On Saturday, CNBC revealed that Berkshire Hathaway Chairman and CEO Warren Buffett acknowledged two major investment errors at the kickoff of this weekend’s annual shareholder meeting in Omaha. CNBC reported:
“I made the wrong decisions on Google and Amazon,” he said at the Berkshire Hathaway 2018 annual shareholder meeting on Saturday. “We’ve looked at it. I made the mistake in not being able to come to a conclusion where I really felt that at the present prices that the prospects were far better than the prices indicated.”
…“I had very very very high opinion of Jeff’s [Jeff Bezos, CEO of Amazon] ability when I first him, and I underestimated him,” he added. “I’ve watched Amazon from the start. I think what Jeff Bezos has done is something close to a miracle … The problem is when I think something will be a miracle, I tend not to bet on it. It would have been far better obviously if I had some insights into certain businesses.”
Over his career, Buffett has amassed a personal fortune of approximately $80 billion. He has also given some $30 billion to charity. With that kind of track record, he could easily be forgiven if he never acknowledged any errors.
A weak or insecure leader seeks to obscure his or her errors. He or she lacks fears the consequences of revealing error. But that’s not Buffett.
He not only mentioned big mistakes, but also suggested that he lacked “insights into certain businesses.” Moreover, he gave credit to Amazon.com founder and CEO Jeff Bezos for the company he built.
It takes an enormous amount of personal strength and inner confidence to point to one’s failures. It takes even more courage to publicly proclaim the root cause of those shortcomings. Yet, one driver of continual learning, which applies to virtually any activity and any field, is an ability to objectively examine what went wrong and why.
It is psychologically easy for one to attribute all success to one’s efforts, while shifting blame for all failures to others and/or uncontrollable circumstances. Such credit-seeking, blame-shifting behavior is a staple of Washington today. For example, the President claimed full credit for the unemployment rate’s decline, even as the economic expansion and the decrease in the unemployment rate long preceded his Presidency. He has also repeatedly shifted blame to others for his failures. The nation’s trade deficit provides a powerful case in point. Unable or unwilling to understand the voluntary nature of transactions responsible for the balance of trade, he essentially accuses other countries of engaging in unfair conduct. Instead, the combination of comparative advantages and market conditions largely explains the nation’s trade balance.
Buffett’s recognition of his errors reveal that he is a CEO who puts objectivity ahead of personal desires for recognition, power, wealth, or self-esteem. Indeed, excessive attention to such personal desires can wreck companies and their shareholders. This is particularly true when it comes to mergers and acquisitions. In his February 2018 letter to shareholders, Buffett discussed the pursuit of acquisitions. He wrote:
Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase. Subordinates will be cheering, envisioning enlarged domains and the compensation levels that typically increase with corporate size. Investment bankers, smelling huge fees, will be applauding as well. (Don’t ask the barber whether you need a haircut.) If the historical performance of the target falls short of validating its acquisition, large “synergies” will be forecast. Spreadsheets never disappoint.
Does that sound familiar? Think, for example, of “magical” economic growth forecasts underlying fiscal projections.
What then is Buffett’s approach?
At Berkshire…we evaluate acquisitions on an all-equity basis, knowing that our taste for overall debt is very low and that to assign a large portion of our debt to any individual business would generally be fallacious… We also never factor in, nor do we often find, synergies.
His methodology has resulted in an extraordinary increase in shareholder wealth for Berkshire’s stockholders. During Buffett’s more than half-century tenure (1965-2017), the value of Berkshire’s stock has increased an average 20.9% per year. During that same period, the S&P 500, inclusive of dividends, has provided an average annual return of 9.9%.
That remarkable record does not stop Buffett from acknowledging error. Learning from error may well be among his secrets to long-run success.
Washington would do well to learn from the “Oracle of Omaha’s” example. Perhaps a little humility spiced by objectivity might lead to better policy outcomes. Domestically and internationally, there is ample room for improved public policy.