How to pick stocks wisely? Learn from Buffett's biggest mistakes

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Every investor makes mistakes, even Warren Buffett who is widely regarded as one of the most successful investors of all time. 

Buffett's annual letters to his Berkshire Hathaway shareholders tell the tales of his biggest investing mistakes. 

What lessons can mooers learn from their mistakes to sharpen their investing game?

Mistake 1: Buying Berkshire Hathaway

Ironically, Buffett said in 2010 that the dumbest stock he ever bought was Berkshire Hathaway Inc.

In 1962, Buffett first invested in Berkshire Hathaway when it was a failing textile company. Later, the firm tried to chisel Buffett out of more money.

To "revenge", Buffett bought control of the company, fired the manager, and tried to keep the textile business running for another 20 years. This vindictive move was estimated to cost Buffett $200 billion.

Lesson learned

The investment advice here is not to let emotions factor into financial decisions.

To avoid the sway of emotion in trading, mooers should have an investment plan and stick to it.

Mistake 2: Buying Dexter Shoe Co.

In 1993, Warren Buffett purchased Dexter Shoe Co. for $433 million in Berkshire Hathaway stock. 

In his 2007 letter to shareholders, Buffett explained the poor decision, admitting it cost investors $3.5 billion, which was worth 1.6% of Berkshire Hathaway's net worth at that time.

"What I had assessed as a durable competitive advantage vanished within a few years...To date, Dexter is the worst deal that I've made. But I’ll make more mistakes in the future — you can bet on that." Buffett wrote.

Lesson learned

When a company has a viable competitive advantage, it can maintain a high-profit margin. For example, Wal-Mart adopts a low-pricing strategy which gives it a unique position among competitors.

However, if there’s no solid reason for customers to continue patronizing a brand, it’s likely destined for failure.

"A truly great business must have an enduring "moat" that protects excellent returns on invested capital," Buffett said.

Mistake 3: Buying a large amount of ConocoPhillips stock

Betting oil price was likely to increase in the long term, Buffett spent just over $7 billion on 85 million shares of ConocoPhillips (a natural gas liquids company), but its market value at the time of the letter was only about $4.4 billion.

In his 2008 annual letter, Buffett told shareholders, “Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year.”

Lesson learned

Don't get too excited at big rallies in stock prices and buy in at too high of a price which you will regret later.

Warren Buffett's mistakes like this one also emphasize the importance of consulting people you trust before making a major investment. Sometimes, getting a different perspective is the best way to see the big picture.

More about Warren Buffett:

Best advice to handle stock market plunge from Buffett and other billionaires 

10 Buffett guidelines that teach us about investing 

Wanna invest like a pro? Check out moomoo's  Guru Lessons 
Source: CNBC, Investopedia