In 1983, Warren Buffett sat down to pen his annual letter to Berkshire Hathaway shareholders. Tucked away at the back of the letter was an ad. Specifically, it was a “business wanted” ad. In it, the Oracle of Omaha outlined the type of businesses he and his partner Charlie Munger were seeking to acquire.
Q1 2023 hedge fund letters, conferences and more
The ad listed six characteristics they preferred when looking at a business. The checklist is simple to understand and chock full of wisdom. The concepts will help any investor achieve gains over time – and keep them out of trouble!
Here’s the list:
- Large earnings (at least $5 million of after-tax earnings);
- Demonstrated consistent earnings power (future projections are of little interest to us, nor are “turn-around” situations);
- Businesses earning good returns on equity while employing little or no debt;
- Management in place (we can’t supply it);
- Simple businesses (if there’s lots of technology, we won’t understand it); and
- An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).
Some of these are self-explanatory, but there is a lot implied behind each one.
Large earnings
You can be sure that if this ad was running today, Buffett would raise the earnings bar. And that’s the point to take away here. Size can be a hindrance. As Berkshire Hathaway ballooned in size, Buffett had to transition from good ideas to good big ideas, and there are far fewer of the latter. Most of us don’t have these restraints and can invest in smaller companies – the type that are off Wall Street’s radar and can have years of exponential growth ahead of them.
Read the full article here by Michael Joseph, Advisor Perspectives.
