The Cigar Stubs
The textile mill that gave Berkshire Hathaway its name turned out to be an albatross for more than two decades as Buffett dithered over shutting it down. Located in Massachusetts, far from the new textile and cotton hubs down South, it was a money-loser from the start. He has since admitted his stubborn attachment to it probably cost Berkshire $200 billion in lost opportunity costs to invest in better companies. Back then, Buffett was more a proponent of the "cigar stub" theory of investing -- buying a downtrodden company or stock and smoking out the last few puffs of profit.
Another iteration of this thesis gone wrong was his purchase of Blue Chip Stamp Co. in the late '60s. It was a lesser rival of the Sperry & Hutchinson Green Stamps Co. Both involved an early form of loyalty program in which shoppers collected stamps that could be redeemed for merchandise. "When I was told that even certain brothels and mortuaries gave stamps to their patrons, I felt I had finally found a sure thing," Buffett said in his 2006 shareholder letter.
However, Blue Chip revenues declined by more than 80 percent from 1970 to 1980 and by almost 99 percent by 1990 as credit-card loyalty programs and increasing affluence made shoppers reluctant to waste time pasting stamps in books. What Buffett learned became a new leg of his investing stool: to only buy businesses for their demonstrated profitability.
The Economic Moat
Buffett coined the term "economic moat" to describe the competitive and hopefully monopolistic advantages that will help a company thrive. He has long said he regrets buying Dexter Shoes in 1993, purchasing it with Berkshire Hathaway stock then worth $433 million for an estimated loss of $3.5 billion. He admits now it didn't have the brand loyalty or moat he expected.
Since then Buffett has hunted for big elephants like Heinz and Burlington Northern Santa Fe, and investing more every year in his "Big Four" stocks: Wells Fargo (WFC), IBM (IBM), American Express (AXP) and Coca-Cola (KO).
Fear and Greed
He purchased US Airways preferred stock in 1989 when optimism about the airline was at its zenith -- just in time for competitors to undercut its prices. He soon found there is no brand loyalty among the flying public.
In 2008, he bought high into ConocoPhillips (COP), expecting oil prices (then more than $100 per barrel) to go even higher, violating his own precept to buy when others are fearful and sell when others are greedy. The loss he took on that gamble amounted to more than $1 billion.
Still, this didn't deter him from a blunder detailed in the 2013 annual shareholder letter -- buying $2 billion worth of bonds in Energy Futures Holdings, an electric utility that has suffered from a decline in natural gas prices. Buffett wrote with his usual candor,"Most of you have never heard of Energy Future Holdings. Consider yourselves lucky; I certainly wish I hadn't," adding the company is likely headed for bankruptcy.
Buffett has had many more big wins than losses, including some out-of-the-park hits like American Express in the 1960s when it was embroiled in a small subsidiary's salad oil scandal, his purchase of Geico and an annual compounded gain of 19.7 percent in Berkshire Hathaway's book value since 1965. In a seven-decade career dating from age 11 when he bought his first stock, Buffett's mistakes have grown fewer and farther between. Even better for investors, when he chooses poorly, he explains where he went wrong, so we can all learn from his mistakes.