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THE WORST OF THE BEST: Mistakes Made by (Otherwise) Successful Investors

In Wall Street’s long history, many investors and companies have made successful investments that put them on the map (and made them hundreds of millions of dollars).  Their success leaves people astounded and, in all likelihood, a bit envious.

But, despite their prolific returns, no one has a perfect investment record. In the hunt for extraordinary profits, an investor’s mistakes can lead to extraordinary losses. And, though it won’t make your stock-picking skills any better, it’s nice to be reminded that even investing giants are still human beings. Here are just a few of the biggest investing mistakes from the past few decades.

Carl Icahn Bets on Blockbuster’s Resilience and Loses

A skilled investor known for turning around failing businesses, Carl Icahn is reported to have invested over $190 million in video rental giant Blockbuster from 2004–05.  Icahn believed the shares to be severely undervalued, but, in reality, the company was permanently losing its market share and was later forced to liquidate. Icahn ended up losing around 97 percent (more than $180 million) of his total investment by the time he threw in the towel in 2010.

The silver lining? Icahn recognized the value of video streaming service Netflix, which was largely responsible for Blockbuster’s decline, and quickly bought nearly 10 percent of the company. When he sold just half of his shares in October 2013, he pocketed over $800 million in profits.

Warren Buffett’s Oil Fiasco

Despite being the most successful investor of all time, Warren Buffett has made a few errors in judgment. His biggest mistake began in 2007–08, when oil prices peaked across the world. Buffett, known for his ability to pick out undervalued stocks, made an uncharacteristic purchase of highly priced ConocoPhillips stock. His purchase was massive, approximately $7 billion in shares. As demand and prices fell following 2008, the stock lost almost half its value. Although ConocoPhillips somewhat recovered, it is estimated that Buffett lost at least $1.5 billion on his commodity speculation.

LTCM Defeated by the Russian Winter

In the 1990s, John Meriwether and his hedge fund Long-Term Capital Management (LTCM) were astounding investors on Wall Street. Using detailed mathematical models and borrowing money to leverage their investments, LTCM targeted small, but predictable, bond trades. LTCM was rarely wrong and produced fantastic returns. However, in 1998, LTCM made a $10 billion bet on Russian bonds, leveraging their money 100-fold. When the bonds went the wrong way later that year, LTCM became destabilized and had to be bailed out by other Wall Street firms to avoid a meltdown in the bond market. By the time Meriwether dismantled LTCM in 2000, it had lost some $4.6 billion.

Bill Ackman Helms a Sinking  J.C. Penney

An activist investor, Bill Ackman is known for finding underperforming stocks and pushing their company profits to the limit. In October 2010, Ackman’s hedge fund took a nearly $1 billion stake in the struggling J.C. Penney and put Ackman on the company’s board of directors. However, the changes made to the company were largely ineffective and the share price continued to plummet. In less than three years, Ackman stepped down from the board and sold his fund’s shares in the company; the resulting losses exceeded $400 million.

David Bonderman’s Bankrupt Bank

Billionaire David Bonderman has been known to find huge profits in scooping up companies on the brink of failure. During the financial crisis, the giant Seattle-based bank Washington Mutual, or “WaMu,” looked like a perfect buying opportunity for Bonderman. Spearheaded by his renowned investment firm TPG Capital, investors dumped a total of $7 billion into the bank in April 2008. However, just five months later, the FDIC shut down WaMu and took all its assets, destroying its investment value. Investors lost every dollar they paid, and TPG Capital’s own $1.35 billion stake in the bank vanished overnight.

Conclusion

The history of investing is littered with hundreds of investors, financiers, and businesses that made big bets and lost. These examples serve as a good reminder that all investments are uncertain, even for the smartest investors in the world.

In investing, success is not about being perfect, but about getting more investments right than wrong. As an investor who is not working with millions or billions, you can only aim to avoid extremely risky investments and not get carried away when buying into an apparent opportunity.

Last Week’s Highlights:

Markets finished the week at a record high Friday with the all major indices gaining a percent or more. Oil prices were up 5%. Janet Yellen spoke in a dovish tone when speaking in front of congress. She highlighted the strength of job growth and indicated the intent to wind down the Fed’s $4.5 trillion balance sheet starting this fall. Her major worry is that inflation remains below the Fed’s target of 2%.   Low inflation coincides with a soft Consumer Price Index (CPI) number and lagging real estate prices- not good for economic growth. China posted Q2 GDP growth of 6.9%, driven by 10% growth in consumer spending and firmer exports, especially steel. President Trump has made cutting US’s trade deficit with China a top agenda item and has also flagged the steel trade as a point of contention.    

Looking Ahead:

Earnings season is officially in full swing with some big names reporting this week, including Under Armour, Bank of America, Microsoft, and General Electric just to name a few.  With major tech, industrials, and financial firms all reporting, earnings this week will showcase the health of corporations across a large portion of the economy.

There will also be a host of economic data being reported. Tuesday will have export and import data. Housing data will be released this week on Tuesday and Wednesday, and initial jobless claims will be reported on Thursday. With Janet Yellen taking a slightly dovish tone, all eyes will be on any potential data points for the Fed to base its monetary policy on. Also, Japan and ECB will be announcing their monetary decisions later this week.

In political news, gridlock continues on Capitol Hill as the vote on the bill to replace Obamacare has been delayed until Senator John McCain recovers from surgery.