Warren Buffett says selling Apple was 'probably a mistake': What investors can learn from his biggest blunders

"I had now committed a major amount of money to a terrible business."

Warren Buffett, Chairman and CEO of Berkshire Hathaway.
David A. Grogan | CNBC

At the annual meeting of Berkshire Hathaway shareholders on Saturday, Warren Buffett found himself in a familiar position: admitting he had a regret. Berkshire's chairman and CEO revealed that he sold a small part of his company's share of Apple stock in 2020. "We got a chance to buy it, and I sold some stock last year," he said. "That was probably a mistake."

Berkshire investors likely aren't losing too much sleep over it. After all, Berkshire stock recently hit an all-time high, and the conglomerate still owns 944 million shares of the iPhone maker valued at about $111 billion. But for everyday investors, it's worth remembering that for as much as Buffett revels in his successes — and there are many — the legendary investor is also willing to acknowledge and learn from his many failures.

Read on for three of Warren Buffett's biggest blunders, and what any investor can stand to learn from them.

1. The $200 billion mistake: Buying Berkshire Hathaway        

During a 2010 appearance on CNBC, Buffett called Berkshire Hathaway "the dumbest stock I ever bought."

That may seem preposterous given that Berkshire's stock price by the end of 1965, the year Buffett acquired the firm, was $19, and Berkshire shares trade for nearly $422,000 apiece today.

Before Buffett turned it into an investing empire, Berkshire Hathaway was a failing textiles firm. Buffett periodically bought up shares, thinking the company undervalued. Eventually he agreed to sell his stake back to owner Seabury Stanton at $11.50 per share.

But when Buffett received the offer letter from Berkshire, the price had changed to $11 3/8. "He chiseled me for an eighth," Buffett told CNBC's Becky Quick. "If that letter had come through with 11 ½, I would have tendered my stock. But this made me mad. So I went out and started buying the stock, and I bought control of the company and fired Mr. Stanton."

Smooth sailing from there, right? Not so, said Buffett: "I had now committed a major amount of money to a terrible business." Instead of investing through a much healthier insurance business, he was weighed down trying to get failing textile businesses to succeed for his first 20 years at Berkshire.

"If instead of putting that money into the textile business originally, we just started out with the insurance company, Berkshire would be worth twice as much as it is now," he said. All in all, Buffett calculated that the mistake was worth $200 billion.

The lesson: Keep emotions out of investing

While most retail investors don't have enough cash to seize control of a business out of spite, many of them do find themselves having emotional responses to their investments. And if those emotions lead you to stray from your investing plan, it can lead to big mistakes, including panic-selling when stocks go down or racing into risky investments out of fear of missing out on big gains.

"One of my biggest goals is for people to never trust their instincts about financial decisions," says Brad Klontz, a certified financial planner and financial psychology professor at Creighton University. "We're wired to do it all wrong."

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2. Buffett's 'most gruesome' mistake: Paying for Dexter Shoe with Berkshire stock

Buffett bought American shoe manufacturer Dexter Shoe in 1993, thinking the company was in a strong position to compete with rival firms. Things soon went south. "What I had assessed as a durable competitive advantage vanished within a few years," Buffett wrote in his 2007 letter to shareholders. The firm was squeezed out by foreign manufacturers and Buffett eventually folded the company into another one of his businesses.

Buffett paid $443 million for the company. By 2015, he called the deal his "most gruesome" mistake. That's because he paid for the deal in Berkshire stock rather than cash. "The shares I used for the purchase are now worth about $5.7 billion," Buffett wrote in his 2014 shareholder letter. "As a financial disaster, this one deserves a spot in the Guinness Book of World Records."

The value of the shares today: $10.6 billion.

The lesson: Don't sell your winners to make risky bets

Buffett's calculus shows that he views every dollar in his portfolio as an opportunity, and you should, too. "In essence, I gave away 1.6% of a wonderful business … to buy a worthless one," he wrote in his 2007 shareholder letter.

As an investor, you don't own one business, but a portfolio of many of them — and hopefully that portfolio is low-cost and well-diversified. Diverting money from your core investments to take a shot on an asset that underperforms has the dual effect of losing you money and diminishing what you could have earned had you stuck with what was working.

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To avoid major portfolio setbacks, investing pros recommend you hold the vast majority of your investments in your core portfolio while setting aside a small portion of your funds for riskier fare, such as individual stocks.

"If you want to take 5% of your portfolio to explore investments and learn about the market, it's OK to get a little risky," Doug Boneparth, a CFP and founder of Bone Fide Wealth in New York City, told Grow. "I can plan around bad things happening to 5% of your invested assets."

3. Buying General Re and ConocoPhillips without considering the downside

Berkshire bought General Reinsurance (Gen Re) in 1998, and although the firm would go on to become a profitable Berkshire holding, the acquisition got off to a rocky start. The firm's profitability fell precipitously in 1999 due to underwriting losses, and after the September 11 terrorist attacks, Buffett said that Gen Re has either ignored or overlooked the possibility of terrorism-related losses when crafting insurance policies.

Berkshire realized $800 million in underwriting losses in 2001 after Gen Re was revealed to have insufficient cash to cover losses from old policies.

Buffett found himself in similar territory in 2009, when he expressed near-instant regret in buying shares in energy giant ConocoPhillips. "Without urging from Charlie [Munger] or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak," he wrote in his 2008 letter to shareholders. "I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year."

The lesson: Know what you stand to lose

Warren Buffett didn't know that a terrorist attack would derail his insurance investment or that falling oil prices would foil his energy bet. But in both cases, it's clear that Buffett invested without fully realizing the potential downside of his bets.

In the case of Gen Re, Buffett, a longtime investor in insurance businesses, failed to do a deep enough dive into the firm's underwriting practices.

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Retail investors don't have access to Buffett's resources, but it's smart to do everything you can to understand the potential risks that come with any investment. When it comes to individual stocks, it pays to delve into companies' filings with the SEC, says Charles Rotblut, vice president of the American Association of Individual Investors. "Read through the 10-K and see if any of the risks the firm mentions are jumping out at you," he says. "That will give you a better sense of that's going on with the business."

When purchasing Conoco, Buffett surely knew all about the potential for big swings in energy markets that could affect the company's bottom line. For the retail investor, it's important to understand that the market goes through cycles, and accordingly, you should make sure you can withstand a big dip in your overall portfolio as well, says Kevin Smith, a CFP and vice president of Wealthspire Advisors.

"You need to be honest with yourself about your appetite for risk," he says. "If you're going to freak out if you're down 20%, it may be time to tweak your portfolio so that it lines up with your risk tolerance."

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