A Look Into Warren Buffett's Worst Investment Ever Provides A Great Lesson

Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B)’s CEO Warren Buffett is recognized as one of (if not the) best investors of all times. However, even the Oracle of Omaha bets on the wrong horse once in a while.

When Buffett was asked about his worst investment, nobody expected his answer: It was Berkshire Hathaway, he said.

But, how can this be? The stock has gained, on average, 20.8 percent per year over the past 50 years, or about 1,600,000 percent since 1964.

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In a letter to Berkshire Hathaway shareholders, the famed investor explained that when he first acquired the company’s stock, back in the '60s, he was well aware of the (then textile) company’s problems, but still decided to buy them because they looked “cheap.” And this was as a "monumentally stupid decision," he added.

Still Puzzled?

As Matthew Frankel recently reminded in a recent Motley Fool article, one of Buffett's best-known quotes is, "It is far better to buy a wonderful business at a fair price than a fair business at a wonderful price.”

“At the time, Berkshire was a fair business at best,” Frankel pointed out.

In addition, Buffett continued in his letter, his stake was built out of spite. The company’s manager in 1964, Seabury Stanton, had offered to buy back Buffett’s shares at $11.50, but then sent a formal offer of $11.375; so, instead of selling, he bought a whole lot more stock — even though he knew the business was struggling. This cost him and other company investors a lot of money.

“By Buffett's own estimates, if he had accepted the lower price for his Berkshire shares, and simply started buying insurance companies instead of trying to save a struggling company, he would have made an additional $200 billion in profit for himself and his shareholders over the years,” Frankel added.

This does not mean that Berkshire Hathaway is not a good investment nowadays. In fact, the company has gone a long way since the '60s constructing a portfolio of approximately 60 fully owned businesses and very large stakes in other stock-market behemoths like The Coca-Cola Co KO, Kraft Heinz Co KHC, International Business Machines Corp. IBM and Wells Fargo & Co WFC, among others. Moreover, as stated above, returns have been stellar.

However, Buffett concluded, this does not make his decisions correct. The lesson here: Always invest in good companies, for the right reasons; choose businesses you know, understand and want to be a part of.

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Disclosure: Javier Hasse holds no interest in any of the securities or entities mentioned above.