Is this the biggest lesson Warren Buffett ever learnt?

Did this event shape Warren Buffett’s thinking more than any other experience?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Like all investors, Warren Buffett has made mistakes. In recent years he recorded major losses with ConocoPhillips and also with Tesco. Both of these events are likely to have helped him become a better investor. However, there is one event which seems to have had a profound impact on the way the Sage of Omaha analyses companies. In fact, it could be said that this one failure was a key reason why he has ended up being such a successful investor.

A problematic company

Towards the beginning of his investment career, Buffett bought a share of a gas station. He is said to have taken an active role in the running of the business, working weekends and even cleaning cars. Despite this, he ended up losing money on the venture, which at the time amounted to around 20% of his net worth. A rival gas station nearby proved to be more popular for whatever reason and Buffett walked away poorer in a monetary sense, but richer for having experienced it.

Lessons learnt

The key lesson that Buffett seems to have learned from the gas station is that a company’s management can work 24 hours a day and provide a great quality product and service, but if a rival is better than them then ultimately the business will fail. That’s exactly what happened to him and it is likely that from this Buffett learned to focus on the competition as much as the company itself. In other words, when buying a stake of a business it is necessary to consider the competitive advantage or economic moat which it has versus rivals.

In addition, Buffett is likely to have learnt that adopting a direct management style does not always work out. If success in business was due to hard work, his gas station would have probably made money. However, he learned that a passive management style and more thought rather than action can make a bigger impact on profitability.

Applying Buffett’s lesson

Of course, the idea of an economic moat is very simple. The most successful companies have some kind of advantage over their rivals which means that they can make more money, better survive downturns and provide greater growth in the long run. It could be argued that this is the most important aspect of investing, since a company with a wide economic moat usually performs well in the long run, even if it is purchased at a relatively high price.

While it is not known whether Buffett focused on economic moats because of his experience with the failed gas station, he built his subsequent investment success on the idea of competitive advantage. Although it is not always possible to accurately assess a company’s economic moat and mistakes are made, attempting to do so could provide your investment portfolio with even better returns in the long run.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Investing Articles

£20,000 in savings? Here’s how I’d aim to turn that into passive income of £903 a month

Our writer shares one approach to passive income investing, spotlighting a quality FTSE 100 stock he recently added to his…

Read more »

Investing Articles

Great dividend stocks! Here’s the forecast for Associated British Food shares to 2027

Associated British Foods' shares have dropped in value this year. Does this present a dip-buying opportunity for dividend investors to…

Read more »

Investing Articles

Should I sell my FTSE All-Share index fund and buy a S&P 500 tracker instead?

Harvey Jones is wondering whether now is a good time to invest more money in the S&P 500, after a…

Read more »

Investing Articles

Should I buy dirt-cheap BT shares after the recent pullback?

BT shares were on the up but now they're sliding again after the board trimmed full-year guidance. Now Harvey Jones…

Read more »

Investing Articles

Up 28%, can the easyJet share price keep rising?

The easyJet share price has gained altitude over one year but plunged over five. Is now an attractive time for…

Read more »

British Isles on nautical map
Investing Articles

Should I buy more BAE Systems shares at 1,350p?

BAE Systems shares have had a fantastic run since early 2022, yet still don't appear overvalued. Is it now time…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

7% yield and a cheap valuation! Is this one of the best shares to buy this month?

Christopher Ruane has been looking for cheap shares to buy. This one has a 7% dividend yield, so is it…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Should I buy National Grid shares for the big dividend before it’s too late?

This year's price weakness has left National Grid shares on what looks like a tempting valuation. I hope it doesn't…

Read more »