Buffett's Biggest Mistake

In his latest annual letter to his Berkshire Hathaway (NYSE: BRK-B) shareholders, Buffett lamented "some dumb things" he did in 2008. He apologized for his ill-timed investment in ConocoPhillips, as well as a smaller stake in two Irish banks, which he dubbed "unforced errors."

And those were far from the first flubs Buffett has made during his illustrious investing career. His purchases of shares in Pier One and US Airways
were poor investments, and he compounded his ill-fated acquisition of
Dexter Shoes by using Berkshire shares instead of cash as currency. In
fact, Berkshire itself was a poor investment -- Buffett greatly
underestimated the capital requirements and competitive pressures
endemic to the textile industry.

The greatest mistake of all

But when
prompted for his greatest investing miss in an interview last year,
Buffett didn't mention any of those gaffes. In fact, Buffett's biggest
mistake wasn't a bad investment at all -- it was a good investment that
could have been great.

"There have been a few things where I've started to buy them and
then they've moved up," Buffett said. But instead of adding to his
position in these great businesses, Buffett "stopped at a tiny fraction
of where we should have gone."

Buffett specifically cited his failure to purchase additional shares of Fannie Mae (NYSE: FNM) in the early '80s and Wal-Mart
in the mid '90s. "Both of those deals would have made us as much as $10
billion, and I managed to absolutely minimize the profits," he said.

The Oracle was similarly wistful about Costco (Nasdaq: COST):
"We own a little at Berkshire, but we should have owned a lot," Buffett
lamented. He blamed his failure to buy more shares on "temporary
insanity."

Don't be insane -- swing the bat!

Buffett
often likens investing to a game of baseball, where every potential
investment is a new pitch, and there are no called strikes. Patient
investors can sit back and wait for the perfect pitch, ready to deposit
that 2-0 fastball into the centerfield bleachers. But before you step
in the batter's box, you must first identify what your perfect pitch
looks like.

Buffett likes to swing at easily understandable businesses "whose
earnings are virtually certain to be materially higher five, ten, and
twenty years from now." After taking too shallow a cut on companies
like Costco, he learned that "over time, you will find only a few
companies that meet these standards -- so when you see one that
qualifies, you should buy a meaningful amount of stock."

Finding your perfect pitch

With the
stocks of many great companies trading at significant discounts to
intrinsic value, experienced gurus like Buffett are swinging for the
fences right now. But many individual investors are standing with their
bat on their shoulder, letting these perfect pitches float on by. Look
at these great opportunities available today:

Data from CapitalIQ, a division of Standard & Poor’s.

Each of these companies is an easily understandable business whose
strong brands mean their earnings are very likely to be materially
higher five, 10, and 20 years from now. But while their future growth
prospects remain strong, their share prices are the cheapest they've
been in years. In such a volatile market, there's a chance these
companies could fall farther, but I believe they're much closer to the
bottom than the top.

Copyright © 2009 Universal Press Syndicate.