Learn from Warren Buffett's Worst Investments

Stock Watch

The Worst Investments Warren Buffett Ever Made

Even the Oracle of Omaha has his share of misses.


It’s hard to fault the investing decisions of Warren Buffett. He isn’t called the Oracle of Omaha for nothing. If you had put $10,000 into Berkshire Hathaway (symbol BRK-B, $136.63) in 1996, when the company first offered its Class B shares—which come with a more palatable price tag than the company’s six-figure Class A shares (BRK-A, $204,600.00)—your investment would now be worth nearly six times as much.

Quiz: How Well Do You Really Know Warren Buffett?

Sponsored Content

But oracles don’t always get it right, and Buffett is no exception. Berkshire’s recent stock performance reflects the poor results of some of his picks. Since hitting an all-time high of $153 in December 2014, the Class B shares have sunk 10.1%. Over that period, Standard & Poor’s 500-stock index has returned 1.4%. (All share prices and returns are as of November 20.)

Berkshire is a massive conglomerate, owning a collection of businesses ranging from See’s Candy to Burlington Northern Santa Fe and, soon, Precision Castparts (PCP, $231.00), a supplier of aerospace parts that Berkshire is acquiring for $37.2 billion. Some of these businesses have stuttered in the past year, weighing on Berkshire’s performance. During the third quarter, revenues for insurance businesses that Berkshire owns, including Geico, declined 15.5% from a year ago, to $11.6 billion. Revenues at Burlington Northern, which operates roughly 32,500 miles of railroad track in the U.S., fell 4.8%, to $5.6 billion, as low energy prices curbed crude-oil shipments.


Berkshire also owns securities, including the stocks of 44 companies. As of the end of September, the stock portfolio had a market value of $127.4 billion. But some of these picks are struggling. One of Berkshire’s largest holdings, American Express (AXP), has sunk 21.1% so far in 2015, in part because the card issuer lost key arrangements with Costco Wholesale (COST) and JetBlue Airlines (JBLU). Another holding, Wal-Mart Stores (WMT), has plummeted 28.7% because of intense competition from everyone from dollar stores to Amazon.com (AMZN).

But perhaps the biggest head-scratcher for Berkshire investors—and one that some are betting could turn out to be a flop—is Buffett’s stake in International Business Machines (IBM). Buffett first invested in IBM in 2011, when the stock traded at about $170 per share. Since then, it has tumbled to $138.50, as the tech giant struggles to adapt to cloud-based computing and sales of its hardware products decline. Buffett, meanwhile, continues to buy. As of the end of September, Berkshire owned a little more than 81 million shares, up from 57.4 million four years ago. Berkshire has $2 billion in unrealized losses on its IBM stake.

To be sure, Buffett is a patient investor who prefers to scoop up blue-chip companies when they are down and out. “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down,” he wrote in a letter to shareholders in 2008. Still, in the third-quarter earnings report, Buffett felt compelled to explain the position, saying, “We currently have no intention of disposing of our investment in IBM common stock” and expect that it “will recover and ultimately exceed our cost.”

Only time will tell if Buffett & Co. are proved right about IBM and their other current holdings, but one investment that for sure didn’t work out was Dexter Shoe Company. Buffett bought the Maine footwear manufacturer in 1993, with $443 million worth of Berkshire stock. Dexter had all the traits that Buffett likes: a strong brand, competitive advantages and excellent management. But low labor costs overseas eventually undercut the business, and eight years later Buffett folded Dexter into another Berkshire subsidiary. In his 2007 shareholder letter, Buffett wrote, “To date, Dexter is the worst deal that I’ve made.” He noted that by using Berkshire stock to make the acquisition, he compounded the loss, from roughly $400 million to $3.5 billion (the value that the Berkshire shares he used to buy Dexter would have grown to).


Foreign markets also played a part in the next flop. In 2012, Buffett bought 415 million shares of Tesco (TSCDY), a U.K. supermarket chain, for $2.3 billion. “Retailing is very competitive in the U.K., and maybe Buffett didn’t see things because he wasn’t there,” says David Kass, a finance professor at the Robert H. Smith School of Business at the University of Maryland in College Park.

Buffett’s eyes were quickly opened, though. In 2013, he sold 114 million shares of Tesco in response to several management moves he didn’t agree with, netting a profit of $43 million. But then Buffett lost focus. He didn’t exit the position completely until 2014, and the delay led to an after-tax loss of $444 million, or 0.2% of Berkshire’s net worth at the time. As he wrote in his 2014 shareholder letter, “My leisurely pace in making sales [of the stock] would prove expensive. [Vice Chairman] Charlie [Munger] calls this sort of behavior ‘thumb-sucking.’ (Considering what my delay cost us, he is being kind.)”

In addition to stocks, Berkshire also owns bonds. As Buffett said in his 2013 shareholder letter, “Usually we’ve done well in these. But not always.” He was referring to Berkshire’s position in Energy Future Holdings, formed in 2007 in a massive leveraged buyout of a Texas utility with coal-fired power plants. The investors in the deal believed that natural gas prices, which had plummeted, would eventually reverse course and boost utility profits. Berkshire put up $2 billion. The theory did not play out. Natural gas prices continued to fall, making it difficult for coal-fired plants to compete. In 2014, Energy Future Holdings filed for bankruptcy protection. Anticipating the bankruptcy, Buffett sold his bond stake in 2013 for $259 million. After accounting for the cash interest that the bonds paid out during the years that Berkshire held its position, the pretax loss totaled $873 million.


But perhaps Buffett’s biggest mistake was his very first investment. In 1964, Buffett was the head of the hedge fund Buffett Partnership Ltd., which owned 7% of the outstanding shares of Berkshire Hathaway, then a struggling textile company. Berkshire’s owner, Seabury Stanton, wanted to repurchase shares, and he and Buffett orally agreed to a price of $11.50 per share. But when the written offer came in, the price was $11.375. Angered by the eighth-of-a-point slight, Buffett instead bought more shares, eventually taking over the company and summarily firing Stanton. “That was a monumentally stupid decision,” wrote Buffett in his 2014 shareholder letter. More than 25% of BPL’s capital would eventually be tied up in the textile manufacturer, which never turned around. In 1985, Buffett shut down the factory’s operations.

Meanwhile, in 1967, Berkshire paid $8.6 million to buy National Indemnity Company, an Omaha-based insurance firm. National would provide the foundation for Berkshire Hathaway, as it is known today. Still, Buffett says he regrets purchasing the company through Berkshire, rather than through BPL. Had he done the latter, Buffett would not have had to share the profits of National Indemnity Company with Berkshire stockholders. And had he accepted Stanton’s tender offer, it would have freed up more money to build the budding holding company. Total damage to Buffett and his hedge fund partners, he says: a whopping $100 billion.

Of course, it’s a bittersweet tale. Buffett’s loss has led to the betterment of millions of everyday investors worldwide. His mistake has been their gain. Thanks for taking one for the team, Mr. Buffett.

See Also: Doubling Down on a Falling Stock