This is the Value Investor podcast with Tracy Rinek, All Things Value All the Time. Welcome back value investors. So everyone makes mistakes in investing, even us value investors and even the greatest investors of all time, including Warren Buffett. So Warren Buffett has been investing for over 80 years now.
It's kind of hard to believe, right? This has been going on since he made money off his paper route and then he bought his first stock at age 11. So in all those decades, there are, of course, going to be mistakes because nobody can be perfect all the time, not even Warren Buffett. So on today's podcast, we're going to look at some of his biggest mistakes and try to figure out how we can avoid making those and learn from what he's gone through.
Because if he made these mistakes, the rest of us are likely going to do it too. And if we avoid these, we'll become better investors overall and obviously better value investors. He seems to have learned from some of his mistakes over the years. But again, if you're investing for 80 years or more now, then you're likely going to make further mistakes at some point along the way.
But we do want to try to avoid these. So let's dive in and see what are the three biggest value investing mistakes that he's made that we are probably doing as well. So the first one is to buy in a difficult industry. That seems kind of obvious, but I'm talking about an industry where difficult to build a moat.
It's difficult to have consistent free cash flow. It might be highly regulated in some ways. These are very difficult. So why be in them at all?
Why not just avoid them? And one of the ones that Buffett has been in and he's been in it twice now is the airlines. So he has famously disavowed all the airline stocks at least one time. It was in the 1980s when he owned US Airways.
Apparently, he didn't even lose money on that deal in the 80s. But then it was just so difficult and he just didn't want to go through it again. So he disavowed them. But then in the mid 2010s, so last decade, Berkshire Hathaway started buying a bunch of the airline stocks again.
And many people thought it was the lieutenants who were buying not really Buffett because he had disavowed them decades before having learned his lesson. But maybe it was lieutenants who were buying. So at one point, Berkshire Hathaway owned Delta, Southwest American and United. And then the pandemic hit.
And Buffett literally ordered the lieutenants to sell all the airline stocks in 2020. He did take a loss on it. And many people had commented shortly thereafter that the shares bounced off of those pandemic lows, the lows in March and April of 2020 when everything started bouncing off the lows. And then it didn't look quite so bad.
So for a couple of quarters, Buffett was mocked for panicking and selling and getting out of that big loss. But since then, and now we're four years later, the airline stocks still haven't been all that great of an investment since he sold out of them in 2020. They've continued to have their ups and downs and their issues. So he doesn't look too dumb for selling them when he did and just getting out of the group completely.
But will this will be two times the term there, will he try for a third time at some point in these airlines? I don't know. But that is one of the biggest value investing mistakes is buying in one of these very difficult industries that you don't have a clear idea on earnings and what valuation the company should even have. So that's the mistake number one is buying in these difficult industries.
Okay, mistake number two is holding the stock for too long, even when it's not performing as you had hoped. So a lot of value investors, myself included, are guilty of this because we tend to be buy and hold investors. Warren Buffett is, he's famously said the time to sell is basically never, never sell. But sometimes you do have to sell.
Either there's a change in the business and the business model is now going into oblivion, like how Buffett owned newspapers for decades because they basically had a monopoly on local advertising. But then when the internet came around, then they didn't. Then businesses like Craigslist moved into that territory and revenue and earnings began to drop for the newspapers. He has now sold out of his newspapers only in the last couple of years, but it turned out not to be that great of an investment in these later years.
And so that was just one example of him holding too long onto that investing thesis and then ultimately being hurt on his original investment. Another example is IBM. We've talked about it many times on the podcast, but he bought it a $10 billion stake in 2011 at around $170 a share and he was finally out of it in 2018 at about $140 to $150 a share. They did see a loss in the Berkshire portfolio when he sold out.
So how do you avoid an IBM though? Is it just simply he stayed in too long, but there was no way of knowing he was staying in too long? Well, there is a way of knowing when you take a look at the earnings and that's what we own as investors. We own the earnings and even as value investors, we want to see the earnings going up.
We want to see earnings growth. That's the whole point of being an owner. We want to see growth even while you're getting it at a cheap price. So it can take several years for a trade to turn and obviously IBM, he was in it for seven years.
No one thinks Warren Buffett is going to buy and then sell within a quarter or even a year or even two years really. That has been happening recently in Berkshire's portfolio as I've talked about here on the podcast. But as I believe those are not Warren Buffett making those trades, those are the lieutenants who don't have his stamina and belief of you have to stay in the stock for the longer periods. But when do you know if you've been in it two, three years, you might not be able to see any kind of pattern or a breakdown in the business.
So therefore you have to own it longer than just that short amount of time period to get a good gauge. He did stay in IBM for seven years though, or maybe it was eight, one, two, three, four, five, six, seven, eight total years. So I took a look at the earnings to see if maybe there were any signals in there about when he should have gotten out instead of getting out in 2018 and maybe he would have saved some losses if he had gotten out earlier. So in 2011 when he bought it, IBM earned $13.39 in 2012.
They earned 1530. So that was a nice gain. So you can see there's some nice earnings growth there. In 2013, it was good again up to 1703.
So from 1339 to 1703. So he's looking pretty vindicated here. This is why he bought it. He bought it on the cheap in 2011.
And now the company is turning it around. The earnings are back to this nice earnings growth. But in 2014, it cooled off a bit down to 1635. Now this wouldn't be enough for anybody to get alarmed because every company has pullbacks in their earnings, even the best ones.
And that's not something where you're like, oh, I need to sell. Suddenly it's on the decline. But it's starting to tell you that there may be a value type of trap there. But one year is not enough to go on.
It's not enough of a trend. So then 2015, it unfortunately did decline again to 1493. Then in 2016, it declined again to 1360. So in 2011, we bought it at 1339.
And by 2016, earnings had gone up. Come back down back to 1360. So that's not really the trajectory you want to go on. And you've given them a couple of years there, 2014, 2015, and then 2016 to see that it wasn't going in the direction you want it.
And maybe by then 2016 is the time when you should have been getting out. Instead he stayed in a little longer. Maybe giving him the benefit of the doubt before he finally threw in the tile. So 2017 was 1383 and 2018 was 1382.
So it basically bottomed in 2016, but then went sideways, not really seeing much earnings growth at all, but not any further declines. But that's not what you want. Even though IBM was still cheap in 2018, you can find companies that are cheap, that are growing their earnings. It doesn't even have to be double digit earnings growth, but just significant single digit earnings growth of 5% to 7%.
If you get it cheap enough, could be enough to want to hold on to that company. But in this case, it wasn't so buffet got out. So this looked good in the first four years, but then the earnings decided to decline there, giving you signs of the value trap. And as it continued to decline, it definitely was a value trap.
As I said, every company has reversals or they stall out for a year or two, but they rebound fairly fast, but IBM did not. Meanwhile, the S&P 500 during the same time period from 2014 to 2018 saw the overall earnings going the other way, going a lot higher. So he was underperforming the S&P 500 as well on the earnings side. That's not what you want.
No matter how cheap it is. So he had to get out. So this was a good example of holding too long. But while I was looking at IBM, because that's like his famous example of, hey, you should have sold earlier.
I decided to take a look at a couple other stocks that he's held for a while now that are still in the portfolio. Is he holding any of these other ones too long? It's easy to just look at IBM and then say, oh, yeah, that's obvious. But what about some of these other ones?
So the first one that springs to mind is Bank of America. It was added to the portfolio in the third quarter of 2017. So 2017, it made $1.82, 2018, 261. So looking a little bit good there, 2019, 293.
So okay, the banks are, you know, this one, Bank of America moving in the right direction. 2020 pandemic hit. So it fell to 187. You could forgive that because a lot of earnings weekend and fell in 2020 because of the lockdowns.
2021, we had a big rebound as the economy started to open up back up to 356. So that's the high sense he bought. So that's looking good. Then 2022, back down a bit to 319, 2023, 342, and then 2024, expected to be 310.
So is this an IBM problem? Well, it's, it's gone up to the new highs, come down a little bit, but mostly stayed somewhat close to those 2021 highs. So not too terrible and not sliding every single year, year over year. So I'm not considering this to be the same kind of problem.
And apparently Warren Buffett isn't either. That's why he's still holding it in the Berkshire portfolio because this earnings outlook doesn't look too shabby. What about Apple ticker? AAPL they bought that in Berkshire in the first quarter of 2016.
So 2016, the company made $2.07, 2017, 230, 2018, 297. So we're going in the right direction and it's very solid, nice gains. 2019, 296. So a bit of a stall there from 297 to 296.
No earnings growth really in there. 2020, the pandemic year, this one did not decline because everybody was on various devices and whatnot and subscribing to things. So earnings were up to 326. Then in 2021, same thing.
We saw a lot of momentum in like the subscription business earnings up to 562. Then 2022, 611, 2023, 612. Basically kind of a replay of 2018, 2019 when there was almost no earnings growth. Now 2024, expected to be 655.
So maybe we're back onto this pattern of growth again, but you are paying a much higher price for that 655 now at nearly 30 times earnings for Apple. So that's also a difference between what was going on in 2018, 2019, when you might have been paying much, much less, almost half, maybe 15 times or even less back then. So that's a question, but if those earnings are still going to turn around and continue higher, then I think Buffett will be, for the most part, staying in these shares, maybe shedding a few here or there as he's done recently. But overall, he should be happy to kind of stay in this position.
Then I took a look at one of his other kind of infamous earnings or buys, which I don't think it was him. It was most likely the lieutenants, which actually we know it was because he put a blame on them. And that was Amazon in the first quarter of 2019. So in 2019, it made $1.15 2020 as the pandemic hit, 209.
Everybody was ordering online at that point, 2021, also booming at 324, but 2022 kind of caught up with them. They had to do layoffs, the shipping cost had soared, expenses across the board had soared, and so they only made 72 cents. But some of those cost cutting maneuvers and then supply chain fixing itself helped in 2023 backup and now 2024, expected to be 408. So that would be a cycle high and pretty impressive growth from 2023 if they get there.
So this one not looking too much like a value trap, but it had 2022. But like I said, every company has a year like that. There's going to be a time where some things just aren't going to work, earnings are going to decline, but you just don't want to see it happening year after year after year, which is what happened with IBM. So Amazon not looking too bad.
And the lieutenants who bought in after Buffett said, yes, it wasn't me in 2019 when shareholders complained that it was not a value stock at that time. They are still in it, but they have shed a few of the shares in recent quarters on Amazon. Okay, so the third mistake kind of plays in right here with what I was just looking at with Amazon because the third one is buying a stock that is actually expensive at the time. And we don't see Buffett do this very often, but now that the lieutenants have a portion of the portfolio and are running their own money, they seem to want to buy some stocks that are not pure classic value stocks, but that are stocks that have underlying value in some other manner, like they are cheap based on comparison to peers, or there was just a big sell off.
So the stock is historically cheap. And I feel like that is the category that Amazon fell in at the time. It was not as we know a classic value stock. So this can hurt your overall returns, however, because value investors historically are buying a stock that's undervalued and that's been around to big gains.
The bad news is already priced in usually. If you had bought Amazon when it was 2022 and the shares did take a dive there, then you might have been getting a much better value than in 2019 when Berkshire actually bought these shares. So when they bought the shares, the end of the quarter price was 151.94. It wasn't that cheap at the time, as I mentioned, certainly not on a PE basis or even price to sales basis.
And Buffett did face the questioning in the May shareholder meeting of that year, but he never really gave us an actual answer on why the lieutenants thought it was cheap at that time, whichever one it was that bought it. And we still don't really know, but nobody really asked any questions about it anymore. It is a very small percentage of the overall portfolio. So people just tend to ignore it or forget that Buffett's in it at all.
But I decided to take a look at those shares to see what have they done since the end of the quarter in 2019 to here in April 2024. So the shares as of the last trading day of March 2019 and through April 2nd, 2024 are up 105.2%. So that doesn't sound too bad. They basically have doubled in that time period.
The S&P 500 is up 84.4%. So it has beat the S&P 500, but the NASDAQ is up 111%. And then I took a look even at Berkshire's own shares. Those are up 109%.
So a little bit better than even what Amazon is doing. But if you recall, the shares did sell off during this time period. At the start of 2024, they were kind of moving in tandem with the S&P 500. They've been a little bit more bullish and are seeing a bit more of a breakout here than the S&P 500, which is why we're now getting the outperformance.
But it hasn't been smooth sailing, that's for sure, because this stock was added at a more expensive price on a pure value investor criteria. I decided to take a look at Chevron ticker CVX, also in the Berkshire portfolio, to see the difference between buying a stock that's more expensive, not really a classic value valuation versus one that is. And CVX was added originally in the fourth quarter of 2020. That was, I believe, lieutenant.
And then Buffett added the big huge investment in it a couple quarters after that. But we're going to go off of Q4 2020, because that is when the original shares were added in. And it was cheap. Remember, this is the end of the first year of the pandemic.
Oil prices had plunged down. They went negative. All the oil stocks were left for dead. They started to rally in November of that year when the COVID vaccine was announced, that Pfizer had one that was workable.
And so we saw a rebound, but still dirt cheap at the end of that year. So since they bought it, those shares, and I went off of the last day of the fourth quarter 2020, which was December 31st, that year, they're up 90.3% sent through April 2nd. And the S&P 500 is up just 39.1%. So quite an outperformance compared to the S&P 500.
Was it because they got it so cheap? Was it because it's just the perfect timing? But that's kind of correlated with the cheapness. We don't know.
We'll never really know. But the whole point of being a value investor is that we want to get it as cheap as possible. The bad news is priced in. The streets ignoring it because the upside is bigger.
And Chevron is working out for them in that classic value kind of way. So those are the three biggest mistakes. Buffett's made them all. Many of us have also made all of these.
I know I have. And again, I'm not saying not to buy stocks that are growth stocks that have sold off or gotten cheaper or cheap compared to their peers. But a mistake is just buying too many of those thinking I'm getting them at a value. When you're not getting them as cheap as the classic values, which should give you more upside.
So sticking with the value, investing the classic value is really hard. We're seeing that with Berkshire's portfolio right now. It's got 160 billion or more in cash. Buffett is basically coming out and saying what he did in the late 1990s, that there's very little that's of value for him to buy right now.
So that's why he's on the sidelines. And even buying his own Berkshire Hathaway shares, which they have done often on in recent years, those shares aren't even cheap right now. They've had quite a run and are trading over 20 times earnings as well. So I'm not even sure he's getting much of a bargain if he buys his own shares.
So it's just very difficult to have the patience to be a value investor and to really wait for the classic value stocks to come into focus. Now, I still think he could be buying even more chevron shares here. For whatever reason, he's not adding a lot to it. But he has in recent quarters again added a little bit to that position.
And he has been buying Occidental, however, but energy is still one of the cheap areas. Banks still cheap, but for whatever reason, he's not finding the values there either. And he has the big position in Bank of America. And as we just saw, the earnings outlook for at least Bank of America is not terrible, but not the greatest either.
And those stocks are not maybe for him cheap enough to get in there when you have this kind of lax, today's, a couple earnings growth expected at least through this year. So yeah, it's hard being a value investor, but we all make these mistakes. They're easy to correct. And hopefully we keep an eye out for them for the next time.
So let me recap some of the stocks we talked about on this episode. Of course, there was IBM. It's always going to be used in these kind of episodes for, you know, Buffett's biggest mistakes. IBM was definitely one of them, but he seems to have, of course, corrected out of that now.
So that's all you can do, ticker IBM. Then we have Amazon ticker AMZN. We have chevron, which we just mentioned ticker C as in Charlie, V as in Victor X, CVX. Then we had Bank of America ticker B A C, B as in boy A as in Adam, C as in Charles.
And then we finished, or on this list, we finished with Apple ticker A as in Adam, A as in Adam, P as in Paul, L as in Larry for that one. And as always, you should subscribe to get all of our podcasts. You can get them on Apple or on Spotify or on Amazon Music. You can get them on YouTube on the Zacks Podcast page.
Go to that page and you'll see all the value investors there, but get us somewhere and I'll see again next week with some more stocks. This material is being provided for informational purposes only, and nothing here in constitutes investment, legal accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this podcast without seeking the services of competent and professional legal tax or accounting council. Publication and distribution of this podcast is not intended to create any information contained here in does not constitute an attorney-client relationship.
No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investment in securities, companies, sectors, and market-identified described were or will be profitable. All information is current as of the date here in and is subject to change without notice. Any views or opinions expressed may not reflect those of Zacks' investment research as a whole.