire Hathaway (NYSE: BRK-A  ) shareholders, Buffett lamented "some dumb things" he did in 2008. He apologized for his ill-timed investment in ConocoPhillips (NYSE: COP  ) , as well as a smaller stake in two Irish banks, which he dubbed "unforced errors."

And those were far from the first flubs Buffett has made during his illustrious investing career. His purchases of shares in Pier One and US Airways were poor investments, and he compounded his ill-fated acquisition of Dexter Shoes by using Berkshire shares instead of cash as currency. In fact, Berkshire itself was a poor investment -- Buffett greatly underestimated the capital requirements and competitive pressures endemic to the textile industry.

The greatest mistake of all
But when prompted for his greatest investing miss in an interview last year, Buffett didn't mention any of those gaffes. In fact, Buffett's biggest mistake wasn't a bad investment at all -- it was a good investment that could have been great.

"There have been a few things where I've started to buy them and then they've moved up," Buffett said. But instead of adding to his position in these great businesses, Buffett "stopped at a tiny fraction of where we should have gone."

Buffett specifically cited his failure to purchase additional shares of Fannie Mae in the early '80s and Wal-Mart (NYSE: WMT  ) in the mid '90s. "Both of those deals would have made us as much as $10 billion, and I managed to absolutely minimize the profits," he said.

The Oracle was similarly wistful about Costco (Nasdaq: COST  ) : "We own a little at Berkshire, but we should have owned a lot," Buffett lamented. He blamed his failure to buy more shares on "temporary insanity."

Don't be insane -- swing the bat!
Buffett often likens investing to a game of baseball, where every potential investment is a new pitch, and there are no called strikes. Patient investors can sit back and wait for the perfect pitch, ready to deposit that 2-0 fastball into the centerfield bleachers. But before you step in the batter's box, you must first identify what your perfect pitch looks like.

Buffett likes to swing at easily understandable businesses "whose earnings are virtually certain to be materially higher five, ten, and twenty years from now." After taking too shallow a cut on companies like Costco, he learned that "over time, you will find only a few companies that meet these standards -- so when you see one that qualifies, you should buy a meaningful amount of stock."

Finding your perfect pitch
With the stocks of many great companies trading at significant discounts to intrinsic value, experienced gurus like Buffett are swinging for the fences right now. But many individual investors are standing with their bat on their shoulder, letting these perfect pitches float on by. Look at these three great opportunities available today:

Company

Average P/E Ratio, Last 5 Years

Current P/E Ratio

PepsiCo (NYSE: PEP  )

24.2

16.3

Target (NYSE: TGT  )

17.7

12.3

Yum! Brands (NYSE: YUM  )

23.1

15.2

Data from Capital IQ, a division of Standard & Poor's.

Each of these companies is an easily understandable business whose strong brands mean their earnings are very likely to be materially higher five, 10, and 20 years from now. But while their future growth prospects remain strong, their share prices are the cheapest they've been in years. In such a volatile market, there's a chance these companies could fall farther, but I believe they're much closer to the bottom than the top.

Ready to swing?
If you'd like a little help identifying some additional companies that are very likely to be bigger and better five, ten, and twenty years from now, please consider taking a free 30-day trial of our Motley Fool Stock Advisor service. Just click here to get started.

Rich Greifner is convinced that this is the year for his beloved Chicago Cubs. Rich owns a Mark Grace rookie card, but none of the stocks mentioned in this article. The Motley Fool owns shares of Berkshire Hathaway. Berkshire, Costco are selections of both Motley Fool Stock Advisor and Inside Value. Wal-Mart is an Inside Value recommendation. PepsiCo is an Income Investor pick. The Fool has a disclosure policy.


Read/Post Comments (14) | Recommend This Article (81)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 06, 2009, at 4:10 PM, madmilker wrote:

    shorting the US dollar....and puttin' money in tat company with tat star in the name!

    but not in tat order....

  • Report this Comment On April 06, 2009, at 4:55 PM, Netteligent09 wrote:

    Time to short NASDAD related companies. Like banks and housing, there are many overvalued companies with high risk.

  • Report this Comment On April 06, 2009, at 4:58 PM, edvale wrote:

    Is Buffett the only business guy the Fool knows? Hear this: we promise to read your emails even if his name isn't prominent.

  • Report this Comment On April 06, 2009, at 5:16 PM, Nvrweakly wrote:

    I'm not sure we should take advice from someone who believes this is the Cubs' year. What was the S & P in 1908, anyway?

  • Report this Comment On April 06, 2009, at 5:30 PM, investor0416 wrote:

    You forgot to mention the BIG problem with General Re!

  • Report this Comment On April 07, 2009, at 7:39 AM, chopchop0 wrote:

    WMT is eating TGT's breakfast right now. They've revamped their stores and consumer analysis shows they are grabbing a bigger slice of middle- and upper-income shoppers, who are buying more than just low-margin grocery items.

    When this is all over, I suspect that market share will stick, and TGT will be worse off for it.

  • Report this Comment On April 07, 2009, at 8:20 AM, jackspratnofat wrote:

    As a shaire holder of Berk I sold most of my stock when the CEO sat on Stage with the same type of Person that would KILL this Country. And are doing so as we set here. One can not be a owner of a large or even a SMALL buessness, and vote in the same People that would EAT YOUR LUNCH!

  • Report this Comment On April 07, 2009, at 10:37 AM, churchill112 wrote:

    Jackspratnofat forgets that the type of person who has tried to KILL this country has been the greedy morons in residence on Wall Street and is not the guy with whom Buffet sat with on stage.

  • Report this Comment On April 07, 2009, at 10:44 AM, tomd728 wrote:

    Man!!!!!!! I must commend jacksprat on his take of

    late with Buffett.

    Any red blooded capitalist would not sit in the same

    building as Obama.Now Mr.Buffett is not the kind of

    guy one would call a sycophant but what the hell was

    he thinking ?

    Sure ! You want to be with a candidate you know is

    going to win or be so out of the focus to let your shareholders have a clue as to what the hell you're

    thinking.

    I really should not care at this point as BRK has lost it's luster and Mr.Buffett has lost his touch with the people.

  • Report this Comment On April 09, 2009, at 2:00 PM, McCrikey wrote:

    When can we expect Buffet to admit he picked a dud for president?

    Also, is he paying enough taxes yet? He likes to complain he isn't.

  • Report this Comment On April 09, 2009, at 11:56 PM, Muhammad4M wrote:

    Thankfully i invested in the Mosaic fund 3 years ago which has compunded at 70% p.a rather than berkshire

  • Report this Comment On April 10, 2009, at 4:47 PM, watchemfall wrote:

    Buffet just said on CNN that the state in the economy is like being in a "war".

  • Report this Comment On April 10, 2009, at 4:51 PM, watchemfall wrote:

    OOPS! CNBC, sry 'bout that.

  • Report this Comment On June 11, 2009, at 2:23 AM, starbucks4ever wrote:

    He regrets not purchasing FNM? We all know how that would have played out.

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