I've been rereading Warren Buffett's old Berkshire Hathaway shareholder letters. It's all part of updating my free e-book, Warren Buffett Predicts the Future, which you can download here.

Before I explain the latest lesson I've been reflecting on, I have a question: Have you ever known anyone who has ever had one of the following experiences?

  • Maybe you know a homeowner who was frustrated when they went to move, and they learned that the expected sales price for their current home didn't reflect all the renovations and improvements they'd made over the years.
  • Maybe you know a former student who spent years and lots of money to get a degree in a field that he or she was passionate about, only to find that it was very difficult to make a living.
  • Perhaps you're acquainted with someone who pined romantically for another person, and who did what they could to try to gain that person's affections (within reason, I hope), only to find it didn't matter, because they "just weren't that into them."
  • Perhaps most relevantly, maybe you know someone who has poured their heart and soul into a business for a long time, only to realize that the market just isn't buying what they have to offer.

If you've ever known anyone like that -- in other words, someone who fell for the incorrect assumption that the value of anything must necessarily be related to the amount of effort or materials it took to create that thing -- then it turns out Buffett might be just the person to explain the facts of life.

In particular, I find that I'm drawn to a short statement -- just 15 words -- that Buffett used to illustrate a simple but brutal truth that so many people fail to appreciate, both in business and in life.

It came in the context of a series of bad decisions that Buffett describes at length, and in retrospect of course, in some of his shareholder letters over the years, starting with the fact that he bought Berkshire Hathaway to begin with.

As Buffett describes it, he made the acquisition almost in a slow-burning fit of pique, after he tried to sell his minority stake in the company, but its then-chief executive tried to needle him on the price. As a result, Buffett has said, he doubled down, and soon had the lion's share of his investments tied up "in a terrible business about which I knew very little. ... I became the dog who caught the car."

After that, he explained in another shareholder letter, he "quickly compounded the error" by marrying an insurance business with the then-"terrible" Berkshire, which "eventually diverted $100 billion or so from [his investors] to a collection of strangers."

But his longest-running mistake in this string was to work so hard and so long to try to make the core textile business of Berkshire Hathaway sufficiently profitable. He put in charge a pair of executives whom he later called "excellent managers, every bit the equal of managers at our more profitable businesses," but it didn't matter.

By the late 1960s and into the 1970s, and 1980s, it simply wasn't possible for a New England textile business like Berkshire's to compete -- first with mills in lower-cost Southern states, and later with overseas factories.

By the time Buffett finally gave up on this quixotic effort, two full decades later, and Berkshire tried to wind down, demand was so low that it had to sell equipment it had paid $13 million for at pennies on the dollar: $163,122. Other textile looms that Berkshire had bought for $5,000 each just few years earlier were sold for scrap ($26 each).

All of this leads to the 15 word quote, which Buffett actually said in context in an interview a decade ago. It's the middle sentence of the three in the passage below: 

"The interesting thing about business, it's not like the Olympics. You don't get any extra points for the fact that something's very hard to do. So you might as well just step over one-foot bars, instead of trying to jump over seven-foot bars."

Now, Buffett is talking about business, but this realization also applies to many other parts of life, too: academics, ambitions, even relationships.

(Heck, it even applies to that expensive equipment Berkshire wound up selling for scrap.) 

The world is full of people who hesitate to appreciate this: passionate entrepreneurs, especially, but people in all fields, who sink so much time and money into their passions, only to find that it becomes harder and harder to separate the effort they've put in from the value others ascribe to their work.

It's not a value judgment. It doesn't mean you shouldn't pursue things you care about, or take risks. It's just cold, hard economics: a brutal truth, if you will.

Refusing to contemplate it is like arguing with arithmetic.

Buffett learned it. And the earlier most people learn it, the happier and more successful they'll be. 

Don't forget the free e-book, Warren Buffett Predicts the Future.