This Monumental Mistake Has Cost Warren Buffett $12 Billion (and Counting)

By Sean Williams Markets Fool.com

Warren Buffett, the chairman and CEO of conglomerate Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B), is often described as the greatest investor on Earth -- and with good reason.

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Buffett's Berkshire has grown its book value in 48 of the past 50 years, and in roughly 4 out of every 5 of those years the book value growth for Berkshire Hathaway has outpaced that of the S&P 500. Plus, on a nominal basis, the S&P 500 rose by roughly 2,300% between December 1964 and December 2015, while Berkshire's stock jumped by a cool 1,000,000% (that's 1 million percent!) over that same time span. Needless to say, Buffett may know a thing or two about investing.

CEO Warren Buffett. Image source: The Motley Fool Flickr.

What's made Buffett such an incredibly accurate and successful investor throughout the years is his attitude toward time. Buffett is seemingly never in a hurry to make money. In fact, he's often boasted with excitement about his portfolio holdings falling in value, because it gives him and Berkshire added time to build their position.

Buffett also sticks to the basics of finding high-quality businesses that can essentially run themselves. He targets businesses that have clear-cut competitive advantages and/or a strong brand name that consumers find attractive. Though there have been losers from time to time (ahem, Tesco), Buffett's game plan has worked far more often than not.

The making of Buffett's most monumental investing mistake

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However, 50 years ago Buffett didn't have all the wisdom he's overflowing with today, and it wound up costing him dearly.

In 1966, Warren Buffett traveled out to Anaheim, California, and met with the CEO of a theme park and movie production company. The name of that CEO? Walt Disney.

At the time of their meeting, Disney (NYSE: DIS) was being valued at approximately $80 million. It had a clean balance sheet, a theme park that was attracting approximately 9 million people per year, and it was just about to install a new ride -- the Pirates of the Caribbean -- for the low, low cost of $17 million.

Image source: Disneyland.

On paper, Disney appeared to have everything that an investor would desire. However, Wall Street didn't see it that way. In the mid-1960s, Disney was earning a good chunk of its profit from Mary Poppins, which was released in August 1964. According to Box Office Mojo, the movie grossed about $31 million following its initial release, which was incredible considering that Disney's budget for the movie was estimated to be between $4.4 million and $6 million. Wall Street was convinced that Disney's movie vault didn't have another Mary Poppins in the pipeline, and thus avoided the stock.

But this didn't deter Buffett. He firmly believed that Disney's vault of content could be renewed and released from time to time to generate new channels of revenue. Buffett took the plunge and purchased a 5% stake in Disney for his partnership, worth about $4 million at the time.

These moves cost Buffett $12 billion

As it turned out, Buffett's thesis on Disney turned out to be incredibly accurate. Since we now have the gift of hindsight, we know that Disney has had multiple film wins, and has turned itself into a content giant. Additionally, it has multiple theme parks around the country that attract tens of millions of people annually. Disney World, in Florida, attracted more than 19 million visitors by itself in 2014.

However, Buffett enjoyed very little of its success. After netting a 50% return on his investment in Disney ($2 million), he sold his 5% stake in 1967. That's right, Warren Buffett, the purveyor of buy-and-hold investing, only held on to one of his investments for about a year.

Image source: Getty Images.

Curious how much a 5% stake in Disney would be worth today? How about a cool $8.78 billion as of the closing price of Disney on March 1, 2017. Buffett netted just a $2 million profit.

And that's not the end of it. In addition to forgoing nearly $8.8 billion in what could be unrealized profit, Buffett has also missed out on more than $800 million in dividend payments based on his 5% ownership stake.

I wish I could say that was the end of it, but it's not.

In 1995, Disney announced that it was acquiring Capital Cities/ABC in a $19 billion cash-and-stock deal to create a massive media company, as well as get control of ESPN, the sports network that was growing viewership by leaps and bounds.

The deal also wound up giving Buffett a second chance with Disney, as his company "inherited" 21 million Disney shares upon the closing of the deal in 1996. When adjusted for splits and dividends, Disney was valued at just under $19 a share when the deal was announced. This meant the Disney shares Buffett was to inheritwere worth just shy of $400 million. But, just like the last time, Buffett and his investment team began to methodically part ways with their inherited Disney shares. While it's impossible to know exactly what price Buffett received for the sale of these 21 million Disney shares, we can say that today these same shares would be worth $2.33 billion!

Altogether, Buffett's Mickey Mouse antics have cost Berkshire and its shareholders $12 billion! Ouch!

Image source: Getty Images.

Buffett's blunder is a key learning tool

It's important to realize that even the best investors in the world are fallible. Buffett has made mistakes, and he'll likely make investment mistakes in the future.

Nonetheless, Buffett's not-so-Minnie misfortune serves as a perfect teaching tool for investors. If Buffett's mistimed Disney sale has taught him (and us) anything, it's that we shouldn't be so rash to sell companies just because of a fancy green arrow in the profit column. Our emotions frequently try to get the best of us, and we fear the possibility of losing what we've gained, regardless of how long we've held our investments.

But the stock market has shown us that high-quality companies get rewarded over time and increase in value. If you own businesses that have clear competitive advantages and well-respected brand-name products or innovations, there may be little reason to ever consider selling them.

Buffett has long stated that his favorite holding period is "forever." While he failed to take his own advice in this instance, he's provided a valuable lesson for other investors to follow.

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Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Walt Disney. The Motley Fool has a disclosure policy.