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If you ever feel like corporate earnings announcements sound more like bedtime stories, you are not alone. Between "adjusted EBITDA," "one-time charges" and "normalised earnings," it's hard to tell whether you are analysing a company or decoding a creative writing assignment.
In his letters from 2014 to 2019, Warren Buffett takes aim at this growing culture of financial storytelling, where numbers are tweaked, costs are waved away and investors are lulled into a false sense of clarity. He doesn't just critique bad accounting. He calls out the belief systems that enable it: that volatility equals risk, that buybacks are always good, and that retained earnings don't need defending. In this story, a part of our series on Buffett's annual letters, we decode how he tears into these myths.
Depreciation is not an optional suggestion
It's surprising how often CEOs pretend depreciation is not a real cost. Buffett doesn't buy it. And neither should we. "Every dime of depreciation expense we report is a real cost," he wrote. If a business requires investment in fixed assets to keep operating, then depreciation reflects that wear and tear. It's not "non-cash"; it's just cash already spent.
So next time someone pitches EBITDA as a magic metric, ask them to include capex. And maybe offer them a polygraph test while you are at it.
Why volatility is not risk (and cash might be)
Here is a paradox for you. Most finance students are taught to treat volatility as the definition of risk. If the price moves around a lot, it must be risky. Buffett calls this "dead wrong."
From 2014 onward, he doubled down on the idea that real risk is not price movement; it's the permanent loss of capital. That is why he warns against hiding out in "safe" assets like long-term bonds or cash when interest rates are near zero. Over time, you will earn a pittance and lose ground to inflation.
So, what should long-term investors do? Buy into a low-cost index fund, ignore the noise, and stay put. It won't feel clever, but that's the point.
Repurchases: Smart only when they are cheap
In 2016, Buffett gave a simple rule for buybacks: companies should repurchase only when their stock is trading below intrinsic value. That is it. Anything else—buying at fair value, buying at inflated value, buying just to offset dilution—is a disservice to remaining shareholders.
He also made a sharper point. Why do managements discuss price so carefully when buying businesses but almost never when repurchasing their own shares? It's the same money being deployed. But when ego meets liquidity, discipline often takes a back seat.
Adjusted earnings: Creativity meets delusion
By 2016, Buffett had had enough. Adjusted earnings had become the new normal—and not in a good way. Managements routinely stripped out restructuring costs, stock-based compensation, and any other "unpleasant" expenses to show smoother, prettier numbers.
But the truth is business is messy. Things break. Employees get paid—in stock or otherwise. Pretending otherwise, Buffett warns, sets off a dangerous culture. Once the top brass starts massaging numbers, it won't be long before subordinates get the message, too.
Reporting for reality, not the Street
In 2018, Buffett pointed out how a single quarter's pressure to "meet the number" can start a cascade of compromises. Maybe you push sales a week early. Maybe you ignore rising insurance claims. Maybe you dip into reserves. "Just this once" becomes a pattern. And suddenly, you are one bad quarter away from full-blown fraud.
The lesson is clear: numbers are not just numbers. They reflect culture. And culture, once compromised, doesn't rebound with the next fiscal year.
Why retained earnings quietly win the race
Of all the sections from these years, 2019's bit on retained earnings might be the most powerful. Buffett revisits the forgotten work of Edgar Lawrence Smith and Keynes' comment on the same: well-run companies that reinvest part of their earnings quietly compound wealth in the background—like clockwork.
That is the hidden force behind a great stock. Dividends are visible. Share price moves are loud. But retained earnings, wisely reinvested, are the quiet engine that builds real wealth.
In closing: Investing is not a performance art
From depreciation deniers to EBITDA evangelists, from smooth earnings to showy buybacks, Buffett's letters remind us that investing is not theatre. It's not about applause. It's not about matching the Street's expectations. It's about putting capital to work, recognising real costs, and making decisions that hold up over time.
Ignore the spectacle. Own good businesses. And never forget that the most dangerous lies in investing are the ones we tell ourselves.
Also read: Why Buffett finds beauty in boring investing
This article was originally published on April 29, 2025.
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