

Here's another excerpt from the 1982 Berkshire Hathaway Shareholder Letter:


Buffett later adds...



At least some familiarity with the limits (and flaws) of an accounting system is useful. The numbers reported in SEC filings often must be converted into something that makes economic sense. It'd be nice if there was some absolutely correct set of numbers, but the investing process always comes down to making sound estimates of reality. Each company and industry has specific challenges. Beware of false precision.

"Better to be vaguely right than exactly wrong." - Carveth Read*

You can figure out whether company XYZ has return on equity (ROE) in the 20-25% range or free cash flow (FCF) is ~$ 950-$975 million. It's fantasy to think you can calculate that the ROE is precisely 23.4% or that the FCF is $ 963 million. Getting to a meaningful rough approximation is what counts.

Enrico Fermi thought the ability to effectively estimate (often called a Fermi estimate or Fermi problem) was an important skill for scientists and engineers to master.

Here's a previous post for some additional background.

One example of Fermi's skills at estimating: a remarkably accurate estimate of the strength of an atomic bomb blast during the Trinity test (of course, the first test of its kind) was made based on the distance travelled by pieces of paper he dropped from his hand upon detonation.

I think it's as useful a skill for investing as he believed it to be for science and engineering.


Related post:
Munger on Accounting

* This quote is sometimes incorrectly attributed to John Maynard Keynes even though the original source is apparently Carveth Read.
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