Q: What's your philosophy in buying businesses?
The first question I ask is: “Does the owner love the business or does he/she love the money?” It’s very easy to tell the difference.
I am proud to be able to provide a good home for many businesses. It is like finding a home for a painting. Business owners who are looking to sell can either sell their businesses to Berkshire (like putting painting in the Metropolitan Museum of Art) or sell to an LBO and let them tear it up, dress up the accounting, and resell it (like selling a painting to a porn shop).
Source: Buffett Vanderbilt Notes
Time: Jan 2005
It's a question of being able to identify businesses that you understand and you are very certain about. If you understand those businesses, and many people do, but Charlie and I don't, then you have the opportunity to evaluate them. If you decide they're fairly priced and they have marvellous prospects, you're going to do very well.
But there's a whole group of companies--a very large group of companies--that Charlie and I just don't know how to value. And that doesn't bother us. I mean, we don't know how to figure out what cocoa beans are going to do, or the Russian ruble--there's all kinds of financial instruments that we just don't feel we have the knowledge to evaluate. It might be a bit too much to expect somebody would understand every business in the world. We find some that are much harder for us to understand. When I say understand--my definition of understand is that you have to have a pretty good idea of where it's going to be in ten years.
I just can't get that conviction with a lot of businesses, whereas I can get them with relatively few. But I only need a few--six or eight, or something like that.
I don't think you'll find better managers than Andy Grove at Intel or Bill Gates at Microsoft and they certainly seem to have fantastic positions in the businesses they're in, but I don't know enough about those businesses to be sure that those businesses are fantastic as I am about being sure that Gillette and Coca-Cola's businesses are fantastic. You may understand those businesses better than you understand Coke and Gillette because of your background or just the way your mind is wired. But I don't, and therefore I have to stick with what I really think I can understand.
Source: BRK Annual Meeting
Time: May 1997
We favor businesses where we really think we know the answer. If we think the business’s competitive position is shaky, we won’t try to compensate with price. We want to buy a great business, defined as having a high return on capital for a long period of time, where we think management will treat us right. We like to buy at 40 cents on the dollar, but will pay a lot closer to $1 on the dollar for a great business.
If we see someone who weighs 300 pounds or 320 pounds, it doesn’t matter–we know they’re fat. We look for fat businesses.
We don’t get paid for the past, only the future [profitability of a business]. The past is only useful to give you insights into the future, but sometimes there’s no insight. At times, we’ve been able to buy businesses at one quarter of what they’re worth, but we haven’t seen that recently except South Korea.
Source: BRK Annual Meeting 2007 Tilson Notes
Q: What is the ideal business?
The ideal business is one that generates very high returns on capital and can invest that capital back into the business at equally high rates. Imagine a $100 million business that earns 20% in one year, reinvests the $20 million profit and in the next year earns 20% of $120 million and so forth. But there are very very few businesses like this. Coke has high returns on capital, but incremental capital doesn't earn anything like its current returns. We love businesses that can earn high rates on even more capital than it earns. Most of our businesses generate lots of money, but can't generate high returns on incremental capital -- for example, See's and Buffalo News. We look for them [areas to wisely reinvest capital], but they don't exist.
So, what we do is take money and move it around into other businesses. The newspaper business earned great returns but not on incremental capital. But the people in the industry only knew how to reinvest it [so they squandered a lot of capital]. But our structure allows us to take excess capital and invest it elsewhere, wherever it makes the most sense. It's an enormous advantage.
See's has produced $1 billion pre-tax for us over time. If we'd deployed that in the candy business, the returns would have been terrible, but instead we took the money out of the business and redeployed it elsewhere. Look at the results!
[CM: There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested -- there's never any cash. It reminds me of the guy who looks at all of his equipment and says, "There's all of my profit." We hate that kind of business.]
We like to be able to move cash around and find it's best use. We'd love to have our companies redeploy cash, but they can't. Gillette has a great business, but can't sensibly reinvest all of the profit.
We don't think the batting average of American industry redeploying capital has been very great. We knock other people doing what has made us so successful.
Source: BRK Annual Meeting 2003 Tilson Notes
Q: What makes a great business?
The best businesses can maintain their earnings without continued reinvestment, whereas in the worst you have to keep pouring money into a money-losing business.
The best business is being the best surgeon in town. You don’t have to do any reinvestment – the investment was the education. The surgeon will retain his earnings power, regardless of inflation.
We like buying businesses with some untapped pricing power. For example, when we bought See’s for $25 million, I asked myself, “If we raised prices by 10 cents per pound, would sales fall off a cliff?” The answer was obviously no. You can determine the strength of a business over time by the amount of agony they go through in raising prices.
A good example is newspapers. The local daily paper controlled the market and every year they raised the [advertising] rates and circulation prices–it was almost a big yawn. They didn’t worry about losing big advertisers like Sears, JC Penney or Wal-Mart, or losing subscribers. They increased prices whether the price of newsprint went up or down.
Now, they agonize over price increases because they worry about driving people to other mediums. That world has changed.
You can learn a lot about the durable economics of a business by watching price behavior. The beer industry is able to raise prices, but it’ s getting tougher.
Source: BRK Annual Meeting 2005 Tilson Notes
Q: When you are looking at a business in which to invest, what are your priorities?
You have to really understand the economics of a business and the kind of people you are getting into business with. They have to love their business. They have to feel that they have been creative, that it is their painting, I am not going to disturb it, just give them more canvas and more brushes, but its their painting, from our standpoint any way. The whole place will reflect the attitude of the person at the top, if you have someone at the top who doesn’t care, the people down below won’t care. On the other hand, if you have someone at the top who cares a great deal, that will be evident across the organization. [The type of people managing the business is a very important criteria, then?] Yes, contracts don’t protect you; you have to have confidence in the people.
Source: University of Nebraska Business Magazine
We want a business that we think, if run well, is going to have a competitive advantage. We don't buy hula hoop or pet rock companies, or companies with explosions in demand but we don't know who the winners will be.
Source: BRK Annual Meeting 2003 Tilson Notes