Investment Filters Used By Warren Buffett And Charlie Munger

From May 5th, 1997 – Warren Buffett and Charlie Munger elaborate the investment filters they used in picking stocks. Charlie Munger states that he considers opportunity cost in selecting the best stocks in his portfolio. Warren Buffett continued to describe the competitive strength of a business as well as the management team of the business. At the end, Charlie Munger insisted that corporate governance is also one of the key considerations.

Warren Buffett going to buy the business

Investment Filters Used By Warren Buffett And Charlie Munger When They Are Going To Buy The Business




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Transcript

Mr. Munger and Mr. Buffett, my name is [inaudible] from Burbank California. I wanted to find out earlier you mentioned, you used filters to look at a company, so could you elaborate on what those filters are.

Warren Well we’ve tried to do a good deal of that and opportunity cost is a huge builder in life.

If you’ve got two suitors who are really eager to have you in one is way better than the other you don’t 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 in the first.

First of all we probably put it through as whether we think what we know instantly I mean 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. And that gets rid of a very significant percentage of the things we buy that we want to tell you some story anything and I’m sure they regard you regard me and Charlie as very arbitrary in terms of you know in the middle of the first sentence is saying well you know we appreciate the call but we’re not interested. I mean you know they just think if they explain something if I get a letter on us all the time.

But we we really can’t tell in the middle of her sentence usually whether those two factors exist and if we can understand it obviously it’s not going to happen. We can make a decision as to whether it has a sustainable edge and if we can understand we very often come to the conclusion that it’s not the kind of business where we’ll have a sustainable edge. So ninety eight percent of the conversations we can we can and you know in the middle of somebody’s first sentence which of course it goes over very big with the color. But and then sometimes if you talk about the entire business we can tell but we can tell. Who we’re dealing with whether a deal is ever going to work out or not. I mean that if there’s an auction going on we don’t want to we have no interest 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 they’re going to sit down or want to renegotiate everything with us all over again after the deal is done and we’re going to buy the business two or three times before we get through it. You just you just see all these things coming.

And on the other hand we’ve had 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 or any. It is just it just there’s other things to do with your time.

Yeah another filler word was alluding to is this concept of the quality person. And of course most people define quality person as somebody very much like themselves. But.

Identical actually is the word we are saying.

But there are so many wonderful people out there and there are so many awful people out there and there and there are signs frequently white flags particularly over the awful people and generally speaking those people are to be avoided. It’s just the amount of misery you bring into your life by. Trusting some awful person. And the amount of publicity that you can bring in by making the right business associations look around this room and there are some wonderful people who created some wonderful businesses that customers can trust them the employees can trust them. The problem is can trust them to do to be fairly faced and reasonably solved and those are the kind of people you want. And people will 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 isn’t the best they don’t want their brand. People who think like that frequently do very well in business and the flags are flying me.

It’s like they got a sign and it just it just says jerk jerk jerk and then yeah and then you think you’re going to buy the business they’re going to be a jerk anymore. I mean it’s.

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