What is Warren Buffett's biggest investing mistake to date? We no longer need to guess at the answer. In an interview that aired yesterday on CNBC, the CEO of Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) said "the dumbest stock" he ever bought was ... Berkshire Hathaway. On the scale of mistakes, this was a beaut – Buffett estimates the opportunity cost of the investment at roughly $200 billion.

A $200 billion blunder for want of an eighth of a dollar
Here's the background: In 1964, Buffett was ready to tender shares he had accumulated in a small textile company -- Berkshire Hathaway -- back to the company. He met with the CEO and they agreed a price of $11.50 a share. Back in Omaha, Buffett received the official tender offer... at a price of $11 3/8! In Buffett's words, "He chiseled me for an eighth." Furious, Buffett refused to tender his shares. In a ruthless and vindictive response, Buffett instead accumulated more shares, eventually taking control of the company -- and firing the CEO.

How did this turn into a $200 billion missed opportunity? At the time of the acquisition, the money Buffett invested in Berkshire's capital represented a substantial part of his investing capital. That investment turned into an "anchor" on returns for twenty years (the original Berkshire Hathaway was eventually shuttered); meanwhile, Buffett's other investments flourished, generating enormous profits.

Buffett could have doubled up!
Buffett believes that if he had allocated the capital he sank into the textile business to his insurance business instead, the resulting conglomerate would be worth twice Berkshire Hathaway's current market value ($205.6 billion). Given the extraordinary success that Buffett achieved despite this misstep, his estimate is eminently plausible.

Among other lessons, this episode taught Buffett to focus on high-quality businesses, rather than businesses that look cheap. (This had been the approach of his mentor, Ben Graham.) This is particularly important when you choose to live with your mistakes; indeed, Buffett prefers to "keep the businesses that aren't as good as the others".

That makes perfect sense when it comes to control investments (i.e., the purchase of entire businesses); that sense of permanence is part of what makes Berkshire a preferred buyer of private companies. In many such situations, Berkshire is the sole bidder.

Buffett's approach doesn't make sense
I have a harder time understanding the rationale for that attitude when it's applied to non-control investments in publicly traded securities. In the public markets, Buffett's refusal to sell yields him no advantage the next time he wants to buy a different stock. Furthermore, he appears to apply this rule inconsistently. Take two examples of businesses that have declined in quality: Why sell down your position in Moody's (NYSE: MCO), but not in the Washington Post (NYSE: WPO)? If you have an explanation for this behavior, please add it to the Comments section below -- I'm genuinely curious.

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Fool contributor Alex Dumortier, CFA has no beneficial interest in any of the stocks in this article. Berkshire Hathaway and Moody's are Motley Fool Inside Value selections. Berkshire Hathaway and Moody's are Motley Fool Stock Advisor picks. Motley Fool Options has recommended writing covered calls on Moody's. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days.

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