The Intelligent Investor's Mistakes: Warren Buffett: 38 Buffett’s Investment Stories, Gain Wisdom, Master Risk and Maximize Profits to Build Enduring Wealth

by Balaji Kasal

“I like to study failure. We want to see what has caused businesses to go bad, and the biggest thing that kills them is complacency. You want a restlessness, a feeling that somebody's always after you, but you're going to stay ahead of them. That restlessness — that tomorrow is more exciting than today — you have to have it permeate the organization.” - Warren Buffett, 2013 at The Coca-Cola Company’s AGM

Buffett openly confesses his mistakes and embraces them. Mistakes are inevitable in investments. Further, he acknowledges that he will be making more mistakes in the future. However, he mastered learning from his mistakes and moving forward. It is the key to success. These mistakes didn't hold him back. He understands the edges of his circle of competence.

“The man who does things makes mistakes, but he doesn't make the biggest mistake of all-doing nothing.” -Benjamin Franklin

“When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact… Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

“Time is the friend of the wonderful business, the enemy of the mediocre.” Lessons: The commodity businesses’ consolidation and synergy strategies fail faster to the historic average or below. Here, 1+1 is less than 2. Cigar-butt value investing is a trading strategy. However, if you are investing for the long-term, you need to avoid them for three reasons. First, they eat up capital. Second, the time to realize the gain is unknown. Third, holding them burns out investor's mental resources and other better opportunities. It is always a wise idea to correct a mistake as early as possible rather than hoping for better days.

“Buying Hochschild-Kohn was like the story of a man who buys a yacht. The two happy days are the day he buys it and the day he sells it.”

A business owner needs to evaluate its sustainable competitive strength to operate and produce profits. Merely engaging in an acquisition solely based on asset price lacks a rationale, unless the acquisition is pursued with the intention to liquidate for profit.

“You don’t have to be a financial analyst, you don’t have to be finance major, to know that $80m is a ridiculous valuation. Eleven million people a year go to Disneyland. That’s $7 a person [or $77m a year] and you get [the rest of the company] thrown in free. It was a joke.” …” It’s good to learn from your mistakes. It's better to learn from other people's mistakes.” … ”And certainly the Disney sale in the ’60s was a huge mistake. I should have been buying, forget about holding, and selling.”

Long-term compounding in wonderful businesses works like magic. So, sit tight on them. Conversely, selling wonderful business too soon is a mistake. Before making any investment decision, specifically on selling, weigh it critically Here you are juggling among potential business prospectus, market scenarios, and opportunity costs. Hence selling is tricky in the investment business. Selling makes sense if the original reason to buy is no longer valid. This could be due to fundamental challenges in business growth. Or, the share price might have risen unrealistically high, and valuations are not justified. Or, you might get a better opportunity.

The permanent investment holding is a myth. The world is changing faster than ever. Businesses have faced consistent challenges from technological innovations and changes in customer preferences.

World Book kept growing for the next few years; Buffett was applauding the business growth when the revenue peaked at $31.8 million in 1991. However, since then, the company started losing business, and revenue plunged to $8.8 million in 1995. The business took a toll against newer ways of delivery of the product: CD-ROM and online offerings. Microsoft launched Encarta, a digital encyclopedia in 1993 that became popular in no time. World Book was facing stiff competition and challenges from new forms of competition. Buffett was optimistic about its business revamp. Management started to invest heavily in electronic products to stay relevant, and they started optimizing the overhead costs. These efforts were expected to improve the viability of the business. However, World Book’s business failed to compete and sustain the company.

New technologies are bringing rapid changes to the world and to businesses. An investor's job is getting harder to identify the businesses with lasting competitive advantages. Shying away from understanding newer technology and its impact on business is no longer an option in this era. To stay and grow in the investment game, you need to keep learning and act based on newer facts.

“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers."…”

Buffett failed to poise Dexter’s business model strength against low-cost shoe producers and imports. The shoe business's low-cost moat vanished sooner than later. Buffett relied heavily on recent successes, rather than looking into future prospects. He overestimated the future earnings from an unregulated commodity like shoes.

Overconfidence and the thrill of past successes are the enemy of an investor.

Involvement in the hyperactive often breeds mistakes.

Any kind of desperation to act is an investment mistake.

An investor needs to watch out for higher valuations in a bull market, specifically. It is even more crucial for businesses operating in commodities or/and are regulated.

“If you want to be wrong then follow the masses.” - Socrates

“When investing, pessimism is your friend, euphoria the enemy,"

Investing in oil and gas requires understanding their cycles. Many things affect prices, including cycles in regional and global economies. Also, consider geopolitical events and transportation scenarios.

For a retailer to expand, many things must fall in place. These include cheap procurement, efficient distribution, wide sales pricing strategies, and grow loyal customers. It gets complicated because of local and global market dynamics and competition. The competition is among local stores, discount stores, and mega-retailers. It is a tough business.

We need to recheck the thesis with any changes in key management as it might lead to changes in business models and the company culture.

“If we buy 30 big businesses and generally let the people who run them successfully and before run them with very little interference from headquarters, and it works out 95 percent of the time very well, and we have one episode (referred to NetJet) when the basic franchise was protected but we lost profit opportunities for a while, it’s not a big failure record.”

Not all subscription businesses that collect advance money from customers will succeed. The underlines business economics take precedence.

Buffett's IBM purchase was one of the biggest mistakes. He had crossed his ‘Circle of Competence’. The mistake was further compounded by holding onto the loser even though it was clear that the company was struggling. The advances in technology and fast pace of competitors, like Amazon Cloud (AWS), disrupted the market. Buffett’s own words: [2012 AGM]: “Well, I would say that I do not understand the moat around an IBM as well as I understand the moat around a Coca-Cola. But I feel good enough about IBM that we’ve put a considerable amount of money in it.” “The chances of being way wrong in IBM are probably less, at least for us, than being way wrong with Google or Apple. But that doesn’t mean that those — the latter two companies —aren’t going to do, say, far better than IBM.” [2013 AGM]: “I’ve got enough conviction about IBM’s position that we took a very large position.” [2017 AGM] “I made a large investment in IBM, and — which has not turned out that well. We haven’t lost money. But in terms of the bull market we’ve been in, it’s been a significant laggard. Bonus: Munger's own words: [2017 AGM]: “Well, we avoided the tech stocks, because we felt we had no advantage there and other people did. And I think that’s a good idea not to play where the other people are better.”

The key

criteria for an investment is the business's long-term competitive edge so it can deliver satisfactory returns to the owners.

“Well, I think it’s generally a mistake to assume that rationality is going to be perfect, even in very able people. We prove that pretty well, regularly.”

Since its acquisition, Kraft Heinz’s revenue has been struggling to grow. The company's valuation at Nasdaq reflects this, even though the company has tried to transform itself continuously through restructuring its operations. In the process, it sold off units like nuts and specialty cheese, while acquiring sauces and condiment companies. The crux of the issue: Kraft Heinz products have limited brand power. Hence, the company faces challenges while dealing with retailers, specifically, biggies. It limits the bargaining power. While these retailers always try to push their own private brands. One such case is Costco’s ‘Kirkland’, marketed as better quality at a lower price. This single brand at Costco earns more than 50% of sales as compared to the overall sales of Kraft Heinz. The Kirkland brand has been around for only thirty years, while the Kraft brand has existed for more than 100 years. Also, Kraft spends heavily on advertising.

Real brand power commands a top price. It dictates pricing to distributors and retailers. Of course, the customer’s pull is strong.

For investors, overpaying causes two issues: a) upward potential gets limited and b) opportunity cost.

“Anytime we look at buying a business, we're evaluating the competitive strengths of the business, the price we have to pay, the management we got, everything. We didn't make a mistake on the management, but in terms of the earning power on average… I believe I was right in concluding that PCC would, over time, earn good returns on the net tangible assets deployed in its operations. I was wrong, however, in judging the average amount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business. PCC is far from my first error of that sort. But it’s a big one.” Lessons: Valuation is the key that decides the investor's gain over time. “Price what you pay; value what you get.”

An investor should never say “never”. There is nothing like permanence in business and in life.

Though Buffett might have left some money on the table in 2008, his purpose might have been to support the US financial system and bring back the confidence. However, I included this section for investors to learn the importance of capital allocation and to make rational decisions.

The role of luck in investment makes all the difference. There are two types of luck in investment: one, when preparation meets the opportunity and second, when an expected and unknown event brings positive surprises. This particular deal is the second type. God bless!

There could be many reasons for a lack of insight into the future. How the economics would pan out over a long period? What would be the competitive advantages? The ’moat’ strength and durability. This might be due to the rapidly changing ecosystem dynamics and exposure to unforeseen catastrophes. The market disruptions. This makes picking a future winner ‘hard’ for the particular businesses he deemed as “out of his circle of competence”.

Furthermore, Berkshire's size has grown so much that only a couple of companies could enter into the big insurance contracts. Low competition!

think most people get very few, what I call, no-brainer opportunities, where it’s just so damned obvious that this is going to work. And since they are very few and they may be separated by periods of years, I think people have to learn to have the courage and the intelligence to step up in a major way when those rare opportunities come by.”

Fort Worth NBC had been running a TV station since 1948. The station had a different name then. Tom Murphy ran Capital Cities Communication and planned to buy the Dallas-For-Worth NBC station. The Carter family owned it. The offer came with the Fort Worth paper. In 1974, the USA's Federal Communications Commission (FCC) made a ruling, prohibiting “cross-ownership” in the same region. Murphy turned to Buffett to sell the station for $35 million. Buffett didn’t take the offer. Murphy was Buffett’s friend. He knew Buffett’s investing style and was sure the Station would add value to Berkshire. Also, Buffett admired Murphy for his business acumen and character. Buffett knew TV stations needed little capital to operate and would have an excellent future. Murphy himself was an expert in the station business and understood the ins and outs of it. In short, he offered future cash flows and assets to Buffett… but, Buffett just ignored it. Fast forward to the 2007 Berkshire annual report: Buffett valued the property at $800 million. The station was earning $73 million before taxes and it earned up to $1 billion since he had turned down the offer. Buffett's own words [2007 AR]: “I knew that TV stations were See’s-like businesses that required virtually no capital investment and had excellent prospects for growth. They were simple to run and showered cash on their owners… In effect Murph whispered “buy” into my ear. But I didn’t listen… Why did I say “no”? The only explanation is th...

Investors must recognize their biases. They should not get trapped by price “anchoring” while buying. The long-term business potential needs to take precedence over the market price movement. An investor needs thorough analysis before selling too. The way done during buy. Businesses need to adjust to new markets. Investors need to give time to understand reality and business impact. Also, how management is responding to the new scenarios. The market has no duty to understand your feelings.

[2017 AGM]: “If you ask me, in retrospect, what was our worst mistake in the tech field, I think we were smart enough to figure out Google. Those ads worked so much better in the early days than anything else. So I would say that we failed you there. And we were smart enough to do it and didn’t do it. We do that all the time, too.” [2019 AGM]: “We could see in our own operations how well that Google advertising was working. And we just sat there sucking our thumbs.” Lessons: Not to miss out on an investment opportunity where you are consuming their products and services. And you know they are minting money and have the potential to scale up profitably.

“Jeff Bezos has built an extraordinary economic machine from standing

still, a start of zero, with competitors with lots of capital.… I should have bought (Amazon) long ago, but I didn’t understand the power of the model and the price always seemed more than the power of the model. I missed big time,” [2018 AGM]: “I made the wrong decision on Google. And Amazon, I just — I really consider that a miracle, that you could be doing Amazon web services and changing retail at the same time, with — you know, without enormous amounts of capital, and with the speed and effectiveness of what Amazon has done. I just — I underestimated — I had a very, very, very high opinion of Jeff’s ability when I first met him. And I underestimated him”

Some basics to successful investing: 1) Seize the opportunity when it arrives; 2) Size up the opportunity; 3) If the opportunity is growing in the future, do not wait for the price to come down to an earlier price (i.e., avoid “price anchoring”) and 4) Limit economic news interference in the decision as long as you see value with a margin-of-safety. Avoid anchoring to the initial price of purchasing a stock. Give more weight to business performance and potential, if your purchase thesis is still intact. As growth becomes more visible, it attracts more investors, and market prices are pushed upward. A wise investor should embrace it, as she or he is riding on the right boat. In a scenario where you understand an industry's potential but can't pick the winner, go by the ‘basket investment’ approach. You buy companies you believe would be in the winning category and you comfort with their management. You may treat this as an industry-specific index fund investing. I recommend to build a wider toolkit in investment to use one as opportunity demand. It would help to evolve and bring more choices.

Understand the economic characteristics and long-term sustainable competitive advantage. Value the business's future prospects. Be philosophical about market price movements and guard your biases. Act decisively. Let go, if missed opportunities. Have a feedback system in place to keep a check and evolve.

The vital part of the investment game is to play, learn, and evolve.

am sure that the whole process prepares you to make wiser decisions to recognize the opportunities. When your preparation meets an opportunity, it is called luck! Become a seeker of luck through your conscious efforts, and train your subconscious mind for the same. With this, I trust that you will succeed. This not only helps you excel in finances but also

makes you live a more joyful and fu...

“Part of making good decisions in business is recognizing the poor decisions you’ve made and why they were poor. I’ve made lots of mistakes. I’m going to make more. It’s the name of the game. You don’t want to expect perfection in yourself. You want to strive to do your best. It’s too demanding to expect perfection in yourself.”