AUDIENCE MEMBER 00:00
Hi. My name is Stuart Kaye, and I’m from New York City.
Warren and Charlie, you spend a lot of time evaluating the management quality and integrity of the companies that you may invest in.
In my current job, I do not have the opportunity to do that. As I read through annual reports and financial statements, what do you suggest I focus on to help me to determine the quality and integrity of management?
WARREN BUFFETT 00:28
Well, you can — we’ve spent many, many years — and we’ve bought many things. I mean, I — without meeting managements at all, having any entree to them.
The stocks — the 5 billion of stocks — that we may have bought in the first quarter, most of those were companies I never met the management, never talked to them.
We read a lot. We read annual reports. We read about competitors. We read about the industries they’re in.
In terms of sizing up managements — obviously if we’re going to buy the whole business, that’s a different question. Then you — because you — we’re going to buy it, be in bed with them, they’re going to run them, and we care very much about whether they’re going to behave in the future as they have in the past once we own the business. And we’ve had very good luck on that.
But in terms of marketable securities, we read the reports. Now, Charlie and I were just talking about one the other day where we read an annual report of a large oil company.
And the company — you know, hundred pages, public relations people, lots of pictures — spent a fortune on it. And you can’t find in that report what their finding cost per McF or per barrel of oil was last year. That’s the most important figure in an oil and gas company over a period of years, but every year counts.
The fact it wouldn’t even be discussed — the reason it wasn’t discussed, it was absolutely terrible — but the fact it wouldn’t even be discussed — and to the extent it was touched on, it was done in a dishonest manner.
When we read things where we basically are getting dishonest messages from the management, it makes a difference to us.
You know, like I say, in marketable securities we can solve that by selling the stock, and it’s not the same thing as buying the entire business.
But I think you can learn a lot by reading the annual letters. I mean, for one thing, if it’s clearly the product of some investor relations department or outside consultant or something of the sort, you know, that tells you something about the individual.
If he’s not willing to talk once a year through a few pages to the people that gave him their money to invest, I mean, that — I’ve really got — I’ve got some questions about people like that.
So I like that feeling that I’m hearing directly from somebody who regards me as a partner.
And you may not get it all the way, but when I get it 0 percent of the way, I don’t like it.
I’ve still bought — we’ve still bought into some — in marketable securities — we’ve bought into some extremely good businesses where we thought they were run by people we didn’t really like very well, because we didn’t feel they could screw them up.
CHARLIE MUNGER 03:27
Yeah. I think that’s exactly right. There are two things: the quality of the business and the quality of the management.
And if the business is good enough, it will carry a lousy manager. And the converse case, where a really good manager gets in a really lousy business, he’ll ordinarily have a very imperfect record.
In other words, it’s a rare person that can take over a textile business, totally doomed, which is what Warren did in his youthful folly —
WARREN BUFFETT 04:00
CHARLIE MUNGER 04:01
— and turn it into what’s happened here. You should not be looking for other Warrens on the theory they’re under every bush.
WARREN BUFFETT 04:09
I figured it out in 20 years, though. I’ll have to say that for myself. (Laughs)
Twenty years, and I finally figured out I was in the wrong business.
But there are businesses — if you gave me first draft pick of all the CEOs in America and said it’s your job to run Ford Motor now or, you know, pick a company that’s in a terribly tough business, you know, I wouldn’t do it.
I mean, that it’s just too tough. They may get it solved, you know, if they get cooperation from unions and a whole bunch of things, but it will not be solely in the control of the CEO who has that job.
He is dependent on too many good things happening outside to say that he alone can get the job, even if he’s the best in the world.
~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.
If a business is good enough, it can carried the lousy manager.
If a business is bad, even an exceptional manager finds it hard to run it.
Business > Management