Warren Buffett: We all make mistakes: not everything goes as planned

In his 2013 Berkshire Hathaway Annual Letter, Warren Buffett discusses the diverse range of Berkshire Hathaway companies, from those with exceptional profitability to those with poor returns due to errors in judgment.

Fortunately, its major acquisitions have generally been successful. Overall, companies employed $25 billion in net tangible assets in 2013, earning 16.7% after taxes on that capital, even with significant capital gains from premium payments.

Although not all investments performed as expected, the intrinsic value of these businesses exceeds their book value. However, the greatest value lies in the insurance and regulated industry segments, where the most substantial gains are found.

Here is an excerpt from the letter:

The multitude of businesses in this section sell products ranging from lollipops to jet planes. Some of these businesses, measured by unlevered net earnings tangible Active, they enjoy an excellent economy, producing profits ranging from 25% after taxes to well over 100%. Others generate good returns in the range of 12% to 20%.

Some, however, have very poor returns, as a result of some serious mistakes I made in my capital allocation work. I was not mistaken: I was simply wrong in my assessment of the economic dynamics of the company or the industry in which it operated.

Fortunately, my mistakes usually involved relatively small acquisitions. Our big purchases have generally worked well, and in some cases, more than well. However, I have not made my last mistake when buying companies or stocks. Not everything goes as planned.

Viewed as a single entity, the companies in this group are an excellent business. They employed an average of $25 billion in net tangible assets during 2013 and, with large amounts of excess cash and little leverage, earned 16.7% after taxes on that capital.

Of course, a business with great economics can be a bad investment if the purchase price is excessive. We have paid substantial premiums to net tangible assets for most of our businesses, a cost that is reflected in the large figure we show for goodwill. However, overall we are getting a decent return on the capital we have invested in this sector. Furthermore, the intrinsic value of these businesses, taken together, exceeds their book value by a good margin. Still, the difference between intrinsic value and book value in the insurance and regulated industry segments is far greater than. That’s where the real big winners reside.

You can read the full letter here:

Berkshire Hathaway 2013 Annual Letter