Though the ‘Oracle of Omaha’ is widely considered to be the greatest investor of all time, even he managed to make a few mistakes.
The Five On Friday is our weekly newsletter covering the investing world’s top stories each week. If you want to subscribe for more great content, simply sign up here.
Warren Buffett’s decision to buy a large stake in multinational energy conglomerate ConocoPhillips (NYSE: COP) was not a mistake because he bought it, but more that he bought the stock at the wrong price. The general idea was that Buffett was making a play for future energy prices, with many believing that oil prices would only increase over the long term. However, this did not play out.
ConocoPhillips was Buffett’s way of benefiting from the expected jump in oil prices. The company was and still is very successful, but buying stocks in a great company does not make a great investment. Since crude oil prices were well over $100 a barrel at the time, oil company stocks were already way up. Buffett lost roughly $2 billion on this as he bought the shares for $7 billion despite only being worth $4.4 billion.
Buffett put this poor investment down to him getting swept up in the excitement surrounding oil prices at the time. A more detached investor might have recognized that the price of crude oil has always exhibited tremendous volatility and that oil companies have long been subject to boom and bust cycles.
2. U.S. Air
Back in 1989, airline stocks were gaining popularity and none more so than that of US Air, known as US Airways Group (NYSE: LCC). Buffett bought into this airline which had achieved tremendous revenue growth since its founding 50 years previous.
Buffett purchased $358 million of US Air preferred stock with 9.25% dividend, mandatory redemption in 10 years, and right to convert into common at $60 a share. The investment quickly turned sour on Buffett, as US Air did not achieve enough revenues to pay the dividends due on his stock, and approached bankruptcy. Only down to a stroke of luck, Buffett was able to offload his shares at a small profit at a later date.
This was Buffett’s only foray into the airline industry but still regrets it to this day. In a 2007 letter to shareholders, he stated that he bought the stock as a security, but would never do it again. The airline industry, in general, is fickle, as there is no customer loyalty, a massive amount of competition, and is often reduced to simply who is the cheapest. As a whole, airline investments rarely produce positive returns for investors. Just look at Boeing’s ongoing issues: Boeing and Muillenburg: Turbulence Ahead.
3. Dexter Shoe Co.
In 1993, Warren Buffett paid $433 million for the Maine-based apparel company, Dexter Shoes. Instead of outright purchasing in cash, Buffett actually made the purchase using Berkshire Class A stock. If Dexter was still around today, it would be worth 8 eight times this on Berkshire stock alone. The key point here being ‘if’ it was still around…
Dexter didn’t make it that long. It ended shoe production in the United States and Puerto Rico in 2001, and Berkshire folded what was left into its H.H. Brown Shoe Group unit. In a 2008 open letter to his shareholders, Buffett declared: ‘To date, Dexter is the worst deal that I’ve made.’
Check out our 3 Sportswear Stocks Knocking it Out of the Park.
The main reason this is one of Buffett’s costliest mistakes is the fact that by giving away $433 million in Berkshire shares, he had essentially cost the shareholders a potential $3.5 billion (what those shares would be worth now). In his own words: ‘I gave away 1.6% of a wonderful business — one now valued at $220 billion — to buy a worthless business.’
Even the greatest have their off days.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Berkshire Hathaway. Read our full disclosure policy here.