CAPITAL IDEAS: What can investors learn from Warren Buffett’s biggest mistakes?
I have always loved that quote from the famed investor and CEO of Berkshire Hathaway Mr. Warren Buffett. Over the years, I have written time and again that betting on your “gut” to pick individual winners in the stock market was more about vanity than the real experience. I consider this quote from Buffett, perhaps the authority on investing, to be proof of my claim.
Mr. Buffett is an extraordinary investor; however, as he would admit, his success has not come solely from his stock-picking ability. He bombed out on IBM, Kraft Heinz, Dexter Shoe Company, U.S. Airways, Tesco, and ConocoPhillips, losing about $37.2 billion total from those investments. These figures demonstrate that even the most seasoned investors can experience substantial losses. Buffett’s missteps offer valuable lessons in investment discipline, the importance of adaptability, and the risks of overconfidence. However, the most crucial investment muscle Mr. Buffett flexes might be patience. The rewards he has accumulated for Berkshire Hathaway are as much about being invested over the long term as they are picking the right stock.
Last week, Berkshire Hathaway held its annual shareholder meeting. Those meetings are famously educational, offering timeless wisdom and actionable insights for investors of all levels. This year’s gathering was particularly memorable, as Buffett surprised the investing world by announcing his decision to step down as CEO, nominating Greg Abel, the current vice chairman of non-insurance operations, as his successor. Amid this announcement, Buffett and his team discussed various critical investment topics that offer lessons and opportunities for all investors. Below are the essential findings from the meeting and what investors can do today to benefit.
1. Leadership Change and Continuity
By naming Greg Abel as his successor, Buffett emphasizes the importance of stability and continuity in corporate leadership. Abel, who has overseen Berkshire’s vast non-insurance business operations, represents a continuation of Berkshire’s longstanding investment philosophy and managerial approach.
Practical takeaway for investors: Investors should evaluate their portfolios and consider the importance of leadership continuity. Identifying companies with clear succession planning and stable management teams can mitigate risks associated with leadership transitions.
2. Caution Against Tariffs and Protectionism
Buffett directly criticized tariffs, describing trade barriers as “an act of war.” He argued that prosperity should not come at the expense of international trading partners. He emphasized that global economic growth and cooperation benefit everyone and that using tariffs as economic weapons creates unnecessary volatility and potential economic downturns.
Practical takeaway for investors: In the current climate of rising protectionism, investors might reconsider exposure to industries vulnerable to tariffs, such as manufacturing or retail companies that may rely on imported goods. Instead, if you are going to pick stocks, seeking companies with strong domestic supply chains or those effectively managing global trade uncertainties could be more prudent.
3. Perspective on Market Volatility
Despite recent volatility prompted by tariffs and other geopolitical concerns, Buffett regarded the turbulence as insignificant in the long-term investment horizon. Notably, he mentioned he would even welcome a substantial decline in Berkshire Hathaway’s stock price as a buying opportunity, highlighting his core philosophy of embracing market declines rather than fearing them.
Practical takeaway for investors: Investors could adopt Buffett’s mindset toward volatility, viewing market corrections not as threats but as opportunities to invest in fundamentally strong companies found in a broad index at discounted prices.
4. America’s Resilience and Exceptionalism
Buffett reaffirmed his belief in America’s enduring economic resilience, citing its history of overcoming wars, recessions, and numerous crises. He remains optimistic about America’s long-term economic potential, suggesting confidence in the U.S. market could continue to underpin investor strategies.
Practical takeaway for investors: Long-term investors could maintain or even enhance their allocation to U.S. equities, emphasizing sectors with consistent performance in various economic climates, such as technology, healthcare, and financial services.
5. Concern Over Fiscal Deficits
Buffett expressed concern over America’s growing fiscal deficit, labeling it unsustainable in the long run. He emphasized the need for fiscal responsibility and suggested that deficits could lead to broader economic issues if no corrective actions are taken.
Practical takeaway for investors: Given Buffett’s concerns about deficits, investors could consider diversifying their portfolios with inflation-protected securities, commodities, or real estate investments to hedge against potential inflationary pressures resulting from sustained deficits. (Although, to put my own stamp on this, I have heard this conversation for decades. Deficits eventually matter, but apparently, they don’t matter until they matter.)
6. Berkshire Hathaway’s Large Cash Holdings and Investment Discipline
Buffett disclosed Berkshire’s substantial cash position—over $330 billion—revealing he nearly invested $10 billion recently but refrained due to valuation concerns. This discipline underscores Buffett’s investment philosophy: patiently waiting for opportunities offering significant value rather than rushing into decisions.
Practical takeaway for investors: Investors today could assess their liquidity and avoid succumbing to market pressures to invest hastily. Maintaining cash reserves allows flexibility to capitalize on compelling opportunities when they arise.
7. Embracing Long-Term Value Investing
Buffett reaffirmed his unwavering commitment to long-term, value-driven investing throughout the meeting. He emphasized the importance of buying stocks in quality businesses at fair or discounted prices and holding them indefinitely.
Practical takeaway for investors: Investors could review their investment criteria, ensuring alignment with a disciplined, long-term strategy rather than speculative short-term trading. Conducting a thorough fundamental analysis and focusing on durable competitive advantages will help identify enduring value.
8. Importance of Integrity and Reputation
Buffett emphasized integrity as crucial to Berkshire Hathaway’s identity and continued success. He consistently highlights the ethical dimension of business practices, underscoring the reputational risk posed by unethical behavior.
Practical takeaway for investors: Investors could critically evaluate companies’ ethical practices and corporate governance standards in their portfolios or watchlists. Prioritizing businesses with transparent practices and strong ethical foundations minimizes long-term reputational risks. (I am going to sound like a greedy capitalist here, but since it is my job to make you money, I will opine that, when investing, profits are the most important thing. I also realize I am a bit of a hypocrite, because when it comes to my company—Berkshire Money Management—our internal cultural motto is “people over profit.” But that is my money, not yours!)
9. Avoiding Speculation and Financial Engineering
Buffett criticized speculative investments and financial engineering practices, warning investors against chasing trends or short-term profits through complex financial products that may not deliver sustainable value.
Practical takeaway for investors: Investors might avoid overly speculative assets lacking fundamental backing. Today’s action would involve reassessing portfolio positions, ensuring investments reflect real, underlying value rather than transient speculative hype. (I am reluctant to contradict Buffett’s advice, but I am a fan of using financial engineering. However, to his point, I only use it to defend the value of portfolios, not to create speculative leverage.)
10. The Opportunity of Economic Challenges
Buffett encouraged investors to view economic challenges as opportunities for growth and investment. He expressed optimism amid global uncertainty, reinforcing that informed and patient investors often prosper most during challenging periods.
Practical takeaway for investors: Investors could use current economic uncertainties as opportunities to evaluate portfolio strengths and position themselves strategically for recovery and growth phases. Identifying undervalued sectors adversely affected by short-term concerns is an opportunity.
Personally, I have learned as much (if not more) from my failures than from my successes. So, as a bonus, let’s consider what investors might learn from Buffett and Berkshire Hathaway’s aforementioned bungled stock picks.
- Importance of Adaptation: Companies must adapt to technological change and consumer shifts. Failure to recognize such trends early can lead to significant underperformance.
- Valuation Matters: Buffett often emphasizes the price paid relative to value. Overpaying—even for good companies—can severely impact returns.
- Management Integrity and Capability: Investments could consider a company’s financial health and its management’s credibility and adaptability.
- Exit Strategies: Investors need clear criteria and disciplined methods for exiting underperforming investments.
These examples reinforce the importance of vigilance, flexibility, and constant reevaluation in investing decisions. However, as I have said numerous times, I think for most investors with a long runway, you can just buy an S&P 500 index fund and never look back. Buffett has promoted for some investors what has become known as the 90/10 Rule, which is to put 90 percent of your money in an S&P 500 index fund and the other 10 percent in short-term government bonds. Sometimes it is best not to overcomplicate things.
Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.