In his widely read annual letter to Berkshire Hathaway shareholders, Warren Buffett wrote about what he considered to be his worst mistake, buying Dexter Shoe.
A company that makes affordable, practical shoes seems like a good fit for Buffett. He likes companies that are easily understandable with products that have a steady demand.
In 1993, Berkshire paid $433 million for the company. But instead of paying cash, as he usually does, Buffett used Berkshire stock to fund the purchase. That Berkshire stock is worth eight times more now than it was back then.
Dexter didn't survive as an independent company. It stopped making shoes in the United States in 2001, and Berkshire folded what was left into its H.H. Brown Shoe Group unit.
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"What I had assessed as durable competitive advantage vanished within a few years,” Buffett wrote. "By using Berkshire stock, I compounded this error hugely.”
"That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion. In essence, I gave away 1.6 percent of a wonderful business -- one now valued at $220 billion -- to buy a worthless business.”
"To date, Dexter is the worst deal that I've made,” Buffett continued. "But I'll make more mistakes in the future -- you can bet on that.”
"A line from Bobby Bare's country song explains what too often happens with acquisitions: ‘I’ve never gone to bed with an ugly woman, but I've sure woke up with a few’,” is how Buffett summarized the lesson in his uniquely folksy way.
One lesson from this mistake for individual investors is to think before selling.
Most individual investors have limited cash. To buy one stock they usually need to sell another. If the stock they sell outperforms the one they buy, they have made the same mistake Buffett made with Dexter Shoe.
Many investors are always looking for the next big winner and fail to evaluate the future prospects of their current winners.
By pausing before you sell and making sure the new stock has more potential than the old one, you minimize the chance of making this mistake.
© NewsMax 2008. All rights reserved.
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