A casual observer may assume the greatest money managers have charmed investing careers filled with success after success.
But that isn't the case, Michael Batnick, director of research at Ritholtz Wealth Management, explained in his new book "Big Mistakes: The Best Investors and Their Worst Investments," released on June 6.
Batnick shared key lessons and money-losing investment examples from several legendary managers such as Warren Buffett, Stanley Druckenmiller and Michael Steinhardt.
Buffett may be the most celebrated investor of them all. The investor's track record is unparalleled. From 1965 to 2017, Berkshire Hathaway's rising market value generated a 20.9 percent annual return compared with the S&P 500's 9.9 percent, resulting in a cumulative gain of 2,404,748 percent versus the market's 15,508 percent return.
And even the Oracle of Omaha has made poor investment decisions. Batnick wrote how the investor acquired a 12 percent stake in US Air for $358 million in 1990, which declined by 76 percent in value in a few years. But the mistaken airline position, which eventually recovered, paled in comparison to the loss related to his investment in Dexter Shoes, the writer said.
Buffett bought the shoe company for $433 million of Berkshire Hathaway stock in 1993, a total of about 25,200 shares. Dexter would eventually be worth zero, which cost the investor nearly $6 billion in economic value due to Berkshire Hathaway shares' appreciation, according to Batnick.
The author quoted Tren Griffin who wrote, "In doing their due-diligence for Dexter Shoes, Buffett and Munger made the mistake of not making sure the business had a moat and being too focused on what they thought was an attractive purchase price."
Druckenmiller's $3 billion loss
Batnick also covered legendary investor Druckenmiller's emotional multibillion-dollar trading mistake during the dot-com bubble.
The billionaire is chairman and chief executive officer of the Duquesne Family Office. His hedge fund track record is also stunning, generating annualized returns of 30 percent across three decades during his investment career.
In 2000 Druckenmiller tried the high-beta, tech high-flyer game and lost, which he talked about during a speech at the Lost Tree Club in January 2015.
"So like around March (of 2000) I could feel it coming. I just had to play. I couldn't help myself ... I think I missed the top by an hour. I bought $6 billion worth of tech stocks, and in six weeks I left Soros and I had lost $3 billion in that one play," Druckenmiller said.
Batnick showed the best, most successful fund managers all have made major analytical or impulsive errors. The key lesson is investors need to learn from their bad experiences, according to the author.
"The next time you take a big loss or sell too early or try to get back to even, remember, we've all been there," Batnick wrote at the end of his book. "The difference between normal people and the best investors is that the great ones learn and grow from their mistakes, while normal people are set back by them."