... [L]ast year I made a major mistake of commission (and maybe more; this one sticks out). Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak ... I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.
-- Warren Buffett in 2008 letter to shareholders (emphasis mine.)
At the time of the letter's publication, Berkshire Hathaway (NYSE:BRK-B) (NYSE:BRK-A) had already seen the value of its stake in ConocoPhillips (NYSE:COP) decline almost $3 billion in value. Buffett has been gradually selling off the stake, working to make the best of what he must see as a bad situation. This past quarter, Berkshire further reduced its stake in ConocoPhillips down to just over 1.3 million shares, vastly cut from the nearly 84 million held at the end of 2008.
What can we learn from Buffett's mistake? Let's take a look not just at ConocoPhillips, but at the entire portfolio that Buffett -- and now also Ted Weschler and Todd Combs -- manages. The reality is, the best way to address a major mistake -- and it looks like the way Buffett dealt with his billion-dollar blunder -- is to keep investing, and not dwell on one bad decision.
HIstory lesson: Even Buffett can't see the future
Back in 2008, the Berkshire stock portfolio was valued at $49 billion, and the $7 billion invested in ConocoPhillips was the largest amount of money spent on any single stock, larger at the time even than the dollars invested in Buffett's favorite bank, Wells Fargo & Co. (NYSE:WFC). As a matter of fact, it was more money invested than the total dollars spent to buy shares of The Coca-Cola Company (NYSE:KO), The American Express Company (NYSE:AXP), and U.S. Bancorp (NYSE:USB) combined.
Within the next year, Berkshire would vastly reduce its stake in ConocoPhillips, selling off about half of its position at a loss:
The graph above shows the market price of ConocoPhillips from the time frame Berkshire bought through the time frame Buffett sold off the first half of its stake. As you can see, the share price was well off the price Berkshire paid, and it probably created $1.5 billion in real losses.
But with some context, the entire Berkshire stock portfolio lost $25 billion from 2007 to 2008, so the $3 billion in lost value of the ConocoPhillips stake was just part of the bigger market collapse that affected Berkshire's portfolio the same way it affected yours and mine.
As you can see from the tables above, the Berkshire portfolio, with a few notable exceptions like the big reduction in ConocoPhillips, remained largely unchanged. Actually, Buffett spent about $1.5 billion to increase Berkshire's investments in Wal-Mart and U.S. Bank, plus billions in investments that aren't listed as common stock.
Fast-forward to today, and a lesson we can all learn
The Berkshire stock portfolio value at the end of 2013 was $117 billion, more than double the low point in 2008, and 56% higher than the 2007 peak of $75 billion. Here's the kicker: The growth in value of the Berkshire portfolio is a combination of both share price appreciation and new stock purchases. The cost of the Berkshire portfolio -- measured by dollars spent to buy the stocks held -- was $34 billion at the end of 2009. At the end of 2013, it was $56.5 billion, or just over $22 billion in "new money" invested, while the total value of the portfolio had grown by $58 billion, well over double the amount of new money invested since the downturn.
The lesson? Buffett -- like most investors who've come through recessions successfully -- stuck to his process. He continued to look for great businesses that he could invest in at what he considered fair prices, while holding onto the core companies in the Berkshire portfolio. Even Buffett's decision to sell off a large portion of the ConocoPhillips stake wasn't about ConocoPhillips' business prospects, so much as it was a means to raise capital for what would become the largest acquisition in Berkshire history -- BNSF Railways.
BNSF has contributed more than $14 billion in net income to Berkshire since being acquired.
Foolish bottom line: The process is what matters most
Buffett is undoubtedly a better stock picker than most of us. The man has spent more than half a century reading financial reports every day; he's forgotten more than many of us will ever know. But what we can all learn from -- and apply to our own investing -- is his focus on the process first, and the results as being almost secondary.
In short, we can all be more like Buffett by staying in tune with our larger goals, and remembering that the process is the only thing we can control. The market -- especially in the short term -- can be irrational, and unforeseen and unpredictable events can have major repercussions, but over time, owning shares of great businesses will overcome the market's occasional insanity. A patient approach that's about buying great businesses, holding them for many years, and investing on a regular basis, has worked for Buffett. It will improve your odds of great returns, too.
Jason Hall owns shares of Berkshire Hathaway and Wells Fargo, and manages a family account with shares of Coca-Cola. The Motley Fool recommends American Express, Berkshire Hathaway, Coca-Cola, and Wells Fargo. The Motley Fool owns shares of Berkshire Hathaway and Wells Fargo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.