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What are the three most important criteria you use for selecting managers?
Warren Buffett: The most important characteristic is that a manager needs to have a passion for his business. When we buy a company, we are monetizing the owner for a lifetime’s worth of work. The individual is already wealthy; we are merely shifting the form of his wealth into something more liquid: cash. After the deal has closed, the seller’s motivation to come to work in the morning isn’t a paycheck. (For that matter, after the deal is done the sellers don’t have any need to work.) We don’t have any employment contracts at Berkshire. Once we buy a business, we do all we can to not extinguish the owner’s passion for the business. We only have 16 people working at headquarters, so there’s no one around who can go out and run a business if the management of one of our businesses leaves. We want to buy from a manager that loves the business, rather than the money.
After passion, the other important characteristics we look for is intelligence, energy, and integrity. That last, integrity, is important. If you’re dealing with someone who doesn’t have integrity, you’d better hope he’s dumb and lazy, too, or else you could be in real trouble.
Q: How did you arrive at your decision to buy Anheuser-Busch? How long did the decision take?
WB: The decision to buy the stock took about 2 seconds. I’ve been reading Anheuser-Busch annuals for 25 years.
CM: Sometimes a company needs to go through a patch of unpleasantness, for an investor of our size, if we’re going to be able to buy at a good price.
Q: What advice would you give a young person who’s interested in investing?
WB: I got started when I was 7. I wasted my life before that. (That reminds me of what W.C. Fields said when he inherited some money: he spent half on whiskey and wasted the rest of it.). My father worked at Harris, Upham in Omaha. The stock market was open a half day on Saturday then, and I used to go down to his office Saturday mornings. I read a lot—everything I could find on investing and the stock market. When I was 11 I bought three shares of stock. Then I read Ben Graham when I was at Nebraska. My advice is to read everything in sight, and to start young. If you start young and read a lot, you’ll do well.
There are no secrets to investing that only some select priesthood knows. Successful investing requires a quality of temperament, not a high IQ. You need an IQ of 125, tops—anything more than that is wasted. But you do need a certain temperament, and must be able to think for yourself. Then constantly look for opportunities. You can learn every day. You can’t act every day, but you can learn every day. It’s like any game, if you enjoy playing it, you’ll do well. But start early, and follow a framework that’s been successful.
WB: We like to buy businesses that we think have untapped pricing power. In 1972 when we were looking at See’s, we asked ourselves, if prices were raised by 10 cents per pound, would sales fall? We believed they would not. You’re not in a great business if you have to have long management discussions before you raise prices.You can learn a lot about a business by the machinations it goes through to raise prices. It’s been tough to raise prices in the beer business lately, which is not a good economic sign.
Q: What are your greatest fears?
WB: I don’t worry about the economics of our businesses. I do worry about something going wrong at our businesses, a la Salomon. We have a lot of employees, and it’s a sure thing that at any given moment, someone might be doing something wrong. So we try to have a culture that minimizes the urge to cut corners. If I get on a NetJets jet and am running late, I’m not going to tell the pilot that it would be great if he could hurry. I want him to go by the book.
CM: It’s bad when headquarters says that earnings must go up regularly. That’s not the kissing cousin of evil—it’s the blood brother of evil. In business, earnings don’t always go up regularly. It’s not just compensation that makes people do bad things. Sometimes, people just don’t want to make the boss look bad, if he’s enunciated a certain earnings goal. You don’t want to set up a system that exerts financial or psychological pressure on people to do things that they know they shouldn’t do.
WB: People pass up attractive opportunities because they get wrapped up in a single statistic. It’s crazy to say that I’ll wait a year because it will get cheaper due to a macro factor.
Warren Buffett: The most important characteristic is that a manager needs to have a passion for his business. When we buy a company, we are monetizing the owner for a lifetime’s worth of work. The individual is already wealthy; we are merely shifting the form of his wealth into something more liquid: cash. After the deal has closed, the seller’s motivation to come to work in the morning isn’t a paycheck. (For that matter, after the deal is done the sellers don’t have any need to work.) We don’t have any employment contracts at Berkshire. Once we buy a business, we do all we can to not extinguish the owner’s passion for the business. We only have 16 people working at headquarters, so there’s no one around who can go out and run a business if the management of one of our businesses leaves. We want to buy from a manager that loves the business, rather than the money.
After passion, the other important characteristics we look for is intelligence, energy, and integrity. That last, integrity, is important. If you’re dealing with someone who doesn’t have integrity, you’d better hope he’s dumb and lazy, too, or else you could be in real trouble.
Q: How did you arrive at your decision to buy Anheuser-Busch? How long did the decision take?
WB: The decision to buy the stock took about 2 seconds. I’ve been reading Anheuser-Busch annuals for 25 years.
CM: Sometimes a company needs to go through a patch of unpleasantness, for an investor of our size, if we’re going to be able to buy at a good price.
Q: What advice would you give a young person who’s interested in investing?
WB: I got started when I was 7. I wasted my life before that. (That reminds me of what W.C. Fields said when he inherited some money: he spent half on whiskey and wasted the rest of it.). My father worked at Harris, Upham in Omaha. The stock market was open a half day on Saturday then, and I used to go down to his office Saturday mornings. I read a lot—everything I could find on investing and the stock market. When I was 11 I bought three shares of stock. Then I read Ben Graham when I was at Nebraska. My advice is to read everything in sight, and to start young. If you start young and read a lot, you’ll do well.
There are no secrets to investing that only some select priesthood knows. Successful investing requires a quality of temperament, not a high IQ. You need an IQ of 125, tops—anything more than that is wasted. But you do need a certain temperament, and must be able to think for yourself. Then constantly look for opportunities. You can learn every day. You can’t act every day, but you can learn every day. It’s like any game, if you enjoy playing it, you’ll do well. But start early, and follow a framework that’s been successful.
WB: We like to buy businesses that we think have untapped pricing power. In 1972 when we were looking at See’s, we asked ourselves, if prices were raised by 10 cents per pound, would sales fall? We believed they would not. You’re not in a great business if you have to have long management discussions before you raise prices.You can learn a lot about a business by the machinations it goes through to raise prices. It’s been tough to raise prices in the beer business lately, which is not a good economic sign.
Q: What are your greatest fears?
WB: I don’t worry about the economics of our businesses. I do worry about something going wrong at our businesses, a la Salomon. We have a lot of employees, and it’s a sure thing that at any given moment, someone might be doing something wrong. So we try to have a culture that minimizes the urge to cut corners. If I get on a NetJets jet and am running late, I’m not going to tell the pilot that it would be great if he could hurry. I want him to go by the book.
CM: It’s bad when headquarters says that earnings must go up regularly. That’s not the kissing cousin of evil—it’s the blood brother of evil. In business, earnings don’t always go up regularly. It’s not just compensation that makes people do bad things. Sometimes, people just don’t want to make the boss look bad, if he’s enunciated a certain earnings goal. You don’t want to set up a system that exerts financial or psychological pressure on people to do things that they know they shouldn’t do.
WB: People pass up attractive opportunities because they get wrapped up in a single statistic. It’s crazy to say that I’ll wait a year because it will get cheaper due to a macro factor.
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