One of the most admirable features of Warren Buffett's 83-year investing career (he bought his first stock at age 11) is how freely he admits to mistakes at Berkshire Hathaway (BRK.A +0.17%) (BRK.B +0.02%). In each of his annual letters to shareholders, he could simply tout Berkshire's massive historical outperformance, and highlight his biggest winners.
But the Oracle of Omaha, who analyzed Dale Carnegie's book How to Win Friends and Influence People as a youth, seems to have taken the book's 12th Principle, to admit mistakes "quickly and emphatically," to heart. In his letters and public statements, he shines a light on his missteps and mistakes he says are purely his own.
Yet you can't achieve a return from 1965 to 2024 of 5,500,000% without getting a few things right. What most people don't understand is that in Buffett's case, it really does come down to getting just a few things right. In his own words, Berkshire's multimillion-percent rise came down to "about a dozen truly good decisions -- that would be about one every five years."
"The weeds wither away in significance as the flowers bloom"
To understand the power of just a few good ideas, consider two investments that Buffett made in 2011 that turned out very differently.
In 2011, Buffett announced that, despite his long-standing aversion to investing in technology firms, he had invested $10.7 billion in International Business Machines (IBM +1.49%) buying 64 million shares. Explaining his decision, he suggested that IBM had the "moat," or protection in its business model from competitors, that he cherishes in investments, saying, "It's a company that helps IT departments do their job better. There is a lot of continuity to it."
But Buffett got his IBM bet wrong. For most of the time that Berkshire held shares, the tech titan was on a 22-quarter streak of declining revenue. By 2018, Buffett had sold his last shares, hinting that the company faced stronger competition than he had reckoned with.
Now, the IBM investment wasn't a total disaster for Berkshire Hathaway, or even unprofitable. While shares trended lower since 2011, dividends allowed the investment to eke out an estimated 5% overall gain. But given how the S&P 500 returned around 16% in that time frame, it stung for a $10.7 billion investment to return just 5% over seven years.
But also in 2011, Berkshire made a much more promising investment in buying shares of Visa (V +1.22%). In the 14 years since, Visa shares have risen from Buffett's average initial purchase price of around $22 per share to about $340 per share today, a more than 15-fold increase. Along the way, Visa hiked its dividend by 1,687%, giving Berkshire an effective 12.1% yield on its initial investment.
NYSE: V
Key Data Points
Outcomes like this are what Buffett means by when he said in his 2022 letter, "The weeds wither away in significance as the flowers bloom." The gains from these rare, "about once every five years" home runs can overwhelm flat investments like the IBM disappointment, or even missteps like his 1993 investment in Dexter Shoe, in which his $433 million position "rather promptly" went to zero.
Image source: Getty Images.
It's a striking coincidence that the total amount Buffett invested in Visa is almost identical to the amount lost on the Dexter Shoes blunder. In the former instance, the initial investment turned into a 15-bagger, plus an explosively growing income stream resulting from 14 prodigious dividend hikes. In the latter, shares went to zero.
Put them together, accounting for the fact that Buffett added to his Visa position in later years, and it's about a 277% increase, not including dividends. This asymmetrical upside shows how weeds "wither in significance" as Berkshire's winning picks extend their run.