Buffett's Big Mistake

We all make mistakes. However, not all mistakes are created equally. When it comes to investing, you can almost guarantee that over a lifetime you’re going to have some losers sprinkled in. One of the sources for many of our mistakes in life comes from overconfidence. Many advisors have heard the common story of a person investing heavily in their company’s stock. All too often this decision is made due to overconfidence in one’s firm and comes back to bite the investor in the end. We must be careful not to get overconfident when making any decision, let alone a decision about our retirement nest egg. If the greatest investor in the world can fall prey to overconfidence then anyone of us can.

In 1993 Warren Buffet and Berkshire Hathaway purchased Dexter Shoes. Dexter was not the first company Buffet had purchased, it wasn’t even the first shoe company he had bought. Two years earlier Berkshire Hathaway bought H.H. Brown, a leading manufacturer of work shoes and boots; it turned out to be a great investment.  After the Dexter acquisition Buffet wrote to his shareholders explaining the deal: Five years ago, we had no thought of getting into shoes. Now we have 7,200 employees in that industry and I sing “there’s no business like shoe business” as I drive to work.

And it wasn’t that Dexter Shoe would be worth zero a few years later that was the problem. The problem, and Buffet’s big mistake, was that he paid for the shoe company with Berkshire Hathaway stock. Those shares have increased in value by over 1,300%! Buffet later admitted in 2014 that he thought the Dexter shoe debacle belonged in the Guinness Book of World Records. Without admitting our mistakes, we cannot learn from them and Buffett can teach us that as well.

As we can see, any one can fall victim to overconfidence. It is tempting to assign more value to something after we have acquired it and made it ours. We must be careful not to assume that we know more about an investment than all the other buyers in the marketplace. Mark Twain once said: “It’s not what you know that ain’t so that gets you in trouble, it’s what you know for sure that just ain’t so.”