As an investor who has earned billions of pounds in the stock market over decades, Warren Buffett can seem like he has the Midas touch.

Investors are often keen to learn from some of his legendary investments. They include the stake in Apple and decades-old investments such as the stake in Coca-Cola that has turned into a passive income gusher, thanks to that company’s long run of annual dividend increases.

Such investments certainly offer some useful and interesting lessons. But Buffett is a smart enough investor to know that learning from your mistakes is at least as important in the stock market as learning from your successes.

Not the answer most people would guess!

So when asked what his biggest mistake was, Buffett did not even hesitate to answer: Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B)!

But wait, what on earth is he talking about? After all, Berkshire was a small, failing textile operation when he bought control of it. Now it is an insurance powerhouse with strong positions in other industries, and a market capitalisation north of $1trn. It is also sitting on a cash pile of hundreds of billions of dollars.

Why on earth would Buffett regard that as a mistake?

Think about omission not just commission

The error in judgement Buffett identified – in my view correctly – is that tying up capital in Berkshire’s original business came at a huge opportunity cost. Buffett spent years trying to improve the doomed textile operation. What if that time and capital had instead been put to more rewarding uses?

Berkshire Hathaway could probably have grown faster and now be a much larger company than it is.

As he explains when discussing why a cheap-looking but struggling business is rarely the bargain it seems, he said: “The original ‘bargain’ price probably will not turn out to be such a steal after all. In a difficult business, no sooner is one problem solved than another surfaces – never is there just one cockroach in the kitchen. Second, any initial advantage you secure will be quickly eroded by the low return that the business earns.”

This, then, was what Buffett calls a mistake of commission – something he did (that he then regretted). But he also warns about mistakes of omission. Those are opportunities he had the knowledge to assess and find attractive, but did not act on.

Buying Berkshire tied up a lot of capital in a bad business that could otherwise have been invested in good ones that were on Buffett’s radar.

This is a powerful, actionable insight!

This was an expensive lesson, but it was one that Buffett learned and took to heart. It can be tempting to look at businesses that have problems but look cheap and think of them as possible bargains.

Some of them are, but many turn out not to be. There is a name for this kind of investment: a value trap.

So Buffett changed his strategy to go hunting for brilliant businesses at attractive prices. That is not necessarily the same as a cheap price.

It is a lesson any investor can apply.

Should you invest £5,000 in Berkshire Hathaway right now?

When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Berkshire Hathaway made the list?

Christopher Ruane does not hold any positions in the companies mentioned.