Mar 21st, 2007 by Martin Lee
2 Mistakes That Warren Buffett Made
Late in 1993, Warren Buffett sold 10 million shares of Cap Cities at $63. At the end of 1994, the price was $85.25, a “loss” of $222.5 million.
This was a “repeat offence” because Warren Buffett had previously sold Cap Cities at $4.30 per share during 1978-1980 and then bought them again for $17.25 in 1986.
However, the top mistake of the year went to the $358 million purchase of USAir preferred stock, made five years ago.
In the analysis of the purchase, Warren Buffett had failed to consider the problems that would affect a carrier whose costs were both high and extremely difficult to lower.
In the beginning, this was not so much a problem as the airlines were protected from competition by regulation. They could absorb high costs by passing them on to consumers using high prices.
Even when deregulation came, the impact was not immediately felt as the capacity of low cost carriers was too small at first. But as the capacity of low cost carriers increased, the high-cost airlines were forced to cut their fares to stay competitive.
This poses serious considerations to their long term viability.
As it turns out, Berkshire’s $358 million worth of preferred stock in USAir was written down to $89.5 million, a loss of 75%.