brettg.com

Warren Buffet’s letter to Berkshire Hathaway shareholders in 2008 is really interesting to read. I learnt an enormous amount about the Global Financial Crisis (GFC, not to be mistaken with KFC) by reading it.

What I found fascinating though was Mr Buffet’s ability to admit mistakes. Why is this so intriguing? Warren Buffet is famous for being a conservative, but consistently performing investor. I maybe out of my depth here, but I understand that his company Berkshire Hathaway is basically the benchmark for all investors and investments.

It seems that many of the high flyers in public companies seem to want to cook the books when they stuff up, as a way of saving face (see the note about Fannie May and Freddie Mac on page 16). Of course by doing that, they inevitably make the situation worse and it always ends badly. By contrast, Mr. Buffet is up front about his stuff ups. Even when they involve billions of dollars, and even when given a bit of time they might turn out ok. See a couple of examples from the letter:

I told you in an earlier part of this report that last year I made a major mistake of commission (and maybe more; this one sticks out). Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in
the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.

I made some other already-recognizable errors as well. They were smaller, but unfortunately not that small. During 2008, I spent $244 million for shares of two Irish banks that appeared cheap to me. At yearend we
wrote these holdings down to market: $27 million, for an 89% loss. Since then, the two stocks have declined even further. The tennis crowd would call my mistakes “unforced errors.”

Nobody wants to lose, and you can see that Warren Buffet hates to make mistakes. Having made a mistake, he is open and up front about it.

What would I do if I lost several billion dollars?

One final word that stood out to me from the letter:

Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns.

This letter is a fascinating read, and quite funny too. If you are interested in what’s going on around it, I highly recommend that you read it. Warren Buffet is certainly my favourite billionaire.