In his annual letter to shareholders, legendary investor Warren Buffett outlined a few approaches to investing and business management that should be avoided.

Buffett cited Jacobi, a mathematician, who advised problem solvers to invert, always invert.

In other words, instead of trying to find ways of doing something successfully, first find methods that are likely fail and avoid them.

Understand the Business

Berkshire Hathaway avoids investing in businesses they cannot evaluate. Buffett famously avoids investments in new and high growth industries where the future is exciting but uncertain and satisfactory valuation is next to impossible.

Three such industries that Buffett cited were autos in 1910, aircraft in 1930, and television in 1950.

The risk to these industries is the competitive dynamics that would decimate almost all of the companies entering those industries.

Even the survivors tended to come away bleeding, added Buffett.

The Omaha investors famously avoided investing in tech companies in the tech boom, even though the sector offered outstanding returns.

Even though he is good friends with Bill Gates, he did not buy any Microsoft shares.

Have Adequate Liquidity

Berkshire Hathaway wholly owns several businesses. Thus, the organization tackles liquidity both as a fund manager and business manager.

We will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity, said Buffett.

In financial panics, great buying opportunities will arise as assets become undervalued. Market participants will sell their assets to generate liquidity and others will sell out of irrational fear.

However, in such times, unprepared funds will not be able to meet demands for redemptions. Even if a fund is performing well, investors may withdraw cash for their own liquidity needs.

Liquidity for businesses, especially banks, is also important in a financial panic because sources of lending will dry up.

According to Buffett, Berkshire Hathaway keeps over $20 billion dollars in cash equivalents. We sleep well, said Buffett.

Berkshire Hathaway's significant insurance operations also influenced the decision to keep such large cash reserves.

Avoid Excessive Bureaucracy

Although mostly known for his investing acumen, Buffett is also an effective business manager.

Berkshire Hathaway ensures that its businesses have competent management and then interferes as little as possible.

Buffett noted the disadvantages of his hands-off approach.

We are sometimes late in spotting management problems, admits Buffett. He also states that subsidiary organizations often make decision that he disagrees with.

However, Berkshire Hathaway would rather suffer the visible costs of a few bad decisions rather than incur the invisible costs of a stifling bureaucracy.

Buffett remarked that his decision to empower managers and not interfere has rewarded Berkshire Hathaway handsomely.

Empowering managers led to faster decisions and actions made at the operational level. It also promoted an owner-oriented attitude, which is invaluable and too seldom found in huge organizations, noted Buffett.