During the 2001 Berkshire Hathaway Annual Meeting, Warren Buffett discusses the concept of errors of omission, which he defines as missed opportunities within their circle of competence, rather than failing to act on areas they don’t understand.
He emphasizes the mistakes of inaction or underaction in situations they fully grasp, likening it to “sucking his thumb” when not capitalizing on clear opportunities.
These errors often occur when they hesitate due to minor price changes or other factors, resulting in significant missed gains. Buffett highlights that conventional accounting doesn’t capture these mistakes, but they are keenly aware of them and consider them crucial in their own evaluations.
Here’s an excerpt from the meeting:
Buffett: Yeah. I might add that when we speak of errors of omission, of which we’ve had plenty, and some very big ones, we don’t mean not buying some stock where we — a friend runs it, or we know the name and it went from one to 100. That doesn’t mean anything. It’s only — We only regard errors as being things that are within our circle of competence. So if somebody knows how to make money in cocoa beans, or they know how to make money in a software company or anything, and we miss that, that is not an error, as far as we’re concerned.
What’s an error is when it’s something we understand, and we stand there and stare at it, and we don’t do anything. Or worse yet, what really gets me is when we do something very small with it. We do an eyedropper’s worth of it, when we could do it very big. Charlie refers to that elegantly when I do that sort of thing as when I’m sucking my thumb.
(Laughter)
And there really — I mean, we have been thumbsuckers at times with businesses that we understood well. And it may have been because we started buying, and the price moved up a little, and we waited around hoping we would get more at the price we originally started — there could be a lot of things. But those are huge mistakes. Conventional accounting, of course, does not pick those up at all. But they’re in our scorebook.
You can watch the entire meeting here:
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