Warren Buffett: The Challenge of Finding Great Businesses

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In his latest 2023 Berkshire Hathaway Annual Letter, Warren Buffett discusses his strategy of investing in businesses with strong fundamentals and enduring competitive advantages. He explains how finding these businesses has become more difficult due to Berkshire’s own size and increased competition. He also emphasizes the importance of trustworthy management, acknowledging the challenge of accurately assessing character. Here’s an excerpt from the letter:

Buffett: Our goal at Berkshire is simple: We want to own either all or a portion of businesses that enjoy good economics that are fundamental and enduring. Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes. It’s harder than you would think to predict which will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen.

At Berkshire, we particularly favor the rare enterprise that can deploy additional capital at high returns in the future. Owning only one of these companies – and simply sitting tight – can deliver wealth almost beyond measure. Even heirs to such a holding can – ugh! – sometimes live a lifetime of leisure.

We also hope these favored businesses are run by able and trustworthy managers, though that is a more difficult judgment to make, however, and Berkshire has had its share of disappointments.

In 1863, Hugh McCulloch, the first Comptroller of the United States, sent a letter to all national banks. His instructions included this warning: “Never deal with a rascal under the expectation that you can prevent him from cheating you.” Many bankers who thought they could “manage” the rascal problem have learned the wisdom of Mr. McCulloch’s advice – and I have as well. People are not that easy to read. Sincerity and empathy can easily be faked. That is as true now as it was in 1863.

This combination of the two necessities I’ve described for acquiring businesses has for long been our goal in purchases and, for a while, we had an abundance of candidates to evaluate.

If I missed one – and I missed plenty – another always came along.

Those days are long behind us; size did us in, though increased competition for purchases was also a factor.

You can read the entire letter here:

Berkshire Hathaway 2023 Annual Letter

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Tobias Carlisle is the founder of The Acquirer’s Multiple®. He is also the founder of Acquirers Funds®. The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates.