Warren Buffett gives his insight into investing in Berkshire Hathaway’s latest letter to investors.
The legendary value investor believes explicitly acknowledging errors or mistakes as positive, signifying lessons learned from past mistakes.
Warren Buffett noted numerous companies with CEOs and board directors who constantly depict their companies in the best light for public or investor relations. He said that the positive spin on a company’s negative performance does not bode well in the medium-long term for investors.
Warren Buffett gives his insight into the importance of transparency to shareholders
“During the 2019-23 period, I have used the words ‘mistake’ or ‘error’ 16 times in my letters to you,” wrote Warren Buffett. “Many other huge companies have never used either word over that span. Amazon, I should acknowledge, made some brutally candid observations in its 2021 letter. Elsewhere, it has generally been happy talk and pictures.”
Warren Buffett implied that companies with a policy of projecting only perfection to analysts and shareholders are making a mistake.
“I have also been a director of large public companies at which ‘mistake’ or ‘wrong’ were forbidden words at board meetings or analyst calls,” he wrote. “That taboo, implying managerial perfection, always made me nervous,” he added.
“I have also been a director of large public companies at which ‘mistake’ or ‘wrong’ were forbidden words at board meetings or analyst calls”
WARREN BUFFETT
Acknowledging and then the responses to mistakes, Warren Buffett gives his insight into investing
Warren Buffett believes that strength is not in the lack of mistakes but in your responses to them.
Mapping Buffett’s Berkshire Hathaway success journey, he pointed out that his success was not due to a lack of mistakes but rather how they were dealt with. While investments like GEICO and Apple drove success, they were just part of many capital allocation decisions, some of which were far from perfect.
“The cardinal sin is delaying the correction of mistakes or what Charlie Munger called ‘thumb-sucking. Problems, he would tell me, cannot be wished away,” he wrote.
“They require action, however uncomfortable that may be… And our experience is that a single winning decision can make a breathtaking difference over time. Think GEICO as a business decision, Ajit Jain as a managerial decision and my luck in finding Charlie Munger as a one-of-a-kind partner, personal advisor and steadfast friend.) Mistakes fade away; winners can forever blossom,” added Warren Buffett.
“The cardinal sin is delaying the correction of mistakes or what Charlie Munger called ‘thumb-sucking. Problems, he would tell me, cannot be wished away”
WARREN BUFFETT
Warren Buffett gives his insight into investing that business leaders must have business talent
He noted that some of the most successful people he has worked with were not the most educated but had the strongest innate business sense.
Warren Buffett is an avid believer in lifelong learning. He highlights the value of work experience and entrepreneurship — qualities of younger professionals, particularly in finance, prioritised over traditional education. Buffett noted that when selecting a CEO, he does not factor into the equation their college institution and an old school place of graduation, place of matriculation university.
“I was lucky enough to get an education at three fine universities. And I avidly believe in lifelong learning. I’ve observed, however, that a significant portion of business talent is innate, with nature swamping nurture” – Warren Buffett
“Of course, there are great managers who attended the most famous schools, but there are plenty such as Pete [Liegl] who may have benefited by attending a less prestigious institution or even by not bothering to finish school,” Buffett wrote. “Look at my friend, Bill Gates, who decided that it was far more important to get underway in an exploding industry that would change the world than it was to stick around for a parchment that he could hang on the wall,” he wrote.
Warren Buffett attributes his success to real-world business experience. “I was lucky enough to get an education at three fine universities. And I avidly believe in lifelong learning. I’ve observed, however, that a significant portion of business talent is innate, with nature swamping nurture,” added Warren Buffett.
Tax as a success indicator, Warren Buffett gives his insight into investing
Buffett’s Hathaway, like most businesses, employs fiscally prudent strategies minimising tax liability.
However, he believes that his company, having paid record tax, indicates profitability and success.
Warren Buffett thinks that companies adopting an overaggressive strategy of tax avoidance can result in damage to their reputation creating regulatory risks, which worsen as the organization grows.
“In 1965, the company did not pay a dime of income tax, an embarrassment that had generally prevailed at the company for a decade,” he wrote. “That sort of economic behaviour may be understandable for glamorous startups, but it’s a blinking yellow light when it happens at a venerable pillar of American industry. Berkshire was heading for the ash can,” wrote Warren Buffett.
“All told, we recorded operating earnings of $47.4 billion in 2024”
– Warren Buffett
“Fast forward 60 years and imagine the surprise at the Treasury when that same company — still operating under the name of Berkshire Hathaway — paid far more in corporate income tax than the US government had ever received from any company—even the American tech titans that commanded market values in the trillions,” he added.
Warren Buffett then put the amount of taxes paid by Berkshire in 2024.
“If Berkshire had sent the Treasury a $1 million check every 20 minutes throughout most of 2024 — visualize 366 days and nights because 2024 was a leap year — we still would have owed the federal government a significant sum at year-end. Indeed, it would be well into January before the Treasury would tell us that we could take a short breather, get some sleep, and prepare for our 2025 tax payments.” he wrote.
EBITDA is flawed, Warren Buffett gives his insight into investing
Operating income is the actual profit from operations, while EBITDA is the profitability potential of the company. Both metrics measure the company’s profitability. Warren Buffett prefers operating earnings as a profit metric rather than EBITDA, which he rejects as a flawed favourite of Wall Street.
“All told, we recorded operating earnings of $47.4 billion in 2024,” he wrote. “We regularly — endlessly, some readers may groan — emphasize this measure rather than the GAAP-mandated earnings that are reported [further in the letter],” he wrote. “All calculations are after depreciation, amortization and income tax. EBITDA, a flawed favourite of Wall Street, is not for us,” he added.
