In his 2020 Berkshire Hathaway Shareholder Letter, Warren Buffett reflects on an $11 billion write-down related to Berkshire’s 2016 acquisition of Precision Castparts (PCC), admitting he overpaid due to overly optimistic profit projections.
Buffett emphasizes that no one misled him and praises PCC as a fine company with an exceptional CEO, Mark Donegan. However, he miscalculated future earnings and the appropriate purchase price. Buffett accepts responsibility, noting this error is significant but not his first of its kind.
Here’s an excerpt from the letter:
The final component in our GAAP figure — that ugly $11 billion write-down — is almost entirely the quantification of a mistake I made in 2016. That year, Berkshire purchased Precision Castparts (“PCC”), and I paid too much for the company.
No one misled me in any way — I was simply too optimistic about PCC’s normalized profit potential. Last year, my miscalculation was laid bare by adverse developments throughout the aerospace industry, PCC’s most important source of customers.
In purchasing PCC, Berkshire bought a fine company — the best in its business. Mark Donegan, PCC’s CEO, is a passionate manager who consistently pours the same energy into the business that he did before we purchased it. We are lucky to have him running things.
I believe I was right in concluding that PCC would, over time, earn good returns on the net tangible assets deployed in its operations. I was wrong, however, in judging the average amount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business.
PCC is far from my first error of that sort. But it’s a big one.
You can find the entire letter here:
2020 Berkshire Hathaway Shareholder Letter
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