Warren Buffett is one of the successful investors in modern times. His investment philosophy is widely followed worldwide, although his track record isn’t entirely perfect. In his annual letter to Berkshire Hathaway shareholders in 2021, the GOAT of investing owned up to one huge mistake. Even the best experience failures.
Buffett’s conglomerate purchased aerospace-parts manufacturer Precision Castparts Corp. (PCC) for US$32.1 billion in 2016. His company wrote down US$9.8 billion off PCC’s value when the global pandemic sapped demand for air travel and PPC products in 2020.
Errors in judgement
According to Buffett, PCC was a fine company and the best in its business. However, he was too optimistic about its normalized profit potential. He misjudged the average amount of future earnings that resulted in a miscalculation of the proper price to pay for the business. PCC wasn’t his worst deal, but the mistake cost him nearly US$10 billion.
In 2019, Buffett admitted his overpayment for Kraft Foods. Berkshire and 3G Capital merged H.J. Heinz Co with Kraft. People thought the mega-merger was a smart move until Buffett’s 2019 letter to shareholders came out. Berkshire reported a US$2.7 billion writedown on its Kraft-Heinz deal in 2018.
In his 2008 annual letter, Buffett considers Dexter Shoe’s purchase in 1993 as his worst deal. He went the extra mile by saying it was a worthless business. The value-based investor regrets using Berkshire stock to fund the acquisition instead of cash.
Buffett’s 2007 letter to shareholders revealed the gruesome mistake of acquiring Dexter for 25,203 Berkshire Class A shares. Before the purchase, he called the shoemaker a business jewel that needs no fixing. In his 2014 annual letter, Buffett said the financial disaster deserves a spot in the Guinness Book of World Records.
When the global pandemic struck in March 2020, many expected Buffett to go on a buying frenzy. Ironically, the legendary was busier unloading shares of badly hit businesses, particularly airline stocks. However, he also made some unusual purchases that surprised his loyal followers.
Brief honeymoon with gold
For the first time, Berkshire Hathaway took a new stake in Barrick Gold (TSX:ABX)(NYSE:GOLD) in Q2 2020. Investors were stunned by the sudden conversion to gold, because Buffett was never a fan of the precious metal. In his 2018 letter, Buffett advised shareholders not to panic and invest in stocks over gold for the long run.
Nonetheless, the honeymoon was brief not sweet, as Berkshire trimmed its position in Barrick in Q3 2020 before shedding its holdings in Q4 2020. Was his decision another error in judgement?
Barrick Gold’s Q4 and full-year 2020 financial results beat expectations. Also, the $43.94 billion company in positive territory after growing its cash balance and reducing debt. Notably, Barrick’s cash flow and free cash flow were $6.4 billion and $3.4 billion.
Mark Bristow, Barrick Gold’s CEO, said that today, investors are piling into assets that don’t have any real value due to overexuberance. He added that the gold price will see another spike higher. The current share price of $24.71 is relatively cheap, while the dividend offer is a modest 1.81%.
You can bet on future mistakes
Warren Buffett is a man who takes responsibility for his actions. He also said in his latest letter that he would make more mistakes in the future.
Speaking of one huge mistake Warren Buffett revealed in his 2021 annual letter to shareholders…
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Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short January 2023 $200 puts on Berkshire Hathaway (B shares), short March 2021 $225 calls on Berkshire Hathaway (B shares), and long January 2023 $200 calls on Berkshire Hathaway (B shares).
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