Warren Buffett

Warren Buffett, Chairman and CEO of Berkshire Hathaway, has inspired many investors and leaders alike over the last fifty plus years. Besides his investment acumen, I love his uncommon business sense, humility, humor, optimism and a healthy dose of candor. He isn't one to shy away from voicing his two cents and giving direct advice.

I am always looking forward to reading his legendary annual letters and when I am too busy, I still end up reading the synopsis. Washington Post has provided a concise overview of the 2014 Buffett annual letter, which has so many key points on what makes great leaders.

It's not often that a great leader accepts his mistakes openly and humbly in an open letter. In this fiftieth edition of the annual letter, this is exactly what Warren Buffett did. He goes at lengths about some of his biggest professional mistakes he ever made during his storied 50 years at Berkshire Hathaway.

Bottom line:
Admit your mistakes and stay humble

Buffett admits that "it was a monumentally stupid decision" - not taking the tender offer of $11.37 a share from Seabury Stanton, the original owner of Berkshire Hathaway on May 6, 1964. Buffett was stuck on getting a slightly higher price of $11.50 a share. Why was this a stupid decision?

Because "Berkshire was then a northern textile manufacturer mired in a terrible business. The industry in which it operated was heading south, both metaphorically and physically." Buffett admits that "buying the (Berkshire) stock at that price was like picking up a discarded cigar butt that had one puff remaining in it. Though the stub might be ugly and soggy, the puff would be free." And yet, instead of taking the pretty good offer from Stanton which would have netted him a solid 50% gain, he ended up buying more Berkshire shares.

Buffett candidly shares that "I found myself with more than 25% of BPL’s capital invested in a terrible business about which I knew very little. I became the dog who caught the car." The huge mistake that Buffett made cost him dearly: "During the 18 years following 1966, we struggled unremittingly with the textile business, all to no avail. But stubbornness – stupidity? – has its limits. In 1985, I finally threw in the towel and closed the operation."

This was not Buffett's biggest business mistake though! Buffett made another colossal mistake, the most costly of his career that gave away $100 billion to complete strangers.

"Early in 1967, I had Berkshire (instead of BPL) pay $8.6 million to buy National Indemnity Company (“NICO”), a small but promising Omaha-based insurer." Buffett confesses: "I’ve had 48 years to think about that question, and I’ve yet to come up with a good answer. I simply made a colossal mistake." NICO had the underpinnings of the insurance business that made Berkshire Hathaway. However, in purchasing NICO, Buffett made three strategic mistakes: He didn't buy it with cash, he didn't buy it with BPL shares, but instead bought it with shares of Berskshire.

Why was this a costly $100 billion mistake? Because Buffett decided to "marry 100% of an excellent business (NICO) to a 61%-owned terrible business (Berkshire Hathaway)." So, he had to give out a lot of shares for this purchase. Had BPL acquired NICO, Buffett and partners would have owned 100% of the fine company, instead of what ended up transpiring wherein Buffett had to share a lot of subsequent profits and Berkshire ownership with share owners of NICO over the last 48 plus years (whom Buffett refers to as complete strangers).

Buffett goes on to admit one more mistake when he bought Waumbec Mills in 1975, another New England textile company, which ultimately closed. He quips that "the northern textile industry is finally extinct. You need no longer panic if you hear that I’ve been spotted wandering around New England."

Buffett has thus made many costly acquisition mistakes during his reign at Berkshire which have actually allowed him to stay humble.

“I’m not embarrassed to admit that Heinz is run far better under Alex Behring, Chairman, and Bernardo Hees, CEO, than would be the case if I were in charge,” he writes. He also “made a big mistake with this investment by dawdling” and not selling Tesco shares when he had the opportunity. Buffett is repeatedly willing to sell himself short, and give credit to others when and where it’s due.

Buffett is quite thankful for the 24 folks who work at his corporate office though. "They handle all of these business tasks cheerfully and with unbelievable efficiency, making my life easy and pleasant." Buffett jokes that they "even get me hamburgers and french fries (smothered in Heinz ketchup, of course) for lunch." Finally, Buffett readily shares that "No CEO has it better; I truly do feel like tap dancing to work every day."

All entrepreneurs and owners aspiring to be great CEOs like Warren Buffett one day should read this Washington Post article 'The leadership wisdom of Warren Buffett' and learn about what makes great leaders.

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