Dan Sweet

Warren Buffett on due diligence, evaluating management, and buy and hold: (4 of 12)

This is the fourth in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

How do you perform due diligence?

Just look for durable competitive advantage.
Iscar – they sent me a letter – guy came to visit – we bought it.
The real key is how much cash are you going to get over the years.
Dexter shoe was a disaster.  It wasn’t the leases or clauses, I was just wrong about the shoe business.  (gave them 2% of Berkshire)

What do you look for in management?

We look for management that loves to work and has passion.
I like doing what I’m doing.
I get to paint my painting on the ceiling – it’ll never be finished, but I do it my way.
I’m looking for people who love the business, not the money.  Employment contracts mean nothing.
My job is to judge whether or not they have the passion in them.
I set all the compensation in ten minutes a year.

What questions do you find most useful when meeting with companies?

Always ask at the end—if you could only buy stock in one of your competitors before going to a desert island for ten years, who would it be?  Who would you short?
Andy Grove—Only the Paranoid Survive
Silver bullet to take out competition.  Who would you take out?  I want the answer to that from the top ten players in the industry

Is it true that Berkshire will never sell a good company?

True.
Not true for our marketable securities.
I have three kids and some days some look more promising than others but I’ve never thought of putting one in a foster home.
I want to own something I feel good about.

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“So I was down in Omaha talking with Warren Buffett…” introducing a series of 12 posts.

I took a trip down to Omaha in October of 2007 to meet Warren Buffett with a few of my Notre Dame MBA classmates.  We joined a group of Stanford MBAs and spend the morning in conversation with Warren Buffett.  He is a class act as these pictures illustrate.

He pulled out his Notre Dame “INVEST LIKE A CHAMPION TODAY” sign to welcome us:

Warren Buffett - Invest like a champion today!

He took us out to eat at one of his favorite restaurants:

Lunch with Warren Buffett at Piccolo's

He posed for pictures with us:

Warren Buffett

And he signed my copy of The Intelligent Investor (Wow, I’m a nerd):

My signed copy of The Intelligent Investor - thanks Warren!

Anyways, it was an amazing experience and I want to share some of the content from the trip so I’ll be typing up a series of posts here to archive the notes I took in my notebook.  I’ll write his responses to our questions in his voice; however, some responses will be paraphrases and some will be direct quotes.  I don’t know which are which so I won’t be differentiating.

Theses are the questions that I’ll be sharing Buffett’s response to:

1 – What are your thoughts on investing in China?

2 – Do you find any of the insurers in China attractive?

3 – Can you comment on the challenge presented by Berkshire’s size?

4 – How do you perform due diligence? What do you look for in management?  What question do you find most useful when meeting with companies?  Is it true that Berkshire will never sell a good company?

5 – How do you decide on an appropriate premium over book?

6 – You’ve been critical of hedge funds in the past.  Didn’t you run a fund with a similar structure before?

7 – What are your personal goals for the next 5-10 years?

8 – Do taxes in the U.S. favor the rich?

9 – Is the Fed doing a good job? (October 2007)

10 – Which railroads do you like and why?

11 – How do you feel about derivatives?

12 – What do you see as the best investments for young investors now?

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