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 shareholders, Buffett lamented "some dumb things" he did in 2008. He apologized for his ill-timed investment in ConocoPhillips, 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 1 Imports 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 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: "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 into 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 great opportunities available today:

Data from Morningstar.

Each of these companies is an easily understandable business whose strong competitive advantages mean their earnings are very likely to be materially higher five, 10, and 20 years from now. But while their 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, 10, and 20 years from now, please consider taking a free 30-day trial of our Motley Fool Stock Advisor service. Just click here to get started.

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This article was originally published April 6, 2009. It has been updated.

Rich Greifner is convinced that this is the year for his beloved Chicago Cubs. Rich owns shares of Fannie Mae. The Motley Fool owns shares of Berkshire Hathaway and Costco. Berkshire Hathaway and Costco are selections of Motley Fool Stock Advisor. Berkshire Hathaway, Costco, and Wal-Mart are Inside Value picks. The Fool has a disclosure policy.