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Warren Buffett's Biggest Blunder Has Now Cost Him $16 Billion

Warren Buffett, the CEO of conglomerate Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B), is arguably the greatest investor of our generation. Sporting approximately $10,000 in seed capital back in the 1950s, the Oracle of Omaha, as he's now known, has grown his net worth to nearly $80 billion, as of this past weekend.

Buffett's secret to success has always been the simplicity of his investing strategy. Buffett and his team at Berkshire Hathaway tend to focus their research on just a few sectors of the market, with a clear focus on businesses that sport clear-cut competitive advantages. When Buffett finds a business he likes, he tends to buy into it for the long haul. Both Wells Fargo and Coca-Cola, for example, have been staples of the Berkshire Hathaway portfolio for 30 and 31 respective years.

The Oracle of Omaha may also choose to acquire businesses he likes outright. Berkshire has acquired about five dozen companies in a variety of sectors and industries over the years, with Buffett and his team currently holding an investment portfolio that tops $201 billion in value. On an aggregate basis, the book value of Berkshire Hathaway rose by a cool 1,091,899% between Dec. 31, 1964 and Dec. 31, 2018.

Berkshire Hathaway CEO Warren Buffett at his company's annual shareholder meeting.
Berkshire Hathaway CEO Warren Buffett at his company's annual shareholder meeting.

Berkshire Hathaway CEO Warren Buffett at his company's annual shareholder meeting. Image source: The Motley Fool.

Even the world's greatest investor makes mistakes

Long story short, Buffett has been right far more than he's been wrong over the years. But make no mistake about it -- even the greatest investor of our generation has been very wrong about certain investments.

Buffett has often been chided throughout the years for not buying into great businesses like (NASDAQ: AMZN) or Alphabet's subsidiary Google when they had considerably lower valuations. Buffett himself has remarked that he valued and appreciated Amazon's business model, and remembered paying high click rates on Google's ad platform for subsidiary Geico's ad campaigns, yet chose not to buy either. Berkshire did recently open a position in Amazon, but obviously missed a monstrous multidecade run-up in the process.

The world's greatest buy-and-hold investor has also taken his occasional lumps when buying into perceived-to-be attractive companies. Back in 2012, Berkshire owned a sizable 415 million-share position in U.K. grocer Tesco (OTC: TSCDY). Though Buffett and his team took a small profit totaling $43 million subsequent to 2012 on some of its Tesco position, Buffett wound up being rocked by Tesco's 2014 admission that it overstated profits. By acting slowly to sell down Berkshire's stake in Tesco, Buffett cost Berkshire about $444 million, after taxes.

But in the grand scheme of things, the Tesco loss is peanuts compared to Buffett's biggest blunder.

Mickey and Minnie Mouse waving to the camera inside Disneyland.
Mickey and Minnie Mouse waving to the camera inside Disneyland.

Image source: Disneyland.

Buffett's worst blunder just keeps growing in size

All the way back in 1966, a then-36-year-old Buffett wound up meeting with theme park visionary Walt Disney in Anaheim, California. At the time, Disney (NYSE: DIS) was valued at about $80 million, and CEO Walt Disney was in the process of realizing his vision for Disneyland. This included the addition of a new ride, Pirates of the Caribbean. With a flawless balance sheet and room for growth, Buffett and his then-partners agreed to become investors in Disney, taking a cool 5% stake.

However, rather than hang onto his Disney investment for a long period of time, which has sort of been the hallmark of any Buffett investment in recent decades, the Oracle of Omaha sold his partnerships' stake in 1967 for a 50% profit. Although Buffett didn't lose money, the $2 million profit that Buffett walked away with pales in comparison to what that position would be worth today.

As of Disney's closing price on Friday, Aug. 23, a 5% stake would be worth $11.86 billion in market cap. Plus, this 5% stake would have worked out to more than $1.1 billion worth of dividend income throughout the years. In effect, Buffett's early sale of Disney has cost more than $13 billion.

But wait -- there's more.

In 1995, Disney announced the acquisition of Capital Cities/ABC, of which Berkshire Hathaway owned shares. When completed, the $19 billion cash-and-stock deal led to Buffett owning 21 million shares of Disney stock. Once again, rather than hanging onto shares of Disney, Berkshire Hathaway completely sold out of its position in the company. Originally valued at close to $400 million following the Capital Cities/ABC deal, those same shares would be worth $2.76 billion as of this past weekend. Additionally, these 21 million shares would have brought in almost $300 million in dividend income.

Altogether, Buffett's decision to sell Disney early not once but twice has meant forgoing in the neighborhood of $16 billion in investment and dividend gains.

A businessman holding a stopwatch behind an ascending pile of coins.
A businessman holding a stopwatch behind an ascending pile of coins.

Image source: Getty Images.

Great companies often yield big rewards over the long run

Though criticizing Buffett's decision-making here might seem harsh, the only thing that's truly remarkable about it is the amount of money that was left on the table. The reality is that we're all going to be guilty of investing faux pas at some point in our lives. The key will be whether or not we learn from those mistakes.

In Buffett's case, you'll note that his initial sale in Disney happened more than 50 years ago. With more than seven decades of investing prowess now under his belt, Buffett has shown that he understands the value that can be created by purchasing and holding great companies. Of Berkshire's top 10 holdings, each has been held for an average of 7.5 years, demonstrating that Buffett has learned from his mistakes over the years.

As for John and Jane Q. Investor, the data doesn't lie: Stock valuations for great companies tend to increase over the long run. Look at any stock market correction for validation of this fact. You could have bought into any of the 37 corrections in the broad-based S&P 500 since 1950 and would have made money as of this past weekend. With the U.S. economy spending far more time expanding than contracting, it makes sense to seek out high-quality companies and hang onto them for very long periods of time, because if you don't, you could wind up with a Buffett-like regret on your conscience.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (C shares), Amazon, Berkshire Hathaway (B shares), and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney, short October 2019 $125 calls on Walt Disney, long January 2021 $200 calls on Berkshire Hathaway (B shares), and short January 2021 $200 puts on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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