Warren Buffett on Mistakes

Buffett publicly acknowledged that he had made an error in buying a large position in ConocoPhillips near the top of the oil price, and that the position had been reduced at a loss. He used the admission to make the broader point that mistakes of timing on commodity-sensitive businesses are a recurring hazard, and that the discipline of staying within the circle of competence applies to industries whose economics depend on a commodity price one cannot forecast.

On the ConocoPhillips error.

Buffett published his first detailed account of his own mistakes. He distinguished errors of commission — buying a business that turned out badly — from errors of omission, the opportunities he saw and failed to act on. He argued that omission errors are invisible in the financial statements but are often the largest in dollar terms, and that the remedy is to act decisively when conviction is genuine.

On mistakes of omission vs commission.

Buffett argued that a business that must continuously reinvest to stay competitive — a textile mill, an airline — reports earnings that are economically fictional for the owner, because the cash never reaches the owner; it is consumed by the business itself. The test is whether a dollar of retained earnings eventually produces more than a dollar of market value. If not, the business is destroying capital regardless of what its income statement says.

Connecting owner earnings to the retained-earnings test.

Buffett explained that the textile business had been a chronic disappointment despite capable management. The problem was structural: the industry's economics — commodity output, intense competition, heavy reinvestment merely to stay even — overwhelmed the efforts of honest operators. He closed the operation rather than continue pouring capital into a business that could not earn an adequate return, framing it as a lesson that a bad business is not redeemed by good people.

On closing the original Berkshire textile mills; the founding mistake of the Berkshire name.