Warren Buffett’s $70 Billion Mistake

Everyone makes mistakes sometimes, even the world’s top investor. Of course, since Warren Buffett is the second wealthiest person in the world and is chairman of a company that is valued at upwards of $200 billion, it stands to reason that his mistakes are going to cost way more than most people. In fact, one of his mistakes has cost his company almost $70 billion—a number that will likely continue to rise.

However, if there’s one thing to be said about Warren Buffett, it’s that he takes responsibility for his mistakes and does his best to prevent it from happening again. In fact, this $70 billion mistake has actually changed the way that Berkshire Hathaway operates. But what was this mistake?

Well, in 1998, Berkshire Hathaway had recently purchased the remaining shares of GEICO and was interested in continuing to expand its insurance operations. So, the company set its sights on a company called General Reinsurance. The company was a profitable reinsurance corporation and has been an excellent asset to Berkshire Hathaway. However, the problem came about with the method of acquisition.

Warren Buffett has long been against using any kind of credit as a result of his upbringing during the Great Depression. However, he didn’t have too much problem with issuing Berkshire stock in lieu of cash for transactions. At the time, Berkshire stocks (which had not been split into Class A and B yet) were worth around $58,400 each. So, to pay for the purchase of General Re, Buffett issued 272,200 new shares to the General Re shareholders. When you adjust the rates for current inflation, this equated to $15.9 billion—a fair price for the company.

Now, fast forward to today when each Berkshire Class A stock is worth more than $250,000 and suddenly those same stocks are worth nearly $70 billion, which is not a price that Buffett would ever consider paying for an insurance company like General Re. And, even worse, that number is going to continue to go up as Berkshire grows, meaning that the price that he paid for the company is definitely more than it’s worth.

But Buffett learned his lesson from the mistake. In his 2016 annual letter, Buffett lamented the mistake and said that he would never again issue shares to pay for anything. “I would rather prep for a colonoscopy than issue Berkshire shares.”

As a direct result of this mistake, Buffett made a new policy: that purchases would only be made in cash. Purchasing anything using stock is risky because the final value is impossible to predict, whereas cash is final. If Buffett had paid $15.9 billion up front, that would be the complete and total cost—no hidden price or increase in shares.

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