Warren’s first mistake was in buying Berkshire. Even though he knew textile manufacturing to be unpromising, he bought because he thought the price looked cheap.
This is akin to the “cigar butt” approach to investing. A cigar butt found on the street that has only one puff left may not offer much of a smoke, but that puff is all profit due to the bargain purchase.
This approach is foolish unless you are a liquidator.
Firstly, the original purchase price might turn out to be not cheap. Usually, there will be more problems hidden from the surface.
Secondly, any initial advantage from the purchase price will be quickly eroded by the low returns of the business.
Another mistake that Warren made was in buying a Baltimore department store, Hochschild Kohn. It was bought at a substantial discount to book value and the management was good.
It was sold three years later for about the same price that Warren paid.
Always keep this in mind, “It’s far better to buy a wonderful company at a fair price than to buy a fair company at a wonderful price.” Look for both first-class business and first-class management.