What Was Warren Buffet’s Biggest Mistake?

Mr. Buffett has spoken openly about a key change he made in his investment philosophy and credited his longtime and recently deceased partner Charlie Munger with helping him see the error in his ways.

Berkshire Hathaway, the very name which houses all the investments of his career was his biggest investment mistake?

In his 2014 letter, he wrote, “My cigar-butt strategy worked very well while I was managing small sums… But it is a terrible mistake for a large portfolio.” He emphasized avoiding emotional decisions and focusing on long-term value.

His reference of a cigar-butt, while potentially vulgar, speaks to a common opinion amongst value investors at the time which was it didn’t matter what you bought as long as you got a good enough deal.

Where did he pivot his attention?

Mr. Buffett shifted to buying “wonderful businesses at fair prices” (e.g., Coca-Cola, Apple) rather than cheap, mediocre ones. This mistake shaped his focus on companies with durable competitive advantages, or “moats.”

Our investment team at DLK aligns well with this attention to the best companies or what we call “Quality”. Seeking and demanding quality is at the core of every business process we run.

What Was Mr. Buffet’s Greatest Advantage?

Regardless of his investment bias or focus, it appears we all can have something in common with Mr. Buffett, and that is time in the market and his choice of country to invest. Buffet’s returns have been compounding for 60 years and in his 2015 Berkshire Hathaway shareholder letter declared publicly his long-held sentiment about where to invest.

“For 240 years it’s been a terrible mistake to bet against America and now is no time to start.”

It is this combination of competitive advantage and time that allows the compounding of wealth to occur.

What Else Made a Difference in Warren Buffet’s Success?

A final element we would like to highlight is the power of association. Mr Buffett repeatedly commented on his association with Charlie Munger as having an outsized impact on his success as a capital allocator. Their homespun Midwest humor may have been lost on much of the world, but the moral lies in the fact that they were a good fit for each other. Both of them consistently stressed the importance of temperament as one of the key traits for an investor.

Here are a few of our favorite quotes about the power of patience.

“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. You need to keep raw, irrational emotion under control.”

“The big money is not in the buying and selling, but in the waiting.”

“The stock market is a device for transferring money from the impatient to the patient.”

“The discipline of sitting still and doing nothing when there’s nothing to do is a very important discipline.”