Hello, Mr. Munger and Mr. Buffett. My name is Liza Rema (PH) from Burbank, California. I wanted to find out — earlier, you mentioned you looked at — you used filters to look at a company. So could you elaborate on what those filters are? WARREN BUFFETT
Charlie, you want to —? CHARLIE MUNGER
Well, we’ve tried to do a good deal of that, and — Opportunity cost is a huge filter in life. If you’ve got two suitors who are really eager to have you, and one is way the hell better than the other, you do not have to spend much time with the other. And that’s the way we filter stock buying opportunities. Our ideas are so simple, people keep asking us for mysteries, when all we have is the most elementary idea. WARREN BUFFETT
Yeah. The first filter we probably put it through is whether we think — and we know instantly — whether it’s a business we’re going to understand, and whether it’s a business that — if it passes through that, it’s whether a company can have a sustainable edge, you know. And that gets rid of a very significant percentage of the things people have — They always want to tell you some story or anything. And I’m sure they regard me and Charlie as very arbitrary, in terms of, you know, in the middle of the first sentence saying, “Well, you know, we appreciate the call, but we’re not interested.” I mean, you know, they just think if they explain something — and I get letters on this all the time. But we really can tell, in the middle of the first sentence, usually, whether those two factors exist. And if we can’t understand it, obviously, it’s not going to have — we can’t make a decision as to whether it has a sustainable edge. And if we can’t understand it, we, very often, can come to the conclusion that it’s not the kind of the business where it will have a sustainable edge. So 98 percent of the conversations we can end, you know, in the middle of somebody’s first sentence, which, of course, goes over very big with the caller, but — (Laughter) And then, sometimes if you’re talking about an entire business, we can tell by who we’re dealing with whether a deal’s ever going to work out or not. I mean, it — if there’s an auction going on, we don’t want to — we have no interest in talking about it. And it just isn’t going, you know, it isn’t going to work. If someone is interested in, essentially, doing that with their business, you know, they’re going to sit down and want to renegotiate everything with us all over again after the deal is done. And we’re going to have to buy the business two or three times before we get through. You just see all these things coming. And on the other hand, we’ve had, you know, terrific experience, basically, with the people we have associated with. So it works. It’s efficient. You know, we don’t want to listen to stories all day. And we don’t read brokerage reports of anything of the sort. It’s just — there’s other things to do with your time. Charlie? CHARLIE MUNGER
Yeah. Another filter that Warren was eluding to is this concept of the “quality person.” And, of course, most people define “quality person” as somebody very much like themselves. (Laughter) But — WARREN BUFFETT
Identical, actually, is the word you’re searching for. (Laughter) CHARLIE MUNGER
But there’s so many wonderful people out there. And there’s so many awful people out there. And there’s signs frequently, like flags, particularly over the awful people. And generally speaking, those people are to be avoided. It just — the amount of misery you bring into your life by trusting some awful person and the amount of felicity that you can bring in by making the right business associations — look around this room. And there’s some wonderful people who have created some wonderful businesses. And their customers can trust them. The employees can trust them. The problems can trust them to be fairly faced and reasonably solved. And those are the kind of people you want. And people who take their promises seriously. I had some experience, recently, with a company. And they have their brand on a particular product. And somebody invented a better product in the same field. And they’re taking their brand off their product. (Laughs) If it isn’t the best, they don’t want their brand on it. People who think like that frequently do very well in business. And the flags are flying. WARREN BUFFETT
It’s like they got a sign on their chest that just says, “Jerk. Jerk. Jerk.” (Laughter) And then you think you’re going to buy the business and they aren’t going to be a jerk, you know, anymore. I mean, it’s — (Laughter)
OK. Area 1.
~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.
1. Opportunity Cost
2. Quality Person
-Avoid the Jerk-