Warren Buffett admits to rare investing blunder

NEW YORK Sat Mar 1, 2014 1:22pm EST

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NEW YORK (Reuters) - Warren Buffett on Saturday said he made a "big mistake" investing in a utility that was the subject of one of the biggest leveraged buyouts ever, but now may be on the road to bankruptcy.

In his annual letter to shareholders of his Berkshire Hathaway Inc, Buffett said he regretted buying $2 billion of bonds of Energy Future Holdings Corp, created in 2007 from the $45 billion buyout of Dallas-based TXU Corp.

Buffett, the so-called Oracle of Omaha and the world's fourth-richest person, had bought the bonds without consulting his second-in-command, vice chairman Charlie Munger.

"Most of you have never heard of Energy Future Holdings. Consider yourselves lucky; I certainly wish I hadn't," Buffett, 83, said. "Next time I'll call Charlie."

He said he threw in the towel last year, selling the bonds for a mere $259 million, leaving Berkshire with a $873 million pre-tax loss after taking interest payments into account.

Buffett italicized "big" in "big mistake" in his letter.

The TXU buyout was led by KKR & Co, TPG Capital Management LP and Goldman Sachs Group Inc's private equity arm.

It was a bet that natural gas prices would rise, allowing the company to charge more for electricity.

Instead, natural gas prices plunged, causing losses at the company's coal-fired plants, and making a lengthy bankruptcy the most likely outcome.

Buffett said that unless natural gas prices soared, Energy Future will "almost certainly" file for bankruptcy this year.

BAD DEALS

Berkshire is a $286 billion conglomerate better known for owning businesses such as Geico car insurance and the BNSF railroad, and stocks such as Wells Fargo & Co and Coca-Cola Co.

But it also invests more than $29.3 billion in fixed income, and Buffett said his bond investments usually do well.

He did not rank Energy Future in his history of bad investments in Saturday's letter.

In his annual letter in 2008, he called his $433 million purchase of Dexter Shoe Inc in 1993 "the worst deal that I've made" because he used Berkshire stock rather than cash for the acquisition, and because Dexter lost its competitive strengths.

"Fortunately, my blunders usually involved relatively small acquisitions," Buffett wrote on Saturday.

"Our large buys have generally worked out well and, in a few cases, more than well. I have not, however, made my last mistake in purchasing either businesses or stocks. Not everything works out as planned."

(Reporting by Jonathan Stempel in New York; Editing by Sophie Hares)

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Comments (3)
Randy549 wrote:
His investment in IBM ain’t doing so well either.

Mar 01, 2014 2:46pm EST  --  Report as abuse
Ahh, good old Warren. The billionaire who wants all of us to pay more taxes on our investments. The site truthorfinance.com had a nice summary of the letter (that also calls out Buffett on his controversial tax positions
http://www.truthorfinance.com/2014/03/buffet-tells-investors-dont-experts/

Mar 01, 2014 5:27pm EST  --  Report as abuse
TonyP4 wrote:
The best investor in our generation cannot beat the market! His portfolio is too big and most of his strategies are not suitable to retail investors as illustrated in my book Debunk the Myths in Investing (500+ pages from amazon).

Mar 02, 2014 9:04am EST  --  Report as abuse
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