Buffett's 1989 letter on avoiding costly myths and mistakes

When Warren Buffett reflected on his 25 years of investing, it was not just about celebrating success but also dissecting mistakes. That is what makes his 1989 letter stand out. It's one of those brutally honest reflections that make you sit up and pay attention. It's packed with lessons on taxes, look-through earnings, debt-fuelled acquisitions, and why avoiding mistakes is often better than trying to fix them. We break it down in continuation of our story series covering his letters and their investing wisdom. The power of tax deferral Compounding works best when left undisturbed, but frequent selling can quietly erode its power. Buffett highlights one often-overlooked culprit: tax. Selling too soon means handing over a portion of your gains to the government, reducing the base on which future returns can grow. To illustrate, he offers a simple thought experiment. Imagine investing Rs 1 in an investment that doubles every year. If you sell and reinvest each time—paying taxes along the way—you'll end up with around Rs 2.9 lakh after 20 years. But if you simply hold on and let the investment compound without interruption, you'd have Rs 9.2 lakh! By deferring taxes, you let the full amount snowball for decades before the government takes its cut—giving you a far larger final sum. Buffett's message is clear: the longer you can postpone paying tax, the more powerful compounding becomes. Look-through earnings: What you don't see might be more valuable If you think reported earnings tell the whole story, think again. Buffett talks about "look-through earnings" as the real measure of a company's profitabili

This article was originally published on April 03, 2025.