Warren Buffett: Dexter Shoe Company Investment Worst of My Career

Earlier this week, Warren Buffett of Berkshire Hathaway announced that he will be stepping down as CEO of the company at the end of the year.

Since 1965, shares of Berkshire Hathaway have returned an astonishing 5,500,000%, meaning that Warren Buffett made many, many great investments along the way. There is a reason why Buffett is called the "Oracle of Omaha".

With that being said, no investor is going to bat .1000, and Warren Buffett is no different. He has admittedly made some poor investments along the way - buying the textile company Berkshire Hathaway, for instance, was a terrible move - one that Buffett himself says likely cost the company hundreds of billions of dollars over time.

There was the purchase of Precision Castparts, the ill-timed purchase of shares in ConocoPhillips, the multiple unprofitable forays into the world of airline investing.

The purchase of Dexter Shoe Company, however, towers above the competition when it comes to poor investment decisions by Buffett.

The company, which was purchased in 1993, was loved by both Buffett and Charlie Munger.

Buffett believed that Dexter Shoe Company was well-managed and could simply be placed into the portfolio of companies at Berkshire Hathaway without any further work. At the time, Buffett said that Dexter Shoe Company was one of the "best-managed companies Charlie and I have seen in our business lifetimes".

The company was a manufacturer of popular men's and women's shoes. Berkshire acquired Dexter Shoe Company for $433 million. Instead of using cash, which Buffett almost always does, Berkshire acquired Dexter Shoe Company for 25,203 Berkshire Hathaway "A" shares.

The shoe business was being saturated by imported shoes, though Buffett believed that Dexter's management team and skilled work force would be able to navigate the company through choppy waters. The shoes are quality, Buffett said, and people will pay for quality.

Buffett miscalculated in this regard, as most American consumers were more than willing to accept inferior shoes if it meant saving money.

Earnings started to drop dramatically at Dexter Shoe Company as foreign competition continued to take hold.

Instead of pivoting and using offshore manufacturers, Buffett elected to maintain the company's operations in the United States. Eventually, all of the workers were laid off, and Dexter Shoe Company was no more.

It wasn't the actual deal that Buffett regretted in later years - it was the fact that he used shares of Berkshire Hathaway to buy the company.

In 2007, Buffett opined on the deal, saying that the error was compounded "hugely" due to using Berkshire Hathaway shares. Instead of the deal costing just $400 million, Buffett said, the deal actually cost $3.5 billion, as this is what the shares of Berkshire were valued at in 2007.

It's no wonder Buffett was so adamant about not using shares of Berkshire to buy other companies, as the Dexter Shoe deal ended up being so incredibly painful.

Even Warren Buffett can buy a "worthless business" every now and then.

Filed under: General Knowledge