How To Get Rich (Slowly): Lessons from Berkshire Hathaway’s 2020 Annual Letter

Nobody’s perfect. Berkshire Hathaway’s 2020 annual letter starts by admitting a mistake but ends with an optimistic tone about American business. In between, it’s sprinkled with stories from Berkshire’s history and Warren Buffett’s investing career. Let’s dive in.

I’ve Made a Huge Mistake

Even legends make mistakes. In January 2016, Berkshire Hathaway acquired Precision Castparts, a manufacturer of advanced metal components, for $37.2 billion. In 2020, it wrote-down Precision Castparts’ value by $11 billion, a whopper of a mistake. It’s Buffett’s error and he owns up to it. He offers no excuses or rationalizations, a level of forthrightness rare in corporate America.

Buffett’s original sin was being too optimistic about Precision Castparts’ outlook:

No one misled me in any way — I was simply too optimistic about PCC’s normalized profit potential. Last year, my miscalculation was laid bare by adverse developments throughout the aerospace industry, PCC’s most important source of customers…I believe I was right in concluding that PCC would, over time, earn good returns on the net tangible assets deployed in its operations. I was wrong, however, in judging the average amount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business. PCC is far from my first error of that sort. But it’s a big one.