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Warren Buffett's Worst Investment of All Time Will Shock You

By Matthew Frankel, CFP® - Updated Dec 12, 2018 at 2:59PM

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Warren Buffett's self-described worst investment of all time has actually made him billions of dollars.

Every long-term stock investor makes some bad picks from time to time, even Warren Buffett, who is widely considered the greatest of all time. However, when the Berkshire Hathaway (BRK.A -0.16%) (BRK.B -0.34%) CEO was asked what his worst investment of all time was, it wasn't a stock that lost him a lot of money -- surprisingly, it was Berkshire Hathaway itself.

First, here's how Buffett gained control of Berkshire

Warren Buffett began buying stock in Berkshire Hathaway in 1962, simply trying to take advantage of a trend in the stock's price that he had spotted. At the time, Berkshire was a textile manufacturing company, and within a few years of Buffett buying his first Berkshire shares, it became apparent that the business wasn't going to get much better, and that Berkshire's financial situation wasn't going to improve.

An investor compares a printed chart with data on a computer screen.

Image source: Getty Images.

In 1964, Berkshire's management made an oral offer to buy back Buffett's shares for $11.50 per share. However, when Buffett received the offer in writing a few weeks later, the offer was for $11.375 -- an eighth of a point lower than agreed upon. Even at this lower price, Buffett would have made more than a 50% gain on a two-year investment.

This infuriated Buffett so much that not only did he refuse to sell, but he decided to buy more Berkshire stock -- a lot more. In fact, Buffett made it his mission to buy enough stock to take control of the company and fire the manager (a man named Seabury Stanton) who had refused to honor his oral agreement to buy back Buffett's stock.

Berkshire Hathaway's amazing performance over the years

In the more than five decades since Buffett took control of Berkshire Hathaway, the company has grown to a collection of about 60 fully owned businesses, including household names such as GEICO, Fruit of the Loom, Duracell, and Pampered Chef. It also has a stock portfolio made up of 45 of the best publicly traded companies in the world, including massive stakes in Kraft Heinz, Coca-Cola, Wells Fargo, IBM, and American Express.

For Berkshire investors, all of this growth has translated into phenomenal performance. Over the past 50 years, the stock has appreciated by at an average rate of 20.8% per year -- and has gained a total of about 1,600,000% since Buffett took the helm. To put this in perspective, if you had the foresight to invest $10,000 in Berkshire in 1964, your shares would be worth just under $160 million today. So if you were ever wondering how Warren Buffett became one of the richest people in the world, this is how it happened.

Wait, how was this a bad investment?

In a letter to Berkshire shareholders, Buffett referred to the actions that resulted in his initially buying Berkshire stock as a "monumentally stupid decision," since he knew that Berkshire's business was in trouble and only bought shares because they looked "cheap."

One of Buffett's most famous quotes is "It is far better to buy a wonderful business at a fair price than a fair business at a wonderful price." At the time, Berkshire was a fair business at best.

The other mistake Buffett regrets is launching his takeover efforts simply out of spite. After the takeover, Berkshire's textile business continued to decline, and in the process cost Buffett and his investors a lot of money.

By Buffett's own estimates, if he had accepted the lower price for his Berkshire shares, and simply started buying insurance companies instead of trying to save a struggling company, he would have made an additional $200 billion in profit for himself and his shareholders over the years.

A good lesson to learn

This isn't to say that you shouldn't buy Berkshire Hathaway today -- quite the opposite, actually. Warren Buffett has built Berkshire into a well-diversified collection of businesses and investments that could work well in any stock investor's portfolio. In fact, Berkshire is the single largest stock holding in my own IRA.

My point here is that you should always make sure you're buying and selling the stocks you own for the right reasons. For example, instead of buying stocks because they're cheap (or to spite the management of a failing textile company), buy them because you want to own the business. In Buffett's case, buying for the wrong reasons worked out pretty well, but usually people who make rash investment decisions don't have such good fortune.

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