Buffett: Not correcting mistakes in time is the biggest mistake

Source: Qin Shuo’s circle of friends

On the evening of February 22, 2025, Beijing time, Buffett released the much-anticipated annual letter to shareholders on the official website of Berkshire Hathaway, which is under his command.

Investors studied it overnight and were eager to read it.

This year’s letter to shareholders is full of wisdom, enthusiasm and humor as usual. Buffett emphasized at the beginning that "we will make mistakes at Berkshire." He divided his mistakes into two types.

One is to misjudge the economic prospects of the acquired company, resulting in capital misallocation. The "acquired company" mentioned here includes both cases of acquiring 100% equity and cases of acquiring part of the tradable stock.

Because, for Buffett, buying stocks means acquiring 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 one category. Similarly, Buffett does not distinguish between the so-called primary market (that is, unlisted equity) and the secondary market (that is, listed equity). The value investment school he followed has always emphasized that buying stocks is investing in companies, not speculating on stocks themselves.

Another mistake was misjudging the ability and loyalty of Berkshire managers when recruiting them. The pain caused by disappointment in loyalty is far greater than the pain caused by its financial impact. He said: "This pain may be close to a failed marriage."

In terms of personality, Buffett is relatively introverted and shy. He really wants to be accepted and liked by others. He has a clear tendency to be a people-pleasing personality, so he is more sensitive to the pain of interpersonal conflicts such as rejection and abandonment than ordinary people.

In short, the first mistake is to misjudge the company, and the second mistake is to misjudge the person.Above these two mistakes, there is a more serious mistake, that is, the mistake of delaying the correction of mistakes, which is also the most serious mistake. Buffett jokingly uses "cardinal sin" to describe this mistake. Munger calls it "thumb-sucking", that is, indecision, indecision, and indecision.

Buffett wrote: "He (Munger) would tell me that problems don't go away on their own because of your good intentions, you have to take action, no matter how uncomfortable it may be."

Buffett does seem to have this shortcoming. He has repeatedly admitted that the biggest mistake of his life was the acquisition of Berkshire Hathaway, which was then a large textile mill in New England. Although he was well aware of the bleak future of the textile industry, product homogeneity, global overcapacity, factories moving to the southern United States, etc., he still couldn't resist the temptation of cheap textile companies' stock prices and "picked up cigar butts to smoke." Seven years after acquiring Berkshire, he couldn't resist the temptation and acquired another textile mill.

After acquiring Berkshire, he tried to solve the company's endless problems, but he didn't find effective solutions to most of the problems. It's like sailing against the current and building a castle on quicksand. Such problems are inherently unsolvable.

But Buffett didn't correct his mistakes immediately. After more than 20 years of delay, he closed Berkshire's textile business in 1985.

He was 55 years old that year. That is to say, Buffett corrected the biggest mistake of his life when he was nearly 60 years old and embarked on a smooth road. Most people of this age have retired, but Buffett's glory has just begun.

In his 1978 letter to shareholders, Buffett talked about the reasons why he was reluctant to close Berkshire's textile business. First, the company was an important employer in the local area, providing objective tax and employment opportunities; second, the management was frank in facing the difficulties and working hard to solve the problems; third, the employees cooperated strongly; fourth, it could still generate stable cash income.

It can be seen that Buffett is not a "ruthless" person. He can't bear to cut off other people's livelihoods, even if this can protect his own investment. So he kept wasting time, and he closed the factory only when he couldn't waste it anymore.

His biography "Snowball" tells about his mental journey during this period. After more than 20 years of painful struggle, he finally found that he was not suitable for directly managing many people. For example, he couldn't face a living person and say "You are fired". When he thought of this person's wife and children relying on this salary, he couldn't say it.

Soft-heartedness is an important reason why Buffett "sucks his thumb" and fails to correct his mistakes in time.

Admitting your mistakes and admitting that you failed to correct your mistakes in time is extremely rare in large companies.

Buffett also wrote: "Between 2019 and 2023, I used the words "mistake" or "error" 16 times in my letters to you. Many other large companies never used these two words during the same period."

However, he also pointed out an exception, Amazon, which wrote some frank observations in its 2021 annual report without mercy. In addition, the annual reports of other large companies are mostly festive words and photos.

Buffett further wrote: "I have served as a director of some large public companies. In some companies' board meetings and analyst meetings, the words "incorrect" or "wrong" are taboos. This taboo means that management feels that they are perfect, which always makes me feel uneasy."

Of course, Buffett also pointed out that sometimes for legal considerations, it is necessary to be reserved when discussing, after all, litigation is rampant in American society.

Companies that do not admit mistakes and face up to mistakes will sooner or later get into trouble, because mistakes will become bigger and bigger until they are out of control.

Salomon Brothers, which almost became Buffett's "Waterloo", is a case that illustrates this problem very well. In 1976, when Buffett's GEICO Insurance Company was in crisis and almost went bankrupt, John Gutfreund, CEO of Salomon Brothers, lent a hand to Buffett, and the two became friends since then.

Although the two had very different investment management philosophies and ways of dealing with people, Buffett has always been grateful for Gut's rescue.

In 1987, Salomon Brothers faced a hostile takeover by Ronald Perelman (with the support of junk bond king Michael Milken), and Gut asked Buffett for help. Berkshire then bought $700 million of Salomon Brothers' convertible preferred shares at the end of September, with the condition that Berkshire could choose to withdraw cash or convert it into common stock every year for five years starting from 1995. The convertible preferred stock interest rate was 9%, the conversion price was $38, and if it was not converted and expired, Salomon had to repurchase it at its own risk.

At that time, Salomon Brothers was one of the largest investment banks in the United States, the undisputed overlord of the bond underwriting market, and one of the main underwriters of US government bonds. In terms of balance sheet, Salomon Brothers was the second largest company in the United States. Its CEO Gutt's photo was published in Business Week and he was dubbed "The King of Wall Street".

Leaving aside personal relationships, Buffett believed that the company's bond underwriting franchise constituted a broad moat. This deal not only provided stable dividend income, but also provided profit opportunities from rising stock prices, killing two birds with one stone.

However, things did not go as planned. From 1990 to 1991, Paul Moser, head of Salomon's issuance department, violated regulations by bidding for treasury bonds several times, hoarded them, and manipulated the market.

Gutt had known about this for a long time, but he didn't care. Not only did he not fire Moser, he also kept Moser in management.

The company's legal counsel at the time reminded Gutt that Moser's behavior had constituted a crime, and if the company did not take any action, it would be tantamount to fighting the government. Gutt said he would deal with the matter seriously, but strangely he did not take any action.

Munger later commented on this incident and said that this was "sucking your thumb". When you should have taken action, you just sit there and think hard, which is a waste of time.

Finally, the US government decided to take severe disciplinary measures against Salomon Brothers, and Salomon's life was hanging by a thread. At this time, Gut asked Buffett for help, hoping that Buffett would replace him as interim chairman.

After Buffett became the chairman of Salomon, he carried out a thorough internal rectification and frankly admitted his mistakes to the outside world. His speech at the congressional hearing on September 11, 1991 was incredible to Wall Street. He repeatedly admitted his mistakes and apologized to his customers, the US government, and the American people.

He also said: "Mr. Chairman, I also want to thank you for holding these hearings so promptly. You and the American people have the right to know what happened to Salomon Brothers. I will tell you all the truth I know so far. Once I know more, I will report it to the relevant authorities immediately."

In the end, Salomon settled the civil lawsuit for $290 million and was exempted from criminal charges. Public opinion unanimously believed that without Buffett's efforts, Salomon would have collapsed. Even more fortunately, Salomon soon had a chance to breathe, because almost overnight, the media turned its attention to the Soviet Union and Gorbachev was dismissed.

In 1993, Moser, the main person involved in the Salomon scandal, was sentenced. Buffett bluntly said that the sentence was too light: "Moser paid $300,000 and was imprisoned for 4 months. Salomon's shareholders, including me, paid $290 million, and I was sentenced to be the general manager for 10 months."

Buffett has talked about the Salomon incident on many occasions. He believes that when Gut first discovered Moser's mistake, he should have called Gerry Corrigan, then chairman of the New York Federal Reserve, to report the mistake truthfully.

According to Gerry Corrigan's temper, he would definitely be very angry and scold Gut, but in the end he would thank Gut for his timely report and then issue a ticket. The next day, Salomon Brothers could continue to operate normally.

But Gutt didn't do so. Instead, he kept hiding things and made mistakes again and again, almost bankrupting Salomon Brothers.

In 1997, Travelers Group acquired Salomon Brothers, and Berkshire Hathaway got away with it, making more than double the profit. The investment was finally over without any danger.

Although the return rate of more than double in ten years is not too low, Buffett believes that considering the time, energy, and efforts he and Munger have put into this investment, as well as the risk of reputation damage, this investment is definitely not worth the loss.

From then on, he and Munger became more alert to moral issues when making investment decisions.

Why do some people admit their mistakes, face their mistakes, and correct their mistakes, while others are unwilling to admit their mistakes and even try their best to cover them up?

In fact, the first paragraph of Buffett's letter to shareholders answered this question: "This letter is presented to you as part of Berkshire's annual report. As a public company, we have a responsibility to provide you with many specific data and information on a regular basis. However, the word "report" implies a greater responsibility. In addition to the prescribed data, we believe that we should also provide you with supplementary information about what you own and how we think. Our goal is to communicate with you in a way that we hope you will adopt when the positions are reversed - 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 treated shareholders as family. In fact, his earliest shareholders were his family. In May 1956, after working in his mentor Graham's New York company for nearly two years, he returned to his hometown of Omaha with $140,000 in savings, thinking that this "huge amount of money" would allow him to retire. But his seven family friends found him and hoped that he would help them manage their finances and get rich. Buffett drafted a simple limited partnership charter, everyone signed it, and the partnership was established.

When Buffett writes a letter to shareholders, he imagines that he is writing to his sisters Doris and Betty, telling them about the company's operating conditions this year and their wealth. In fact, he would first write "Dear Doris and Betty" as the heading, and then change the heading to "Dear Shareholders" after writing the full text.

If all companies write annual reports to shareholders like Buffett, feeling that they are writing to their family, then they will not deny their mistakes, cover up their mistakes, and deceive themselves. However, few companies can do this.

What's worse is that many companies do the opposite. They regard shareholders as potential targets for taking advantage or even fraud. They are full of thoughts about how to turn these potential victims into real victims without being punished by law, so they stage all kinds of bloody dramas of cheating and deceiving.

It can be seen that the attitude towards mistakes is actually behind morality. This is also the most difficult part of learning Buffett. His investment philosophy and investment methods are not difficult. Many people also have his calm and rational personality, but if their morality cannot keep up, everything is in vain.