Buffett's Biggest Mistakes — The Expensive Ones Never Showed Up in the Accounts

The cigar butt: cheap enough to work once, never enough to compound

"I went around looking for what I call used cigar butts of stocks... this terrible-looking, soggy, ugly-looking cigar with one puff left in it. You pick it up and you get your one puff. Disgusting, you throw it away, but it's free."

The method was Graham's and it was purely quantitative: find things trading below what they would fetch broken up, buy them, take the puff. It worked. Buffett's objection is not that it does not work — "you can make money doing it" — but that it does not scale, and it does not compound.

The reason is the sentence worth memorising: "time is the friend of the wonderful business. You keep compounding, it keeps doing more business, and you keep making more money. Time is the enemy of the lousy business."

This is the same insight as the one about holding periods elsewhere in this section, from the other end: if a business is not getting better, the only way to profit from it is to sell at the right moment. That makes your return depend on timing rather than on the business — a much harder thing to be repeatedly right about.

The example he uses is Berkshire Hathaway

"Buying Berkshire Hathaway itself was a mistake. Because Berkshire was a lousy textile business, and I bought it very cheap."

It qualified on every quantitative test: below working capital per share, "you got the plants for nothing, you got the machinery for nothing, you got the inventory and receivables at a discount." And the result: "20 years later, I was still running a lousy business, and that money did not compound."

The counterfactual he draws is precise, and it is the part most retellings drop. The insurance business, See's Candy, the newspaper — he would have bought all of those anyway. The mistake was using a failing textile mill as the platform to do it from: "I would have been way better doing that with a brand new little entity that I'd set up, rather than using Berkshire."

The airline gets shorter treatment and a sharper verdict: a US Air preferred bought in 1989, and "as soon as my check cleared, the company went into the red and never got out." Then the bit that gives the game away — he has an 800 number to call when he thinks about buying an airline stock, and "it takes hours" to talk him out of it. The pull was still there after the loss. Knowing something was a mistake and no longer wanting to repeat it are different states.

The expensive mistakes were the ones with no entry in the ledger

"The biggest mistakes I've made by far are mistakes of omission and not commission. It's the things I knew enough to do, they were within my circle of competence, and I was sucking my thumb. And those are really the ones that hurt."

The named example is Fannie Mae: a company he understood, in trouble, buyable "for practically nothing", and he did not act. "I probably cost Berkshire at least $5 billion by sucking my thumb." Against that, the recorded losses in this clip — the mills, the airline, a filling station — are small.

The condition that makes something a mistake of omission is strict, and he applies it carefully: it has to have been inside your competence. "I don't worry about that if it's Microsoft, because I don't know it. Microsoft isn't in my circle of competence, so I don't have any reason to think I'm entitled to make money out of it." Missing something you never understood is not an error. Missing something you did understand is.

Then the structural problem: "that never shows up under conventional accounting... unless I tell you about them in the annual report, you're not going to know it." This is why the error persists. Every commission mistake announces itself with a red number. Every omission mistake is silent, so the feedback loop that would correct it does not exist.

The punch card: fewer decisions, made harder

"You would be better off if, when you got out of school, you got a punch card with 20 punches on it. And every financial decision you made, you used up a punch. You'd get very rich, because you'd think through very hard each one."

The behaviour it is aimed at is named exactly: "if you went to a cocktail party and somebody talked about a company you didn't even understand what they did, or couldn't pronounce the name, but they made some money last week — you wouldn't buy it if you only had 20 punches." Cheap access produces cheap decisions, and "it's easier now than ever, because you can do it online." That was said in 2001, before commission-free apps.

There is a tension here that is worth naming rather than smoothing over. The punch card argues for restraint, and the omission argument argues for acting decisively when the chance appears. He resolves it himself: "big opportunities in life have to be seized. We don't do very many things, but when we get the chance to do something that's right and big, we've got to do it."

That last item is the sharpest line in the clip: "even to do it on a small scale is just as big a mistake, almost, as not doing it at all." A half-hearted position on your best idea produces the same outcome as omission — you were right and it did not change anything.

What transfers to an ordinary account, and what does not

Three ideas here transfer directly. Two need a caveat before you apply them at a small size.

Transfers cleanly: the review habit. Keep a record of things you understood, considered, and did not buy — with the reason. That list is the only way an omission ever becomes visible, and building it costs nothing.

Transfers cleanly: separating the decision from the outcome. Berkshire the mistake became Berkshire the company. If your review only asks whether a position made money, you will keep bad reasoning that got lucky and discard good reasoning that did not.

Transfers cleanly: the competence condition on regret. If you did not understand it, missing it is not a mistake and does not belong on the list. Most of what feels like a missed opportunity — the stock that ran 400% in a sector you cannot describe — fails this test, and treating it as failure is how people talk themselves into the next one.

Needs a caveat: "seize the big ones" is being said by someone with a permanent capital base, no redemptions, and decades of calibration on what a big one looks like. The version that survives translation is not concentrate hard; it is do not take a position so small that being right about it changes nothing. Size to your ruin threshold, not to your conviction — and see cutting losses and position sizing for where that limit sits.

Needs a caveat: the punch card is a thinking device rather than a rule. Taken literally it argues against regular index contributions, which are the correct behaviour for almost everyone and are explicitly not the kind of decision it is aimed at. It is a constraint on stock selection, not on saving — the two are argued separately in why most active investors trail the index.