Errors of Omission

Summary

The failure to act on an attractive opportunity that is well understood (often cited by Buffett as Berkshire's costliest category of mistakes). Because these errors do not appear on GAAP financial statements or balance sheets, they are invisible to the public, yet their opportunity cost can run into the billions.

Evolution & Mentions

• 1989: In discussing "Mistakes of the First 25 Years," Buffett admits that his biggest errors were failing to buy businesses that were obviously cheap and within his circle of competence. He notes that the failure to purchase more of companies like Coca-Cola or GEICO early on cost shareholders immensely. 1989 Letter

• 1991: Buffett formally names the "Mistake Du Jour" as an Error of Omission (often caused by "thumb-sucking"). He shares the case of Fannie Mae. In 1988, Berkshire decided to invest $350-$400 million in Fannie Mae under CEO David Maxwell. After acquiring only 7 million shares, the stock price ticked up, causing Buffett to stop buying in frustration. He then sold the 7 million shares because he disliked holding small positions. This error of omission cost Berkshire an estimated $1.4 billion in foregone profit by 1991. 1991 Letter

• 2001: Buffett emphasizes that the errors of omission are Berkshire's most expensive. He notes that because these errors are invisible, corporate managers are rarely held accountable for them, but to a long-term owner, they are devastating. 2001 Letter

• 2003: At the annual meeting, Buffett and Munger discuss their "Walmart Whiff." Buffett notes that he failed to buy a massive stake in Walmart because the price moved up an eighth of a point, costing Berkshire an estimated $10 billion in value. He cites this as a classic error of omission caused by price stubbornness. 2003 Meeting

• 2017: Buffett draws the boundary of errors of omission around the Circle of Competence. Missing Google or Amazon (which were within their strike zone to evaluate, since Google was a massive customer of Geico and Amazon was clearly dominating retail) were errors of omission. However, missing complex technology startups they could not understand is not an error of omission, as those pitches were outside their strike zone. 2017 Meeting

Primary Source Quotes

"Typically, our most egregious mistakes fall in the omission, rather than the commission, category. That may spare Charlie and me some embarrassment, since you don’t see these errors; but their invisibility does not reduce their cost." — Warren Buffett, 1991 Letter

"The mistakes that have been most costly to us are errors of omission... they never show up in the financials." — Warren Buffett, 2001 Letter

🔗 Connections

• Entities: Fannie Mae, David Maxwell, Frank Rooney
• Concepts: Circle of Competence, Opportunity Cost