
There is much to be learned from Buffett's decades of investing experience, so I have selected three of Buffett's biggest mistakes to analyze. (Learn about Buffett's investing life in Warren Buffett: The Road To Riches.)

Mistake: Buying at the wrong price

In 2008, Buffett bought a large stake in the stock of ConocoPhillips as a play on future energy prices. I think many might agree that an increase in oil prices is likely over the long term, and that ConocoPhillips will likely benefit . However, this turned out to be a bad investment, because Buffett bought in at too high of a price, resulting in a multibillion dollar loss to Berkshire. The difference between a great company and a great investment is the price at which you buy stock and this time around Buffett was "dead wrong". Since crude oil prices were well over $100 a barrel at the time, oil company stocks were way up.

Lesson Learned


U.S. Air
Mistake: Confusing revenue growth with a successful business

Buffett bought preferred stock in U.S. Air in 1989 - no doubt attracted by the high revenue growth it had achieved up until that point. The investment quickly turned sour on Buffett, as the U.S. Air did not achieve enough revenues to pay the dividends due on his stock. With luck on his side, Buffett was later able to unload his shares at a profit. Despite this good fortune, Buffett realizes that this investment return was guided by lady luck and the burst of optimism for the industry. (You may not believe it, Buffett is jealous of the small-time investor. Read about it in Why Warren Buffett Envies You.)

Lesson Learned
As Buffett points out in his 2007 letter to Berkshire shareholders, sometimes businesses look good in terms of revenue growth, but require large capital investments all along the way to enable this growth. This is the case with airlines, which generally require additional aircraft to significantly expand revenues. The trouble with these capital intensive business models is that by the time they achieve a large base of earnings, they are heavily laden with debt. This can leave little left for shareholders, and makes the company highly vulnerable to bankruptcy if business declines.


Dexter Shoes
Mistake: Investing in a company without a sustainable competitive advantage


Lesson Learned
Companies can only earn high profits when they have some sort of a sustainable competitive advantage over other firms in their business area. Wal-mart has incredibly low prices. Honda has high quality vehicles. As long as these companies can deliver on these things better than anyone else, they can maintain high profit margins. If not, the high profits attract many competitors that will slowly eat away at the business and take all the profits for themselves.


The Bottom Line
While making mistakes with money is always painful, paying a few "school fees" now and then doesn't have to be a total loss. If you analyze your mistakes and learn from them, you might very well make the money back next time. All investors, even Warren Buffett, must acknowledge that mistakes will be made along the way. (We've seen his mistakes, but his triumphs are even more impressive. Check out Warren Buffett's Best Buys.)

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