Mazor'sEdge

Warren Buffett has a simple yet powerful message for investors: the complexity of an investing strategy doesn’t guarantee greater rewards. Speaking at the 1998 Berkshire Hathaway Annual Meeting, Buffett contrasted investing with Olympic diving.

“In Olympic diving, they have a degree of difficulty factor,” Buffett explained. “But that’s not true in investments. You get paid just as well for a simple dive, as long as you execute it correctly.”

Buffett emphasized the importance of execution over complexity, highlighting that investors can achieve success by focusing on straightforward strategies. He used the analogy of stepping over one-foot bars rather than attempting to clear seven or eight-foot bars for Olympic glory.

“It’s very nice, because you get paid just as well for the one-foot bars,” Buffett remarked.

Buffett’s words serve as a reminder that in the world of investing, simplicity and sound execution often yield the best results. Instead of chasing complex strategies, investors can find success by mastering the basics and staying disciplined in their approach.

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© 2024 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

In the realm of discussing a company’s financial health, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) has emerged as a ubiquitous metric. Yet, its widespread acceptance does not extend to all corners of the investing world. Notably, legendary investor Warren Buffett, along with his long-time partner Charlie Munger, have been vocal critics of the acronym, with Munger caustically dubbing it as “bullshit earnings.”

Buffett’s skepticism towards EBITDA was underscored at the 2017 Berkshire Hathaway Annual Meeting. He highlighted depreciation, a key component excluded from EBITDA calculations, as a particularly concerning aspect. Unlike other expenses, depreciation involves spending money upfront and subsequently recording expenses, essentially creating a reverse float. Buffett argues that such an approach misrepresents the true financial position of a company and can lead to inflated valuations.

Moreover, Buffett points out the self-serving nature of EBITDA’s popularity within financial circles. Wall Street benefits from the metric’s emphasis, as it often results in higher borrowing capabilities and inflated valuations, fueling a cycle of misinformation and misrepresentation.

For Buffett, the allure of EBITDA is a “mass delusion,” diverting attention away from more meaningful indicators of a company’s long-term viability. Instead, he advocates for a thorough understanding of a company’s fundamentals, including its capital expenditures and cash flows.

In essence, Buffett’s critique of EBITDA serves as a reminder to investors to scrutinize widely accepted metrics and delve deeper into a company’s financial reality. While EBITDA may offer a convenient shorthand, its shortcomings can lead to misguided investment decisions. As Buffett remarked, “It’s better to be approximately right than precisely wrong.”

Hear Buffett’s full explanation

See the complete Lessons From Warren Buffett series

© 2024 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.