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3 of Warren Buffett’s biggest investing mistakes—including the ‘dumbest’ stock he ever bought

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Each year, in a widely read annual letter to shareholders, Berkshire Hathaway chairman Warren Buffett shares financial highlights at the firm, explanations of his investment philosophies and pearls of wisdom accumulated over his 92 years.

Each year, investors come back hoping to glean something from the "Oracle of Omaha" and his massively successful career as a money manager. There was plenty of that to be had in the 2022 version of the letter, which published on Saturday. But Buffett was quick to point out his shortcomings as well.

"Over the years, I have made many mistakes. Consequently, our extensive collection of businesses currently consists of a few enterprises that have truly extraordinary economics, many that enjoy very good economic characteristics, and a large group that are marginal," Buffett wrote. "Along the way, other businesses in which I have invested have died, their products unwanted by the public."

Buffett goes on to write that Berkshire's results "have been the product of about a dozen truly good decisions" over the course of 58 years.

With respect, it's likely quite a few more than that. But in the spirit of humility, let's take a look at three of Buffett's worst decisions, and what investors can learn from them.

1. Buying Berkshire Hathaway                

During a 2010 appearance on CNBC, Buffett called Berkshire Hathaway "the dumbest stock I ever bought."

In 1962 Buffett had built a stake in what was then a failing textiles firm, but agreed to sell his stock back to owner Seabury Stanton at $11.50 per share. But when Buffett received the offer letter from Berkshire, the price had changed to $11 3/8.

Feeling chiseled, Buffett sought payback. Instead of selling, he began buying the stock, took control of the company and fired Stanton.

Had he sold, he may have taken the money and invested in the insurance business — a move that he'd eventually make anyway, and one that would launch is business empire. Instead, he had to spend years and resources trying to revive his textile holding.

"I had now committed a major amount of money to a terrible business," Buffett later said of the purchase. He calculated that the mistake was worth $200 billion.

It's unlikely you'll be in position to buy a company out of spite, but you may find yourself making investing decisions based on emotions, whether it's exuberance over a risky investment you think could make you rich or fear that a falling market could ruin your portfolio.

In each case, it's important to take a step back and realize that investing is a long-term game, not one that's played in the day-to-day fluctuations of the market.

Being a good investor "is about teaching yourself not to let your emotions become your portfolio's worst enemy," says Sam Stovall, chief investment strategist at CFRA.

2. A 'world record' mistake: Buying Dexter Shoe

Buffett bought American shoe company Dexter Shoe in 1993, overlooking that the firm was facing heat from foreign manufacturers. "What I had assessed as a durable competitive advantage vanished within a few years," Buffett wrote in his 2007 letter to shareholders.

Compounding the mistake, Buffett paid $443 million for the company in Berkshire stock rather than cash. Today, the shares would be worth north of $12 billion.

"As a financial disaster, this one deserves a spot in the Guinness Book of World Records," Buffett wrote in his 2014 shareholder letter.

You may not have stock in your own lucrative company to trade, but you do likely have a core portfolio of low-cost, well-diversified funds. Diverting a major portion of your assets from your core investments to take a chance on an unknown quantity can be a dangerous move, investing pros say.

If your bet goes south, you'll not only lose money on your investment, but you'll miss out on the gains you would have enjoyed by sticking to the plan.

That's not to say you can never take a chance on an investment you like. But such a holding "should never be a dominant force in your portfolio," says Kenneth Lamont, senior manager research analyst for passive strategies at Morningstar. If you're going to invest in something like, say, a trendy thematic ETF, "you shouldn't be putting in money you couldn't essentially afford to lose."

3. 'Dawdling' before selling Tesco

By the end of 2012, Berkshire owned 415 million shares of UK grocer Tesco — an investment of $2.3 billion. Over the next year, Buffett wrote in his 2014 shareholder letter, he began to "sour" on the firm and sold 114 million shares.

Buffett has made his reputation (and billions of dollars) as an investor by buying great companies and holding on over the long term. The problem was, Tesco was slowly revealing itself to be a not-so-great company.

"During 2014, Tesco's problems worsened by the month. The company's market share fell, its margins contracted and accounting problems surfaced," Buffett wrote. "In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives."

Berkshire eventually sold its remaining interest in the firm and took a $444 million loss.

"An attentive investor, I'm embarrassed to report, would have sold Tesco shares earlier. I made a big mistake with this investment by dawdling," says Buffett.

But even attentive investors can find it difficult to sell struggling stocks they once liked. A cognitive bias known as "anchoring" is one that just about every investor struggles with, says Scott Nations, president of investment volatility analytics firm NationsShares and author of "The Anxious Investor." 

"If you bought an investment at X price, and now it's worth 20% less, it's tough to disabuse yourself of the notion that it's worth X," he says.

Instead of reevaluating the investment and possibly selling, you tend to hang on and, well, dawdle. What Nations suggests doing if you hold such an investment is actually exactly what Buffett did: Sell a chunk of your holding and "see if that doesn't help you think more clearly."

By mentally resetting the value of your failing investment, you can take a more clear-eyed view of its long-term prospects. In other words, Buffett made the right move here. Just not fast enough for his liking.

Get CNBC's free Warren Buffett Guide to Investing, which distills the billionaire's No. 1 best piece of advice for regular investors, do's and don'ts, and three key investing principles into a clear and simple guidebook.

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