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Warren Buffett's $10 billion mistake: Precision Castparts

Published 02/27/2021, 03:23 PM
Updated 02/27/2021, 04:45 PM
© Reuters. FILE PHOTO: Warren Buffett talks with Mark Donegan CEO of Precision Castparts during the Berkshire Hathaway Annual Shareholders Meeting in Omaha Nebraska

By Jonathan Stempel

(Reuters) - Warren Buffett makes mistakes too.

The 90-year-old billionaire on Saturday admitted he "paid too much" when his Berkshire Hathaway (NYSE:BRKa) Inc spent $32.1 billion in 2016 to buy aircraft and industrial parts maker Precision Castparts Corp, its largest acquisition.

Berkshire wrote off $9.8 billion of Precision's value last August, as the coronavirus pandemic sapped demand for air travel and the Portland, Oregon-based unit's products.

In his annual letter to investors, Buffett said he bought "a fine company - the best in its business," and Berkshire was "lucky" to have Precision Chief Executive Mark Donegan still in charge.

But Buffett said he was "simply too optimistic about PCC's normalized profit potential."

Precision shed more than 13,400 jobs, or 40% of its workforce, in 2020, and only recently has begun to improve margins, Berkshire said.

"I was wrong ... in judging the average amount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business," Buffett wrote. "PCC is far from my first error of that sort. But it's a big one."

Two years ago, Buffett admitted he "overpaid" for Kraft Foods when Berkshire and private equity firm 3G Capital merged it in 2015 with their H.J. Heinz Co to form Kraft Heinz (NASDAQ:KHC) Co.

And in his 2008 annual letter, Buffett called his 1993 purchase of Dexter Shoe his "worst deal" ever, saying he had bought a "worthless business" and compounded his error by using Berkshire stock rather than cash to fund the acquisition.

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"I'll make more mistakes in the future - you can bet on that," he wrote.

Tom Russo, a longtime Berkshire investor, welcomed Buffett's candor.

"I admire Warren for taking personal responsibility for Precision Castparts," he said. "Few managers are willing to admit their responsibility rather than pass on blame."

Latest comments

He doesnt really make good pics anymore and hasnt for a while. He basically got out of the airlines and oil at their lows and is just now bullish on oil again after its doubled.
Berkshire Hathaway bought 48.5 million shares of CVX in QE4 last year.... right about the time it began it's climb to from around $70 to $100. That's roughly a 1.5 billion dollar gain.
After 3 decades of economic disaster, 1 after another, stuff better start going up as people are entering prime part of their lives with enough income to invest (me being one).
It's normal to realize mistakes after bad performances. Surely he could not foresee the Pandemic, nobody was taking that into account before mid-December. I would not classify that as a mistake.  IMO it's worst mistake was to buy many airlines (e.g. DAL, LUV, etc) mid-Feb and he sold them the first week of April. Just after the crash! Everybody knows that after a crash of 30%+ YOU DO NOT HAVE TO SELL, IF YOU CAN YOU HAVE TO BUY!!!
Dah
I already know his other mistake, to which he will admit in due time...here is a hit, its in the gold mining space.
Warren already sold Barrick
nice topic 🌹
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