In his latest Wall Street Journal column, James B. Stewart examines some of the mistakes Warren Buffett acknowledged making in Berkshire Hathaway’s 2009 letter to shareholders, and explains what average investors can learn from “The Oracle of Omaha’s” mistakes.
Most interesting is Stewart’s discussion of Buffett’s decision to buy $7 billion in ConocoPhillips shares last summer, around the time that oil was hitting its peak. Since then, Conoco shares — and those of most oil firms — have plummeted along with the price of oil. Stewart says this mistake is particularly eye-catching, given the “be greedy when others are fearful, and fearful when others are greedy” philosophy Buffett has touted. “I sold half my position in COP (and other energy positions) last year after pointing to all the signs that oil and commodities were in a bubble,” Stewart writes. “If even I could discern the ‘euphoria’ that Mr. Buffett warns about, surely he could, too. And yet he bought: over $7 billion worth, evidently, now worth even less than the $4.4 billion reflected in Mr. Buffett’s letter.”
“How could the Cassandra of overpriced markets have done such a thing?” asks Stewart. Perhaps Buffett will explain sometime, he says, adding, “but whatever the reasons, it is a testament to the power of the herd instinct that even a Buffett could be swept up in the euphoria.”
Stewart also discusses Buffett’s decision to up his stake in Burlington Northern Railroad, a firm sensitive to commodities prices, and his failure to sell off shares of maligned financial firm Moody’s, which have plunged. These mistakes stand out, he says, because the decisions seem to contradict Buffett’s philosophy.
The broader point Stewart makes, however, isn’t a criticism of Buffett. It’s a warning about howmuch havoc the market can play on investors’ emotions. “While I feel Mr. Buffett’s homespun wisdom has never been more timely, in my experience it has never been more difficult to implement,” he says of the “pessimism is your friend, euphoria the enemy” mindset that Buffett touts in his recent letter. “If even Mr. Buffett can succumb [to market euphoria], then the rest of us shouldn’t be too hard on ourselves,” Stewart says. “At the same time, we should learn from his and our mistakes. So if you’re feeling some pressure to sell into the current pessimism, stop and think: If pessimism is your friend, euphoria your enemy, is this the time to sell?”