Part 2: Buffett’s Biggest Mistake & Evolution
How Buffett evolved from cigar butts to compounding machines, and why time is the friend of great businesses
This clip is taken from the same Terry Leadership Speaker Series lecture in 2001, where Buffett reflects on one of the biggest mistakes in his investing career and how his thinking evolved over time.
One of his most famous admissions is this:
Buying Berkshire Hathaway itself was a mistake.
At the time, it was a classic “cigar butt” investment — a struggling textile business that looked statistically cheap, with one last puff of value left.
Early in his career, Warren Buffett was deeply influenced by Ben Graham’s philosophy: buy things that are cheap.
He would look for what he called “cigar butt” stocks, discarded, ugly businesses trading far below intrinsic value, with just one last puff of value left. Statistically cheap, often unloved, and seemingly low risk.
And to be fair, it worked. Many investors have made a lot of money with this approach.
But over time, Buffett realised something important:
Cheap businesses come with hidden costs.
Even if you buy them at a discount, the underlying economics are often so poor that the gains are limited, temporary, or simply not worth the effort. Management quality is usually mediocre, reinvestment opportunities are weak, and the business itself continues to deteriorate.
In other words, you’re constantly fighting the business.
Buffett has since called this approach one of his biggest mistakes.
The turning point came with Charlie Munger, who pushed Buffett to shift from buying “cheap companies” to buying “wonderful businesses.”
The idea is simple, but profound:
A great business compounds over time.
A bad business does not.
Even if you pay a fair price, or what feels like a slightly expensive price, a high quality business with strong returns on capital, pricing power, and durable competitive advantages will continue to generate value for decades.
Meanwhile, a cheap business often stays cheap or worse, destroys capital.
This philosophy became the foundation of Berkshire Hathaway’s success.
It’s why Buffett moved away from textile mills and struggling companies, and into businesses like Coca-Cola, See’s Candies, and American Express.
The real lesson is not about valuation alone.
It’s about the interaction between price and quality.
A cheap price cannot fix a bad business.
But a great business can justify almost any reasonable price if held long enough.
For investors, this is a constant trap:
We are naturally drawn to things that look “cheap.”
But cheapness without quality is often just value illusion.
This idea is also what influenced me to start this blog in the first place.
Over time, I’ve come to realise that investing is not about finding what is cheapest, it’s about identifying what is truly great.
Since then, my process has become much simpler, but also much harder:
I keep reviewing my companies, asking one question, which of these are truly the best and most importantly, within my circle of competence?
Not the cheapest.
Not the most beaten down.
But the ones with the strongest economics, the longest runway, and the ability to compound over time.
I am still constantly reviewing my personal portfolio to ensure it is truly high quality, at least by my own standard.
Because in the end, returns don’t come from what looks cheap today, they come from what continues to get better over the next 5 to 10 years.
Time is the friend of great businesses, and the enemy of poor ones.
See you on the next one!
