1985
Click here to read the letter.🧠 Key Takeaways
Trying to transform an inherently unremarkable business into something remarkable is like trying to fit a square peg into a round hole — it’s never going to work.
Owners of a business have invested capital and are at risk of losing it if the business does not perform well. On the other hand, holders of options do not share this same downside risk. They have the right to purchase stock at a predetermined price, but are not obligated to do so. They have the opportunity to benefit from any increase in the stock price without risking any of their own capital.
✍️ Memorable Quotes
“A horse that can count to ten is a remarkable horse - not
a remarkable mathematician. Likewise, a textile company that allocates capital brilliantly within its industry is a remarkable textile company - but not a remarkable business. My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad). Some years ago I wrote: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.” Nothing has since changed my point of view on that matter. Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
Some businesses are just not that great. While they might stand out within their respective industries, they generally lack the wow factor. Warren says that if you find yourself involved in such a business, it's better to seek opportunities elsewhere rather than trying to force something that will never be.
Trying to transform an inherently unremarkable business into something remarkable is like trying to fit a square peg into a round hole — it’s never going to work.
“Ironically, the rhetoric about options frequently describes them as desirable because they put managers and owners in the same financial boat. In reality, the boats are far different. No owner has ever escaped the burden of capital costs, whereas a holder of a fixed-price option bears no capital costs at all. An owner must weigh upside potential against downside risk; an option holder has no downside. In fact, the business project in which you would wish to have an option frequently is a project in which you would reject ownership. (I’ll be happy to accept a lottery ticket as a gift - but I’ll never buy one.)”
Here, Warren highlights a fundamental difference between stock owners and option holders in terms of financial risk and responsibility.
Owners of a business have invested capital and are at risk of losing it if the business does not perform well. On the other hand, holders of options do not share this same downside risk.
They have the right to purchase stock at a predetermined price, but are not obligated to do so. They have the opportunity to benefit from any increase in the stock price without risking any of their own capital.