Warren Buffett's ‘monumental’ mistake taught him this — What turns a good business into a bad investment?
Warren Buffett has experienced some of highest peaks among investors across the globe, but even the ‘Oracle of Omaha’ has made some mistakes. Here’s what he learnt from his biggest blunder: “If you pay too much for them, you can turn a good business into a bad investment.”
At the start of this year, Warren Buffett officially handed over the reins of Berkshire Hathaway, to his and late partner-friend Charlie Munger’s long-time successor Greg Abel. Amid his exit from active investing for the company, a clip of the billionaire investor’s MPW interview with Fortune (originally posted on 7 October 2014), has garnered over 10,000 views on social media platform X (formerly Twitter).
What turns a good business into a bad investment? Here’s Warren Buffet’s views
Speaking to the magazine on his own failures and learning from them, Warren Buffett qualified a good business as “the one that earns a high rate of return on tangible assets”.
Adding, “That’s pretty simple. And, the very best businesses are the ones that earn a high range of return on tangible assets and grow. But even the ones that don’t grow, if they earn a high return on tangible assets and then of course if you don’t pay too much, they can be a good investment.”
Why the qualifier? Because the legendary investor lost billions (when calculated today) on a deal made in his early years. He explained, “They are a good business to start with, by the high returns. (But), if you pay too much for them, you can turn a good business into a bad investment. The big mistake we made in the early years was to try and buy a bad business at a really cheap price and it took me about 20 or 30 years to figure out that wasn’t a good idea.”
What was Warren Buffett’s worst-ever business decision?
In various interviews and during Berkshire’s annual shareholder meetings and his letter, Warren Buffett has never shied away from admitting his mistakes. He called his purchase of Dexter Shoe Company in 1993 as his “worst deal ever”. At the time, he paid $443 million in Berkshire stock for the purchase of what looked like a sound business, the catch however was that it was unable to withstand price and supply competition from Chinese rivals and soon folded.
The hit Warren Buffett took for the stocks he gave away till February 2025 amounted to $17.87 billion, according to Investopedia. Over the years, Warren Buffett has said the mistake was “monumental” and “deserves a spot in the Guinness Book of World Records”.
However, the early blunder served one purpose, it gave the legendary investor an early lesson that has since guided his moves to great success for Berkshire.