With a net worth of around $104 billion, Warren Buffett has obviously made plenty of good decisions along the way. But the legendary investor readily acknowledges that he's made his fair share of mistakes.  

What is Buffett's biggest mistake of all? You might be surprised. The dumbest stock Buffett ever bought was also his most successful investment ever.

Warren Buffett with people in the background.

Image source: The Motley Fool.

Buffett's biggest blunder

In an interview with CNBC in 2010, Buffett was asked to identify the worst trade he had made in his long investing career. He didn't have to think about the response. Buffett immediately replied that "the dumbest stock" he ever bought was...Berkshire Hathaway (BRK.A 0.48%) (BRK.B 0.44%)

Was Buffett only joking? Nope. He went on to explain the circumstances behind his initial investment in Berkshire Hathaway. 

Buffett became aware of what was then a struggling textile company in 1962. He began to buy a few shares. By 1964, the investment partnership he ran had amassed a significant stake in Berkshire. Seabury Stanton, the chairman and CEO of Berkshire Hathaway at the time, was a big fan of stock buybacks. He reached out to Buffett about selling his shares back to the company. Buffett agreed to sell for $11.50 per share.

The story could have ended with Buffett's partnership making a tidy profit. When Buffett received the tender offer from Berkshire, though, it was for only $11.375 per share. He was furious at having been misled. Instead of selling his shares back to Berkshire, Buffett decided to buy enough stock to take control of the company.

However, he soon realized that he had made a big mistake. Berkshire's textile business was, in Buffett's own words, "on a death march." He likely had this experience in mind years later when he wrote, "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

Making lemonade from a lemon

So how did Buffett's biggest blunder turn into his most successful investment ever? Buffett reminisced about the turn of events in his latest letter to Berkshire Hathaway shareholders. He wrote that after a few years "came a stroke of good luck."

In 1967, Buffett bought an insurance company, National Indemnity, and rolled it into Berkshire's operations. Buffett would later acknowledge that if he hadn't acquired the insurer, Berkshire "would be lucky to be worth half of what it is today." 

The purchase of National Indemnity really opened Buffett's eyes to the favorable economics associated with operating an insurer. He went on to acquire other insurance companies through the years, notably including GEICO in 1996 and General Reinsurance in 1998.

Buffett also began scooping up other businesses and investing in the stocks of publicly traded companies. He held onto Berkshire's textile operations for around 20 years before finally throwing in the towel. By that point, though, Berkshire Hathaway had become much more than just a textile company.

Just how successful has Buffett's lemon-to-lemonade story been? As of the end of 2022, Berkshire Hathaway had delivered a total return of 3,787,464% since Buffett took control in 1964. That translates to a compound annual growth rate of 19.8%. By comparison, the S&P 500 delivered an annualized return of 9.8% during the same period with dividends included. 

Learning from Buffett's other mistakes

Regular investors won't be able to flip big blunders into hugely successful investments the way Buffett did. But you can learn from the way he has persevered after making other mistakes.

Buffett revealed how to do so in his recent letter to Berkshire shareholders. In the letter, he explained what his "secret sauce" to investing success has been. Buffett summarized the secret in just 10 words: "The weeds wither away in significance as the flowers bloom."

The "weeds" represent the stocks you buy that turn out to be mistakes. The "flowers" represent the stocks that go on to be successful. Over time, the successes will more than makeup for the mistakes.

By the way, the final chapter with Buffett's greatest investing success still hasn't been written. Buffett doesn't think it will be. He wrote to shareholders last month: "At Berkshire, there will be no finish line."