Though the Oracle of Omaha is widely considered to be the greatest investor of all time, even he managed to make a few mistakes. Here's a look at three of them.
Warren Buffett's decision to buy a large stake in multinational energy conglomerate ConocoPhillips (NYSE:COP) was not a mistake because he bought it, but rather that he bought the stock at the wrong price. The general idea was that Buffett was making a play for future energy prices, with many believing that oil prices would only increase over the long term. However, this did not play out.
ConocoPhillips was Buffett's way of benefiting from the expected jump in oil prices. The company was and still is very successful, but buying stocks in a great company does not make a great investment. Since crude oil prices were well over $100 a barrel at the time (2008), oil company stocks were already way up. Buffett lost roughly $2 billion as he bought the shares for $7 billion despite only being worth $4.4 billion.
Buffett put this poor investment down to getting swept up in the excitement surrounding oil prices at the time. A more detached investor might have recognized that the price of crude oil has always exhibited tremendous volatility and that oil companies have long been subject to boom and bust cycles.
Back in 1989, airline stocks were gaining popularity and none more so than USAir. (The company changed its name to US Airways in the 1990s and later merged with Amercian Airlines.) Buffett bought into this airline, which had achieved tremendous revenue growth since its founding 50 years earlier.
Buffett purchased $358 million of USAir preferred stock with 9.25% dividend, mandatory redemption in 10 years, and right to convert into common at $60 a share. The investment quickly turned sour, as USAir didn't achieve enough revenue to pay the dividends due on his stock, and approached bankruptcy. Only down to a stroke of luck, Buffett was able to offload his shares at a small profit at a later date.
Buffett still regrets his first foray into the airline industry to this day. In a 2007 letter to shareholders, he stated that he bought the stock as a security, but would never do it again. The airline industry, in general, is fickle because of a lack of customer loyalty, massive competition, and customers' tendency to choose the cheapest option. As a whole, airline investments rarely produce positive returns for investors.
3. Dexter Shoe Co.
In 1993, Warren Buffett paid $433 million for the Maine-based apparel company Dexter Shoe. Instead of paying in cash, Buffett actually made the purchase using Berkshire Hathaway Class A stock. Berkshire stock is worth eight times as much today.
Dexter ended shoe production in the United States and Puerto Rico in 2001, and Berkshire folded what was left into its H.H. Brown Shoe Group unit. In a 2008 open letter to his shareholders, Buffett declared: "To date, Dexter is the worst deal that I've made."
The main reason this is one of Buffett's costliest mistakes is the fact that by giving away $433 million in Berkshire shares, he had essentially cost the shareholders a potential $3.5 billion (what those shares would be worth now). In his own words: "I gave away 1.6% of a wonderful business -- one now valued at $220 billion -- to buy a worthless business."
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Berkshire Hathaway. Read the full disclosure policy here.