Warren Buffett's Biggest Blunders

May 13, 2010 — -- He's a billionaire celebrated the world over for a decades-long record of prescient stock picks balanced by a refreshingly humble demeanor. But even legendary investor Warren Buffett, 79, has had his share of questionable calls and clear mistakes -- many of which he's freely admitted.

"He is genuinely free of arrogance," said Alice Schroeder, a former managing director at Morgan Stanley and the author of "The Snowball: Warren Buffett and the Business of Life."

Most recently, the purchase of Burlington Northern Santa Fe Corp. railroad by Buffett's Berkshire Hathaway company has drawn the scrutiny from the Securities and Exchange Commission. The SEC is reviewing how Berkshire informed Burlington shareholders of its plans to buy a $26 billion majority stake in the railroad, according to a report by the Wall Street Journal.

Neither the SEC nor Buffett have commented publicly on the subject and it's unclear whether anything will come of the SEC review. But Buffett has had run-ins with regulators in the past that did cast a shadow, at least temporarily, on his company. Below, we take a look at these and other notable lowlights in a career and life that is the envy of Wall Street.

Surprising Mistake: Buying Berkshire Hathaway

Today, Buffett's name is practically synonymous with that of his company, Berkshire Hathaway. But if Buffett could travel back through time to address one longstanding regret, Berkshire Hathaway might have never become part of the Buffett universe.

What today is a holding company began as a Massachusetts-based textile manufacturing firm. Buffett acquired a majority stake in the firm in 1965 and in the decades that followed, bought and folded other businesses under the Berkshire umbrella, creating the powerhouse it is today.

But even as Berkshire grew, its underlying textile business lost money. Its mills were eventually closed, resulting in massive layoffs. Buffett found it all "quite painful," Schroeder said.

"I would have been better off if I'd never heard of Berkshire Hathaway," Buffett once said, according to "The Snowball."

SEC Investigates Buffett's Blue Chip Stamps

In 1975, the SEC launched an investigation of Blue Chip Stamps, a company in which Buffett had a major stake, to determine whether Blue Chip committed fraud in its purchase of another company, Wesco Financial, a savings-and-loan business. Buffett was subpoenaed and at one point, was at risk of being named in an SEC consent decree -- a finding of wrongdoing by the commission -- Schroeder said.

The SEC ultimately charged Blue Chip a $115,000 penalty but the commission did not name Buffett in its finding, allowing him to avoid what otherwise could have been a major black mark on his reputation, Schroeder said.

Not 'Smart': Buying US Air

Buffett invested $358 million in USAir in 1989, impressed by the airline's profitable record. He later would admit that he overlooked the fact that the company's costs could prove a huge liability in the increasingly-competitive, unregulated airline business. The airline crashed into the red shortly after Buffett's investment and lost more than $2 billion in four years.

"A friend once asked me: 'If you're so rich, why aren't you smart?'" Buffett wrote in a 1996 letter to Berkshire Hathaway investors. "After reviewing my sorry performance with USAir, you may conclude he had a point."

Dexter Shoe: Waking Up With an 'Ugly Woman'

Berkshire Hathaway acquired Maine-based Dexter Shoe in 1993 for $433 million. But the company, as Buffett later noted, was pummeled by "brutal" competition from cheaper shoe manufacturers abroad.

Dexter eventually closed its U.S. factories and laid off hundreds of workers.

"To date, Dexter is the worst deal that I've made," Buffett said in a 2007 investor letter. "A line from Bobby Bare's country song explains what too often happens with acquisitions 'I've never gone to bed with an ugly woman, but I've sure woke up with a few."

General Re Scandal

Some 30 years after Buffett's SEC scare with Blue Chip Stamps, the commission joined the New York Attorney General's Office and the Department of Justice in another investigation ensnaring Buffett.

The probe focused on whether employees of General Re, a reinsurance company and a subsidiary of Berkshire Hathaway, conspired with an employee of then-insurance giant AIG to manipulate AIG's financial statements. In 2008, four former General Re executives and one former AIG executive were convicted of fraud. As of last fall, all filed appeals, according to The American Lawyer.

Buffett was included on the government's witness list during the 2008 trial but was never called to testify.

There were questions about how much Buffett knew about the transactions involved in the alleged fraud. Buffett and Berkshire said at the time that while he was aware of the deals, he didn't have detailed knowledge of them, according to published reports.

This year, General Re agreed to pay $92.2 million in a settlement with federal officials and AIG shareholders related to the fraud case.

"We did something wrong and we paid the price," Buffett said in an interview with the Fox Business Network.

Conoco No-No

Buffett bought billions of dollars in shares of energy giant ConocoPhillips just as oil and gas prices hit their peak, a bad move he acknowledged in a 2008 letter to investors.

"I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year," he wrote. "[T]he terrible timing of my purchase has cost Berkshire several billion dollars."

Parenting Oversight?

In a recent interview with Reuters, Buffett's son, Peter Buffett, said the values he was taught in childhood helped him taking on some trying times in his adult life. Peter Buffett recounts his childhood in a new book, "Life is What You Make it: Finding Your Own Path to Fulfillment."

"I was not only not handed everything as a kid, I was shown that there are lots of other people out there with very different circumstances," he said.

But Schroeder questions whether Warren Buffett could have done more to advise his three children about their finances.

"He never taught his children about money," she said. "He seemed to assume that they would learn from his example."

Writing her book on Buffett, she said, gave her "enormous appreciation of the huge challenges of raising children in a wealthy family."

"The Buffetts had more challenges than most," Schroeder said. "Warren was very withholding with money towards his children, so they grew up to have certainly no feeling of entitlement, but I sensed a feeling of deprivation."

Buffett's children, she said, "are good at finding a silver lining" in that deprivation.

ABC News' Matthew Jaffe contributed to this report.