I was wrong

"I was wrong." It's a simple thought that is not often expressed or felt in any area of expertise. People would much rather insist that they were actually right, try and forget about the whole thing, or even sincerely believe in whatever excuses they are giving.

But not Warren Buffett. Here's what Buffett says in his latest letter to the shareholders of Berkshire Hathaway: Over the years, I have made many mistakes. Consequently, our extensive collection of businesses currently consists of a few enterprises that have truly extraordinary economics, many that enjoy very good economic characteristics, and a large group that are marginal. Along the way, other businesses in which I have invested have died, their products unwanted by the public.

Later in the same letter, he returns to the same theme: At this point, a report card from me is appropriate: In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so. In some cases, also, bad moves by me have been rescued by very large doses of luck. (Remember our escapes from near-disasters at USAir and Salomon? I certainly do.) Our satisfactory results have been the product of about a dozen truly good decisions - that would be about one every five years.

Remember, he does not need to bring up his mistakes, let alone dwell upon them in this manner. This is a letter - not a press conference or a Q&A session. No one is demanding an explanation. So why does he keep bringing up the bad choices he made? Is it just masochism? I don't think so. In talking about his mistakes, I believe Buffett sets a great example for investors and shows them how to make better investment decisions. Berkshire's huge mistake in not buying into tech in its heyday is a great example of this that the two old men cheerfully admit to.

Most of us, as investors and in other walks of life, rationalise our bad decisions or simply forget about them. Professional fund managers and business managers always try to paper over their mistakes simply as a professional survival mechanism. However, with Buffett and Munger, I have observed that they do not do that over the years. Not only did they admit their mistake to themselves, but they also discussed the mistakes in some detail.

The idea that Buffett is demonstrating in the above extract from the latest letter is that one can do very well indeed without being universally successful in all one's investments. You can make many 'so so' decisions - as he calls them - but as long as a certain set of your decisions work out, or are just lucky, then you'll do well in the end. He points to what is actually a shocking confession - the vast success of Berkshire is the result of no more than about a dozen outstanding decisions!

The biggest advantage of admitting mistakes is that it leaves the path open for self-improvement and eventually doing much better. Admitting mistakes is not just some kind of self-flagellation ritual - it directly leads to making better decisions and, thus, making more money. It makes us better investors. Personally, as well as in Value Research's investment research. Over the years, we have gone wrong a few times, but every time, we have tried to analyse the error with self-awareness to try and ensure that it does not happen again. Apart from being honest with oneself, that's a practical payoff for admitting one's mistakes. Buffett's partner Charlie Munger once said, "Forgetting your mistakes is a terrible error if you are trying to improve your cognition... Why not celebrate stupidities!"

Why not, indeed. It's a great idea. It'll make you more money from investing.

Suggested read: Warren Buffett's annual letter for 2023