Buffett's Big Gaffes: Even the Legends Make Mistakes

By Todd Shriber

Warren Buffett has been extolled as one of history's greatest investors and the returns enjoyed by Berkshire Hathaway (NYSE: BRK-A, BRK-B) certainly support the notion that the “Oracle of Omaha” is a well-deserved moniker for Buffett. The average annual return for Berkshire Hathaway shares has been something in the neighborhood of 21% for over 50 years. That's an absolutely staggering performance that would make any hedge fund manager blush. Not to mention, that's more than double the typical return offered by the S&P 500 over the same time.

Overall, Buffett's ability to spot great stocks trading at deeply discounted prices has allowed him to produce some pretty gaudy returns for investors, but he is by no means infallible. The stock market can be a humbling adventure, a fact Buffett has been reminded of on multiple occasions. Some of Buffett's blunders have been widely known about and reported on for years while others are more recent and could be up for debate. Let's have a look at some of the investments that Buffett and Berkshire shareholders would like to forget.

Dexter Shoes Goes Off the Deep End

At the time, Buffett's investment in Dexter Shoes looked like it made a lot of sense. This is exactly the type of stodgy, prosaic business that Buffett had invested in numerous times before to help Berkshire turn many a tidy a profit. Think along the lines of Berkshire's ownership of Cort Furniture Rental, Dairy Queen and See's Candies. Not sexy businesses, but you know what you're getting as an investor.

Or do you? In 1993, Berkshire paid $433 million to acquire Maine-based Dexter. Within a few years, by Buffett's own admission, the competitive advantage he had originally seen with Dexter was nearly invisible. Making the mistake all the more painful was the fact that Dexter wasn't acquired for cash, but instead was purchased with Berkshire stock. The final tab on this mistake? A $3.5 billion loss. Even Buffett himself has called the misstep the worst deal he's ever made.

Buy Low, Sell High? Try The Other Way Around

Berkshire started accumulating a position in ConocoPhillips (NYSE: COP), the third-largest U.S. oil company, in 2008. It's too bad that Berkshire was buying shares of ConocoPhillips right before oil futures hit their all-time around $147 a barrel AND right before the onset of the global financial crisis.

The financial crisis led to the bursting of the commodities bubble, which sent oil prices tumbling in a big way. Obviously, that's bad news for a company like Conoco, which explores for and sells oil, as well as shareholders of oil companies, no matter who they are. Berkshire continued to add to its Conoco stake in 2009, perhaps as a dollar-cost averaging move, but that may not be enough to result in a profitable investment.

It goes to show that even the Oracle of Omaha can be lured into bad market timing. Oil prices were high, but if Buffett could truly see the future, he would've known that the oil bull market was coming to an end. Lately Buffett seems to have grown tired of his Conoco investment; second-quarter 13F filings show Berkshire has been trimming its position in the oil producer.

Friends With Bill Gates, But Nary A Tech Investment

One reason average investors worship Buffett so much is his folksy Midwestern charm. That demeanor even applies to his investing style: He never invests in a business that he doesn't understand. So despite his chummy relationship with Microsoft (Nasdaq: MSFT) founder Bill Gates (the two play cards together and Buffett has donated beaucoups to the Bill & Melinda Gates Foundation), Buffett has never been a big fan of investing in the tech sector.

Buffett attributes this to the complexity of the business. As such, Berkshire never profited from the Nasdaq's incredible run during the late 1990s. Some would say Buffett's reluctance on tech was proven correct when the Nasdaq crashed, but it is worth noting that from the ashes of tech's early 21st century collapse emerged a new leadership of tech companies that provided shareholders with amazing returns, namely Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG). Buffett never invested in either.

Honorable Mention Mistakes:

1) Never swapping out of Coca-Cola (NYSE: KO) for PepsiCo (NYSE: PEP). Berkshire has long been one of Coke's largest shareholders, but take a look at a chart that measures the two cola rivals' performance against each other from 1977 through today, a very Buffett-like time horizon. Pepsi looks like it's on its way to leaving Coke in the dust.

2) Maintaining significant positions in financial stocks like American Express (NYSE: AXP), M&T Bank (NYSE: MTB), US Bancorp (NYSE: USB) and Wells Fargo (NYSE: WFC) while the sector was collapsing and bank dividends were being slashed in 2008-2009.

3) Buffett's 1989 investment in US Airways (NYSE: LCC) investment was completely ill-conceived. Even at their best, airlines are capital-intensive businesses that frequently deal with copious amounts of debt, and in 1989, the U.S. economy was just starting to slip into a recession. However, Buffett got lucky and was able to dump the shares and turn a profit.