In his 1983 Berkshire Hathaway Annual Letter, Warren Buffett discusses his shift in perspective on the value of economic goodwill in business investments. Originally trained to prioritize tangible assets, Buffett initially shunned businesses with high goodwill values, resulting in missed opportunities.
Over time, influenced by direct and vicarious business experiences and the teachings of John Maynard Keynes—who emphasized the challenge of moving beyond entrenched ideas—his views evolved. He now favors businesses with substantial, enduring goodwill and minimal tangible assets. Here’s an excerpt from the letter:
You can live a full and rewarding life without ever thinking about Goodwill and its amortization. But students of investment and management should understand the nuances of the subject.
My own thinking has changed drastically from 35 years ago when I was taught to favor tangible assets and to shun businesses whose value depended largely upon economic Goodwill. This bias caused me to make many important business mistakes of omission, although relatively few of commission.
Keynes identified my problem: “The difficulty lies not in the new ideas but in escaping from the old ones.” My escape was long delayed, in part because most of what I had been taught by the same teacher had been (and continues to be) so extraordinarily valuable.
Ultimately, business experience, direct and vicarious, produced my present strong preference for businesses that possess large amounts of enduring Goodwill and that utilize a minimum of tangible assets.
I recommend the Appendix to those who are comfortable with accounting terminology and who have an interest in understanding the business aspects of Goodwill. Whether or not you wish to tackle the Appendix, you should be aware that Charlie and I believe that Berkshire possesses very significant economic Goodwill value above that reflected in our book value.
You can read the entire letter here:
1983 Berkshire Hathaway Annual Letter
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