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Learning From Buffett’s $11 Billion Mistake

Learning From Buffett’s  $11 Billion Mistake

The rule of thumb is that when Warren Buffett makes a market move, others listen and follow due to his outstanding investing performance. However, every now and then, even he makes a mistake--even if Berkshire Hathaway’s balance sheet isn’t much worse for it.  

Buffett has taken personal responsibility for paying too high a price for Berkshire biggest acquisition in 2016: Precision Castparts Corp. Berkshire Hathaway acquired the company for $32.1 billion, and then took a nearly $11-billion writedown, most of it attributed to Precision.

In his annual letter to investors this weekend, Buffett said, "My miscalculation was laid bare by adverse developments throughout the aerospace industry."

Buffett said he bought “a fine company - the best in its business” but was simply too optimistic about the company's normalized profit potential. 

“I was wrong ... in judging the average amount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business,” Buffett wrote.

Last August, as the pandemic pretty much grounded the airline industry, Berkshire wrote off $9.8 billion of Precision’s value. Then, in Q2 2020, Precision was hit with a $78-million pre-tax loss from earnings of $481 million the previous year.

Overall, the pandemic cost Precision over 13,400 jobs, representing 40% of its workforce. 

Even though the company has begun to improve margins recently, the airline industry has still not recovered as expected. 

According to some estimates, air travel in the United States is unlikely to return to pre-pandemic levels before 2024. That will surely add more pressure on the supply chain in the industry, including on Precision Castparts.

Berkshire Hathaway sold all its airline stocks including the American, Southwest, Delta Air Lines and United back in May.

Berkshire Hathaway also suffered losses earlier in 2020, including with Kraft Heinz and Occidental Petroleum. 

Even so, the report showed Berkshire's total net earnings during the second quarter were $26.3 billion. 

Despite that loss and fallout from the pandemic in general, Berkshire Hathaway posted a net profit of $35.8 billion in Q4 2020, representing an increase of 23%. Its profitable holdings for the quarter included Apple Inc. and Geico.=

Amazon was another of Buffett’s “mistakes” that left Berkshire with only a small stake. 

“I was too dumb to realize. I did not think Bezos could succeed on the scale he has,” Buffett said four years ago. Since then, his holding company Berkshire Hathaway bought nearly $1 billion in Amazon shares.

In 2018, Berkshire Hathaway entered its joint venture with Amazon and JPMorgan Chase, called Haven, an independent healthcare company. 

In 2019, Buffett also admitted he overpaid for Kraft Foods in 2015. A decade earlier, he called his 1993 purchase of Dexter Shoe his “worst deal” ever. 

Still, in the latest annual letter to investors the 90-year-old billionaire wrote: “I’ll make more mistakes in the future - you can bet on that.”

By Tom Kool for Safehaven.com

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