Warren Buffett is widely regarded as one of the most successful investors of all time. Yet, as Buffett is willing to admit, even the best investors make mistakes. Buffett's legendary annual letters to his Berkshire Hathaway shareholders tell the tales of his biggest investing mistakes.
There is much to be learned from Buffett's decades of investing experience, so I have selected three of Buffett's biggest mistakes to analyze. (Learn about Buffett's investing life in Warren Buffett: The Road To Riches.)

ConocoPhillips
Mistake: Buying at the wrong price

In 2008, Buffett bought a large stake in the stock of ConocoPhillips as a play on future energy prices. I think many might agree that an increase in oil prices is likely over the long term, and that ConocoPhillips will likely benefit . However, this turned out to be a bad investment, because Buffett bought in at too high of a price, resulting in a multibillion dollar loss to Berkshire. The difference between a great company and a great investment is the price at which you buy stock and this time around Buffett was "dead wrong". Since crude oil prices were well over $100 a barrel at the time, oil company stocks were way up.

Lesson Learned
It's easy to get swept up in the excitement of big rallies and buy in at a prices that you should not have - in retrospect. Investors who control their emotions can perform a more objective analysis. 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.

Buffett says: "When investing, pessimism is your friend, euphoria the enemy."

U.S. Air
Mistake: Confusing revenue growth with a successful business

Buffett bought preferred stock in U.S. Air in 1989 - no doubt attracted by the high revenue growth it had achieved up until that point. The investment quickly turned sour on Buffett, as the U.S. Air did not achieve enough revenues to pay the dividends due on his stock. With luck on his side, Buffett was later able to unload his shares at a profit. Despite this good fortune, Buffett realizes that this investment return was guided by lady luck and the burst of optimism for the industry. (You may not believe it, Buffett is jealous of the small-time investor. Read about it in Why Warren Buffett Envies You.)

Lesson Learned
As Buffett points out in his 2007 letter to Berkshire shareholders, sometimes businesses look good in terms of revenue growth, but require large capital investments all along the way to enable this growth. This is the case with airlines, which generally require additional aircraft to significantly expand revenues. The trouble with these capital intensive business models is that by the time they achieve a large base of earnings, they are heavily laden with debt. This can leave little left for shareholders, and makes the company highly vulnerable to bankruptcy if business declines.

Buffett says: "Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it."

Dexter Shoes
Mistake: Investing in a company without a sustainable competitive advantage

In 1993, Buffett bought a shoe company called Dexter Shoes. Buffett's investment in Dexter Shoes turned into a disaster because he saw a durable competitive advantage in Dexter that quickly disappeared. According to Buffett, "What I had assessed as durable competitive advantage vanished within a few years." Buffett claims that this investment was the worst he has ever made, resulting in a loss to shareholders of $3.5 billion.

Lesson Learned
Companies can only earn high profits when they have some sort of a sustainable competitive advantage over other firms in their business area. Wal-mart has incredibly low prices. Honda has high quality vehicles. As long as these companies can deliver on these things better than anyone else, they can maintain high profit margins. If not, the high profits attract many competitors that will slowly eat away at the business and take all the profits for themselves.

Buffett says: "A truly great business must have an enduring "moat" that protects excellent returns on invested capital."

The Bottom Line
While making mistakes with money is always painful, paying a few "school fees" now and then doesn't have to be a total loss. If you analyze your mistakes and learn from them, you might very well make the money back next time. All investors, even Warren Buffett, must acknowledge that mistakes will be made along the way. (We've seen his mistakes, but his triumphs are even more impressive. Check out Warren Buffett's Best Buys.)

Related Articles
  1. Fundamental Analysis

    3 Misconceptions About Warren Buffett

    Learn why Warren Buffett is the man behind the curtain and how he is misunderstood regarding the ways he has adapted and changed his investing approach over the years.
  2. Mutual Funds & ETFs

    Invesco’s Top Funds for Retirement

    Here's a list of Invesco investments—retirement funds—that may work for you if you have the time to let them mature over the long term.
  3. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  4. Mutual Funds & ETFs

    The 3 Best T. Rowe Price Funds for Value Investors in 2016

    Read analyses of the top three T. Rowe Price value funds open to new investors, and learn about their investment objectives and historical performances.
  5. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  6. Stock Analysis

    The 5 Best Stocks That Pay Monthly Dividends (PSEC, LTC)

    Get the scoop on five of the best stocks that pay regular monthly dividends, offering investors looking for regular income dividend yields of up to 16%.
  7. Stock Analysis

    If You Had Invested Right After Berkshire Hathaway's IPO (BRK.A)

    Learn how much you would now have if you had invested right after Berkshire Hathaway's IPO, and find out the classes of shares that you could invest in.
  8. Economics

    How Warren Buffett Made Berkshire A Winner

    Berkshire Fine Spinning Associated and Hathaway Manufacturing Company merged in 1955 to form Berkshire Hathaway.
  9. Budgeting

    Lost Your Job? 6 Things to Do Immediately

    If you’ve lost your job, shoring up your finances as best you can will make it easier to get back on your feet again when that next position rolls around.
  10. Fundamental Analysis

    3 Long-Term Investing Strategies With Strong Track Records

    Learn why discipline and a statistically valid investment strategy can help an investor limit losses and beat the market over the long term.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What are ComputerShare's escheatment services?

    Escheatment is the process by which ownership of abandoned property is transferred to the state. Escheated property can include ... Read Full Answer >>
  3. Have hedge funds eroded market opportunities?

    Hedge funds have not eroded market opportunities for longer-term investors. Many investors incorrectly assume they cannot ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between passive and active asset management? (SPY)

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Hot Definitions
  1. Short Selling

    Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is ...
  2. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  3. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  4. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  5. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  6. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center