Mistakes of the First Twenty-Five Years

Mistakes of the First Twenty-Five Years

By the WealthOS Research Desk

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Introduction

Every year, Berkshire Hathaway shareholders receive a letter. Most are read for the commentary on markets and the wry observations. But the most valuable section Buffett ever published appeared in the 1989 letter, under the heading "Mistakes of the First Twenty-Five Years."

What makes it unusual is not that a successful investor admitted errors. It is that he analysed them by category, with a theory of why they happened — and then said the pattern would continue.

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The Confession

Buffett opened by noting his habit of discussing the mistakes the company's managers made, and then admitted he had neglected what he called his own "mistakes of commission" at the parent level. He then spent the following pages on them.

His framing is worth reading carefully. He wrote that a decade of using the word "mistake" in the letters had been accompanied by a corresponding absence of any entry under that heading, which he described as the sort of thing that should have made readers suspicious.

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The Core Distinction

The heart of the section is a distinction that most investors still get backwards.

Mistakes of commission — things he bought that he should not have. These, he said, cost him visible money.

Mistakes of omission — things he understood well enough to buy and did not. These, he argued, cost far more. His estimate in that letter was that the omission errors had cost Berkshire a very large amount relative to the commission errors, and that the pattern was not close.

His example was telling: a business he had identified and understood, which subsequently compounded enormously, and which he had passed on. He described the loss from that single decision in the same breath as the total of his visible purchasing errors.

The reason this matters is behavioural. Commission errors leave a scar: you see the price you paid and the value you lost. Omission errors leave nothing to look at, so they are never reviewed, never learned from, and never counted. They are, in his words, the errors that never show up in the financial statements.

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The Institutional Imperative

The section also names the mechanism behind most of his commission errors. Buffett described what he called the institutional imperative: the tendency of organisations to resist change, to absorb available capital with new projects, and to imitate peers, driven by management's reluctance to appear to be doing nothing.

He listed what experience had taught him:

He noted that these tendencies are not usually caused by venality or stupidity, but that they nonetheless produce poor capital allocation. He then gave the practical consequence: he had learned to be suspicious of proposals whose main justification was that other companies were doing the same thing.

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What He Took From It

The letter does not end with resolution. It ends with a stated limitation, which is the part most often skipped.

Buffett wrote that he expected the mistakes to continue, both kinds, and that he could not promise otherwise. What he could do was acknowledge them openly when they occurred. He also drew a conclusion about the value of a long holding period: that the best way to avoid the worst mistakes is to buy businesses so good that you never need to sell them, because the decision to sell is where many errors are made.

That is a more honest position than the version usually quoted. The point was not that he had learned to stop making mistakes, but that he had learned to name them accurately.

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Why It Still Matters

Three practical lessons.

1. Count your omissions. The investments you understood and declined will never appear on any statement. Reviewing them deliberately is the only way they teach you anything.

2. Distrust the peer justification. "Everyone is doing it" is a reason to look harder, not a reason to proceed. This applies to acquisitions and equally to your own portfolio.

3. Judge the reasoning, not the outcome. Buffett's interest in this section is in the *quality of the decisions*, not the results of a single year. He is explicit that the letters exist partly so that shareholders can evaluate the reasoning, which they cannot do if only results are reported.

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Conclusion

The 1989 letter is worth reading in full, and it is available on Berkshire's own site. What makes it exceptional is not the confession, which is rare enough, but the taxonomy: errors of commission are visible and therefore learnable, errors of omission are invisible and therefore compound. The institutional imperative explains why the visible ones keep happening.

The practical takeaway is uncomfortable. The expensive mistakes are usually the things you correctly decided not to do.

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This article references Warren Buffett's 1989 Berkshire Hathaway shareholder letter, including the section "Mistakes of the First Twenty-Five Years" and the discussion of the institutional imperative. It is educational material, not investment advice.