Since this was written by Warren Buffett in 1990, it refers to the mistakes that he made from 1965-1990. Here’s a summary of what he did wrongly.
His first mistake was buying a textile business. Even though he knew the industry was not promising, he was enticed to buy because it was cheap. While buying cheap shares was rewarding to him in his early years, this strategy was not ideal at all.
If you can buy a business at a sufficiently low price, there should be a point in the future where you can unload it at a decent profit. However, this approach is foolish as the “bargain” price might turn out to be not a bargain at all.
In a difficult business, there are usually many problems that it has to face one after another.
Also, any advantage obtained from a low price is usually quickly eroded by the returns of the business.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
Easy Does It
Charlie Munger and Warren Buffett did not learn how to solve difficult business problems. Instead, what they have learnt is to avoid them.
In both business and investments it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult.
Of course, there are occassions when tough problems must be tackled. In other instances, a great investment opportunity occurs when a marvelous business encounters a one-time huge, but solvable, problem.
His Most Surprising Discovery
He refers to an overwhelming important unseen force in business called “the institutional imperative.” Examples given by Buffett include:
1) An institution will resist any change in its current direction.
2) Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds.
3) Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops.
4) The behavior of peer companies, whether they are expanding, acquiring, setting
executive compensation or whatever, will be mindlessly imitated.
All these are not caused by stupidity, but by institutional dynamics.
Buffett learnt to go into business only with people that he liked, trust and admire. While this policy will not ensure success, wonders can be accomplished if this relationship is made with people in business with good economics characteristics.
On the other hand, he will never go into partnerships with people who lack admirable qualities, no matter how good the propects of the business could be.
Publicly Unseen Mistakes
Some of Buffett’s mistakes were not publicly visible. There were a couple of stock and business purchases whose virtues he understood and yet didn’t make. This inaction has cost Berkshire’s shareholders dearly.
Conservative Financial Policies
In Buffett’s view, Berkshire’s consistently conservative financial policies was not a mistake.
Howeever, it was clear that significantly higher leverage ratios would have produced considerably better returns on equity than the 23.8% they averaged.
Even in 1965, if he could have judged there to be a 99% probability that higher leverage would be good (and a 1% chance of anguish), he wouldn’t have liked the 99:1 odds.
Leverage to him is an acceleration of your process. If your action is sensible, you should still get good results.