Decisions decisions

Billionaires Warren Buffet and Bill Gates

Buffet’s annual letter to shareholders is famously both candid and amusing, with a particular brand of humility: “here are all the dumb things I did on my way to being a multi-billionaire”.

Obviously the force behind Berkshire Hathaway knows a few things about investing. This year Bill Gates particularly highlighted the section from page 23 onward.

Aside from the views on the efficient allocation of capital with regards to taxation (which is surprisingly interesting), Buffet looks at how to know when an investment is worth making, particularly focusing on how vested interests can distort the market. He focusses on an early mistake to stay in the textiles industry for the wrong reasons, and which took decades to overturn:

“…[the] capital withdrawals within the textile industry that should have been obvious were delayed for
decades because of the vain hopes and self-interest of managements. Indeed, I myself delayed abandoning our obsolete textile mills for far too long.

“A CEO with capital employed in a declining operation seldom elects to massively redeploy that capital into
unrelated activities. A move of that kind would usually require that long-time associates be fired and mistakes be admitted. Moreover, it’s unlikely that CEO would be the manager you would wish to handle the redeployment job even if he or she was inclined to undertake it

“…[At Berkshire Hathaway] ….we are free of historical biases created by lifelong association with a given industry and are not subject to pressures from colleagues having a vested interest in maintaining the status quo. That’s important: If horses had controlled investment decisions, there would have been no auto industry.”

In Unthinkable, we discuss exactly these issues of course. It’s very close to being at the heart of why such decisions are so difficult to make at a human level. We also talk about the incredible value of real case histories – not those of the “conquering hero” variety. The great attractiveness of Buffet’s letter this year is that it shows us how much can be learn from mistakes openly shared.