jakiro
Source: Qin Shuo’s circle of friends
On the evening of February 22, 2025, Beijing time, Buffett released the highly anticipated annual open letter to shareholders on the official website of Berkshire Hathaway.
People in the investment industry studied overnight, feeling hungry and thirsty.
This year’s open letter to shareholders is as usual full of wisdom, enthusiasm and humor.Buffett began by emphasizing that “we also make mistakes at Berkshire.” He divided his mistakes into two types.
One is to misjudgment the economic prospects of the acquired company, resulting in a mismatch in capital.The “acquired companies” mentioned here include cases of acquiring 100% of the equity and cases of acquiring some tradable stocks.
Because, for Buffett, buying stocks is to obtain the business of the company represented by the stocks, and the specific proportion does not affect the nature of this behavior, so it is classified into the same category.Similarly, Buffett does not distinguish between the so-called primary market (i.e. unlisted equity) and secondary market (i.e. listed equity).The value investment school he pursues has always emphasized that buying stocks is investing in companies, not speculating on the stock itself.
Another mistake is to misjudgment his ability and loyalty when hiring Berkshire managers.The pain of disappointment in loyalty is much greater than the pain of its financial impact, he said: “This pain may be close to a failed marriage.”
In terms of personality, Buffett is more introverted and shy, and he really wants to be accepted and liked by others. He has a clear tendency to please, so he is more sensitive to interpersonal conflict-type pain such as being rejected and abandoned than ordinary people.
In short, the first mistake is to misread the company, and the second mistake is to misread the person.There is a more serious mistake above these two mistakes, namely, delaying the correction of the wrong mistake, which is also the most serious mistake. Buffett jokedly used the “cardinal sin” to describe this mistake.Munger calls it “thumb-sucking”, which means hesitation, indecisiveness, and constant failure.
“He (Munger) will tell me that the problem does not disappear on its own because of your good wishes, and you have to take action, no matter how uncomfortable it may be.”
Buffett does seem to have this shortcoming.He has admitted many times that his biggest mistake in his life was the acquisition of Berkshire Hathaway, a large textile factory in the New England area at that time.Although he knew very well that the textile industry had a bleak future, product homogeneity, global overcapacity, factories were transferring to the southern United States, etc., he still could not resist the temptation of cheap stock prices of textile companies, “picking up cigars butts to smoke.”After seven years of acquiring Berkshire, he couldn’t resist the temptation and acquired another textile factory.
After acquiring Berkshire, he tried to solve the company’s endless problems, and most of them did not find effective solutions.It’s like sailing against the current and building a castle on the quicksand. This kind of problem is indescribable.
But Buffett did not correct the mistake immediately. After delaying for more than 20 years, he closed Berkshire’s textile business in 1985.
He was 55 years old that year.In other words, Buffett corrected the biggest mistake in his life when he was nearly sixty years old and embarked on the road of prosperity.Most people of this age have retired, and Buffett’s glory has just begun.
In a letter to shareholders in 1978, Buffett talked about the reasons why he was reluctant to close Berkshire’s textile business. First, the company is an important local employer and provides objective tax and employment opportunities; second, the management is frankly facing difficulties and working hard to solve problems; third, employees are working hard to cooperate; fourth, they can still generate stable cash income.
It can be seen that Buffett is not a “ruthless” person. He is unwilling to cut off other people’s livelihoods, even if this can protect his own investment.So I kept consuming it, and the factory was closed until I couldn’t last.
His biography “Snowball” talks about his mental journey during this period. After more than 20 years of painful struggle, he finally found that he was very unsuitable to directly manage many people.For example, he cannot face a living person saying “You have been fired”, and he cannot say anything when he thinks of this person’s wife and children relying on this salary to live.
A soft heart is an important reason why Buffett “sucks his thumb” and fails to correct his mistakes in time.
It is extremely rare in large companies to admit your mistakes and admit that you have failed to correct your mistakes in a timely manner.
Buffett also wrote: “Between 2019 and 2023, I used the words ‘mistake’ or ‘error’ 16 times in my letter to you. Many other big companies have never used these words in the same period.”
However, he also pointed out an exception, which is Amazon, the company wrote some frank observations in its 2021 annual report.In addition, the annual reports of other large companies are mostly festive words and photos.
“I have served as a director of some large listed companies, and in some companies’ boards and analyst meetings, “mistake or “mistake” is a forbidden word. This taboo means management feels perfect, which always makes me feel uneasy.”
Of course, Buffett also pointed out that sometimes for legal considerations, there is indeed a need to be reserved during discussions, after all, litigation in the United States is rampant.
Companies that do not admit their mistakes and do not face them will sooner or later fall into trouble, because the mistakes will become bigger and bigger until they are out of control.
The Salomon, which almost became Buffett’s “Waterloo”, is a case that can explain this problem very well.When Buffett’s GEICO insurance company was in crisis and almost went bankrupt in 1976, John Gutfreund, CEO of Solomon Brothers, once reached out to help and pulled Buffett, and the two became friends since then.
Although the two have different investment management philosophy and behavior, Buffett has always been grateful for Gut’s gratitude for his rescue.
In 1987, the Solomon brothers faced a malicious acquisition by Ronald Perelman (backed by the king of junk debt Michael Milken), and Gut asked Buffett for help.Berkshire then bought $700 million in convertible preferred shares of Solomon Brothers at the end of September, accompanied by the conditions that in the five years since 1995, Berkshire can choose every year whether to recover cash or convert it into common stock. The convertible preferred shares have a 9% interest rate and a conversion price of $38. If it is not converted and Solomon must repurchase it after maturity, at your own risk.
At that time, Solomon Brothers was one of the largest investment banks in the United States, the invincible overlord of the bond underwriting market, and one of the main underwriters of US government bonds.According to the balance sheet, Solomon Brothers is the second largest company in the United States.The photos of its CEO Guter were featured in Business Weekly and were given the reputation of “King of Wall Street”.
Not to mention favors, Buffett believes that the company’s bond underwriting concession constitutes a broad moat, and this transaction has both stable dividend income and profit opportunities for rising stock prices, killing two birds with one stone.
However, things went against my wishes. From 1990 to 1991, Paul Moze, the head of Solomon’s issuance Department, violated regulations to bid for government bonds several times, hoarded goods and manipulated the market.
Guter had already known about this and didn’t care. Not only did he not fire Moze, he also continued to let Moze stay in the management.
The company’s legal counsel at that time reminded Guter that Moze’s behavior had constituted a crime, and if the company did not take any action, it would be like fighting with the government.Gut said he would deal with this matter seriously, but strangely he did not take any action.
Munger later commented on this matter and said that this was “thumb sucking”. When he had to take action, he just sat there and meditated hard, which was a waste of time.
Finally, the US government decided to take severe punishment measures against Solomon, and Solomon’s life was hanging on the line.At this time, Gut asked Buffett for help, hoping that Buffett would replace him as interim chairman.
After Buffett became chairman of Solomon, he carried out a thorough rectification internally and frankly admitted his mistakes to the outside world.His speech at the Congressional hearing on September 11, 1991 made Wall Street feel incredible, and he repeatedly apologized to his clients, the US government, and the American people.
He also said, “Mr. President, I would like to thank you for holding these hearings so promptly. You and the American people have the right to know what happened to the Solomon Brothers Company, and I will tell you all the truth I know so far. Once I know more, I will report it to the authorities immediately.”
Eventually, Solomon settled the civil lawsuit for $290 million and was exempted from criminal charges.Public opinion agreed that without Buffett’s efforts, Solomon would have gone bankrupt.Fortunately, Solomon quickly had a chance to breathe, because almost overnight, the media turned their attention to the Soviet Union and Gorbachev was dismissed.
In 1993, Moze, the main person in the Solomon scandal, was sentenced.Buffett said his judgment was too light: “Mozer paid $300,000 and was imprisoned for four months. Solomon’s shareholders, including me, paid $290 million, and I was also sentenced to be general manager for 10 months.”
Buffett has talked about the Solomon incident on many occasions. He believes that when Guter first discovered Moser’s mistake, he should call Gerry Corrigan, then chairman of the New York Fed, to report the mistake truthfully.
According to Gerry Corrigan’s temper, he would definitely be very angry and scold Guter, but in the end he would express his gratitude for Guter’s timely report and issue a ticket. The next day, the Solomon brothers could continue to operate normally.
But Gut did not do this, but instead kept it hidden again and again, making mistakes again and again, almost shutting down the Solomon Brothers’ company.
In 1997, Travelers Group acquired Solomon Brothers, and Berkshire broke through and made more than double the profit.The investment, which is safe and safe, has finally ended.
Although the return rate of more than doubled in ten years is not too low, Buffett believes that considering the time, energy, effort and hard work he and Munger have put in for this investment, the investment will definitely not be worth the loss.
From then on, he and Munger became more alert to moral issues when making investment decisions.
Why do some people admit mistakes, face them, and correct them, while others are unwilling to admit mistakes, and even try their best to cover up their mistakes?
In fact, the first paragraph of Buffett’s letter to shareholders answers the question: “This letter is presented to you as part of Berkshire’s annual report. As a public company, it is our responsibility to provide you with a lot of specific data and information regularly. However, the term ‘report’ means greater responsibility. In addition to the prescribed data, we believe you should also be provided with additional information about what you have and how we think. Our goal is to communicate with you in a way that we want you to take when you are in a position swap — that is, if you are the CEO of Berkshire and my family and I are passive investors, entrusting our savings to you.”
Buffett has always regarded shareholders as family members.In fact, his earliest shareholder was his family.In May 1956, after working for the New York company of his mentor Graham for nearly two years, he returned to his hometown of Omaha with $140,000 in savings, feeling that this “huge amount of money” could allow him to retire.But his seven family and friends found him and hoped that he would help them manage their finances and get rich.Buffett drafted a simple articles of association of limited partnerships, and everyone signed the letter and the partnership was established.
When Buffett wrote a letter to shareholders, he would imagine that he was writing to his sister Doris and sister Betty, telling them about the company’s business this year and their wealth.In fact, he would first write “Dear Doris and Betty”, and after the full text was written, he would change the “Dear Shareholder”.
If all companies write annual reports to shareholders like Buffett, feeling like they are writing letters to their families, then they will not fail to admit their mistakes, cover up their mistakes, or deceive themselves.However, few companies can do this.
What’s worse is that many companies regard shareholders as potential targets of taking advantage of or even fraud, and are full of thoughts on how to turn these potential victims into real victims without legal sanctions, so they staged various bloody dramas of cheating.
It can be seen that behind the wrong attitude is morality.This is also the most difficult part of learning from Buffett.His investment philosophy and investment methods are not difficult. Many people also have his calm and rational personality, but if the moral character cannot keep up, everything will be in vain.
