Business Checklist

Shiv is Silence - Silence is Shiv - Bhanu as the off button
Oneness (Sattva) Selfishness (Rajas)

Knowledge and wisdom Desires and family
Truthfulness, Fearlessness,
Angry & Restless
Selfless, Desireless, Heart Reward Driven, Ego
driven Driven
Mild, Tasty, Nourishing food Salty Spicy Unhealthy food
Truthful yet kind and gentle Manipulative and aggressive speech
Giving without thought of Giving with expectations of
reward to a deserving person return
Healing & Creativity Fame, Power, Money
Know difference between
Confuses right & wrong (rationalizing)
right & wrong
Calm & Equanimous Competitive
Logical Emotional
Real knowledge Chauffeur knowledge
Thinking Execution
Disconnect on seeing threat Attack on seeing threat
Generous & Democratic (Win- Feudal & Selfish (Win-Lose or
Win) Race)
Mindset of abundance Mindset of opportunity
Broad and long term gaze Short term and narrow gaze
Consequence for others Consequence for self
Task focused Outcome focused
Disciplined (delay of Action (quick results long term
gratification long term good) discontent)
Detached Possesive
High self control Greedy
Wise Informed
Humble Prideful
Compassionate Self centered
Little bit of gap between you and your thoughts - like Leonardo's Mona Lisa
Seperation (Tamas)
Intertia & Laziness
Fearful, Confused
Blind and Thoughtless
Overcooked impure food

Vulgar and untruthful speech
Giving with regrets
Sleep & Violence

Completely deluded, inverts
right & wrong
Irritable, Confused & Careless
Sense pleasures
Cynical
Following orders
Follow others on seeing threat
Distructive (Lose-Lose), Hostile
& Head On
Mindset of scarcity
Tunelled vision (based on habit)
Consequence for neither
Unfocused
Slothful (instant gratification)

Use fear & control
Hedonist
Ignorant
Arrogant
Cruel
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Leadership
Leadership typology - Sattva (others hunger) - Rajas (activating selfishness) - Tamas (asshole & genital)
Seven levels of consciousness - Food, Sex, Fame Power Money, Family, Self expression, Others hunger, Onenes
Nine qualities of a leader - Equanimity, Oneness, Detachment, Self Control, Wisdom, Humility & Surrender, Co
Nine traits of a bully - Irritability, Seperation, Control, Hedonism, Ignorance, Arrogance, Cruelty, Insecurity, Hyp
Is the CEO self-promoting?
Does the management have a determination to continue to develop products or processes that will still further incr
of currently attractive product lines have largely been exploited?
Does the management talk freely to investors about its affairs when things are going well but “clam up” when troub
Does the company have a management of unquestionable integrity?
A CEO who doesn't perform is frequently carried indefinitely. One reason is that performance standards for his job s
they may be waived or explained away, even when the performance shortfalls are major and repeated. At too many
performance and then hastily paints the bullseye around the spot where it lands.
CEO has no immediate superior whose performance is itself getting measured. The sales manager who retains a bun
water himself. It is in his immediate self-interest to promptly weed out his hiring mistakes. Otherwise, he himself m
inept secretaries faces the same imperative. But the CEO's boss is a Board of Directors that seldom measures itself a
corporate performance.
A good managerial record (measured by economic returns) is far more a function of what business boat you get into
intelligence and effort help considerably, of course, in any business, good or bad)
When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental eco
remains intact.
How would you evaluate this business if you were to become its CEO?
Does the CEO manage the business to benefit all stakeholders?
Does management think independently and remain unswayed by what others in their industry are doing?
To become more successful, a firm needs a leader with a determined entrepreneurial personality combining the dri
the fortunes of the firm.
Attention must be paid to attracting competent managers at lower levels and to training them for larger responsibil
talent pool. The need to recruit the chief executive from outside is a particularly dangerous sign
The entrepreneurial spirit must permeate the organization.
1. Is management rational?
2. Is management candid with the shareholders?
3. Does management resist the institutional imperative?
In evaluating people, you look for three qualities: integrity, intelligence, and energy. If you don’t have the first, the o
Are any of the key members of the company’s management team going through a difficult personal experience that
benefit of their shareholders? Also, has this management team previously done anything self-serving that appears d
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Research
Does the comapany have products and services with sufficient market potential to make possible a sizable increase
sales for atleast several years ?
People don’t buy products but uses of product
Growth should not be judged because of one year but by units of several years
Two kind of companies - fortunate and able (Alcoa) & fortunate because they are able (DuPont)
Correctly judging the long range sales curve of a company is of extreme importance
A franchise as a company whose product or service (1) is needed or desired, (2) has no close substitute, and (3
not regulated
How effective are the company’s research and development efforts in relation to its size?
Companies vary a lot in what they include as R&D expense and what they exclude
Necessary to have leaders who can coordinate the skills of different experts
Close relationship between research, production and sales
Coordination skill of top management - would they abandon research projects
Does the company benefit from low margin government contracts whose know how can be transfered to high
margin private projects
Does the company do worthwile market research
Competitive destruction-You know, you have the finest buggy whip factory and all of a sudden in comes this little
horseless carriage. And before too many years go by, your buggy whip business is dead. You either get into a differe
business or you're dead - you're destroyed. It happens again and again and again.
"Surfing" - when a surfer gets up and catches the wave and just stays there, he can go a long, long time. But if he ge
the wave, he becomes mired in shallows
Since Croesus was the supremely rich king of Lydia (modern day Turkey), the question is what would you do if mone
wasn't an issue?
A firm must have a strong enough customer orientation to recognize changes in customer needs and interests and t
to react promptly to those changes in an appropriate manner. This capability should lead to generating a flow of new
products that more than offset lines maturing or becoming obsolete.
Even nontechnical firms today require a strong and well-directed research capability to (a) produce newer and bette
products, and (b) perform services in a more effective or efficient way
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Strategy
Can company increase prices to pass cost increases to customers
Excess capacity can curtail the ability to pass price increase to customers
Are there other aspects of the business somewhat peculiar to the industry involved which will give the investor imp
outstanding the company may be in relation to its competition
Company must have other source of competitive advantage rather than patent protection
Engineering that is constantly improving the product is far more valuable than patent protection
To be a truly conservative investment, company must be a low cost producer
Favored business must have two characteristics: (1) an ability to increase prices rather easily (even when product de
capacity is not fully uti- lized) without fear of significant loss of either market share or unit volume, and (2) an ability
large dollar volume increases in business (often produced more by inflation than by real growth) with only minor a
of capital.
Strong preference for businesses that possess large amounts of enduring Goodwill and that utilize a minimum of tan
Businesses logically are worth far more than net tangible assets when they can be expected to produce earnings on
considerably in excess of market rates of return. The capitalized value of this excess return is economic Goodwill.
Consumer franchises are a prime source of economic Goodwill. Other sources include governmental franchises not
lation, such as television stations, and an enduring position as the low cost producer in an industry.
True economic Goodwill tends to rise in nominal value proportionally with inflation
Any unleveraged business that requires some net tangible assets to operate (and almost all do) is hurt by inflation. B
little in the way of tangible assets simply are hurt the least.
Leaving the question of price aside, the best business to own is one that over an extended period can employ large
incremental capital at very high rates of return. The worst business to own is one that must, or will, do the opposite
employ ever-greater amounts of capital at very low rates of return. Unfortunately, the first type of business is very h
high-return businesses need relatively little capital. Shareholders of such a business usually will benefit if it pays out
dividends or makes significant stock repurchases.
Time is the friend of the wonderful business, the enemy of the mediocre
Invert always invert - think what can go wrong with the business - and avoid it
I can’t understand what I can't recreate - Munger on Coke
Cognition misled by tiny changes involving low contrast will often miss a trend that is destiny
Just as in an ecosystem, people who narrowly specialize can get terribly good at occupying some little niche. Just as
niches, similarly, people who specialize in the business world - and get very good because they specialize - frequent
that they wouldn't get any other way.
In terms of which businesses succeed and which businesses fail, advantages of scale are ungodly important.
One great advantage of scale taught in all of the business schools of the world is cost reductions along the s
curve. Just doing something complicated in more and more volume enables human beings, who are trying t
motivated by the incentives of capitalism, to do it more and more efficiently.
The very nature of things is that if you get a whole lot of volume through your joint, you get better at proces
That's an enormous advantage. And it has a lot to do with which businesses succeed and fail
If you were Proctor & Gamble, you could afford to use this new method of advertising. You could afford the
network television because you were selling so damn many cans and bottles. Some little guy couldn't. And t
buying it in part. Therefore, he couldn't use it. In effect, if you didn't have a big volume, you couldn't use ne
which was the most effective technique
Your advantage of scale can be an informational advantage. If I go to some remote place, I may see Wrigley
alongside Glotz's chewing gum. Well, I know that Wrigley is a satisfactory product, whereas I don't know an
So if one is $.40 and the other is $.30, am I going to take something I don't know and put it in my mouth - w
personal place, after all - for a lousy dime?
In some businesses, the very nature of things is to sort of cascade toward the overwhelming dominance of o
obvious one is daily newspapers. There's practically no city left in the U.S., aside from a few very big ones, w
than one daily newspaper.
Another advantage of scale comes from psychology. The psychologists use the term "social proof". We are a
subconsciously and to some extent consciously - by what we see others do and approve. Therefore, if every
something, we think it's better. We don't like to be the one guy who's out of step.
Try to compete with a company that has an established distribution network. It has likely covered its fixed c
large incremental profits as it delivers more stuff, while you'll need to take on large losses for a time until (if
scale to become profitable.
There are also disadvantages of scale. For example, we - by which I mean Berkshire Hathaway - are the large
Capital Cities/ABC. And we had trade publications there that got murdered - where our competitors beat us
beat us was by going to a narrower specialization
Another defect of scale - flush, fat, stupid bureaucracy
In [a] rapidly globalizing world... with uncertain economic and political forecasts... And with increasingly het
consumers... uncertainty, ambiguity, and rapid change favor flexibility and adaptability over sheer scale.
Can you describe
what thehow the business
customer’s worldoperates,
would look in like
yourwithout
own words?
the product or
service
Use an analogy to describe how the business operates
What is the business doing that the competitors are not doing yet?
How does the business make money?
If you can’t understand how a business makes money, then you should not invest in it.
How hasbusiness
the business evolved
evolved over acquisitions
by noting time? made and new product
developments from year to year.
In what foreign markets does the business operate, and what are the risks of operating in these countries?
How Long Has the Business Been Operating in the Foreign Market?
Is the Business Investing in R&D to Adapt Its Products to the Specific Tastes of the Customers in a Foreign M
Has the Management Team Assigned a Specific Regional Manager to Emerging Markets?
Is Revenue Growth Translating into Profit Growth?
What Are the Risks to a Company’s Foreign Earnings? - Country risk, currency risk,
Who is the core customer of the business?
Is the customer
A businessbase concentrated
that or diversified?
earns its revenues from a diversified customer base
has less risk than one with a concentrated customer base.
Is it easy high-
or difficult to convince
pressure customers
sales tactics to buy
to sell their the products
products or services?
or services typically do not have sustainable business mod
for the customer.
What is the customer retention rate for the business?
Customers who enroll in loyalty programs are typically repeat customers
Whether a business is selective about the types of customers it will do business with.
What are the signs a business is customer oriented?
How does management stay close to customers?
Find out if the business solves customer problems quickly
and easily.
What pain does the business alleviate for the customer?
To what degree is the customer dependent on the products or services from the business?
If the business disappeared tomorrow, what impact would this have on the customer base?
Does the business have a sustainable competitive advantage and what is its source?
1. Network economics
2. Brand loyalty
3. Patents
4. Regulatory licenses
5. Switching costs
6. Cost advantages stemming from scale, location, or access to a unique asset
Does the business operate in a good or bad industry?
To beginisevaluating
If there the industry,
a broad range compare
of ROIC, with somethe distribution
companies of returns
doing well andon invested capital
some
To getdoing poorly,
a deeper this is a tougher
understanding industry
of whether antoindustry
be in. is good
or bad, compare the best companies to the worst within the industry.
How has the industry evolved over time?
What is the competitive landscape, and how intense is the competition?
Does the Business Have Limited Competition?
Does the Industry Change Often?
How Do the Competitors Compete within an Industry, and How Could That Change?
How Fiercely Do Businesses Compete?
What Risks Does the Business Face from Substitute Products?
Can Competition from Low- Cost Countries Impact the Business?
Which Competitor Sets the Industry Standard?
Why Have Competitors Failed in an Industry?
What type of relationship does the business have with its suppliers?
Does the Business Have Reliable Sources of Supply?
Is the Business Dependent on Only a Few Suppliers?
Is the Business Dependent on Commodity Resources, and to What Degree?
Those businesses that are highly dependent on commodity resources—such as oil, steel, or chemicals—a
because you must assume a certain price for the commodity in the future.
What are the fundamentals of the business?
What are the key risks the business faces?
How does inflation affect the business?
To what degree is the business cyclical, countercyclical, or recession-resistant?
Does the business grow through mergers and acquisitions (M&A), or does it grow organically?
What is the management team’s motivation to grow the business?
Has historical growth been profitable and will it continue?
What are the future growth prospects for the business?
How does management make M&A decisions?
Have past acquisitions been successful?
Creating value not beating rivals is at the heart of competition
In an unregulated commodity business, a company must lower its costs to competitive levels or face extinction.
In a business selling a commodity-type product, it's impossible to be a lot smarter than your dumbest competi
If rivalry is intense companies compete away the value they create - in lower prices or higher costs of competin
Are their many competitors roughly equal in size
Slow growth promotes battle over market share
High exit barriers - excess capacity can lower profitabiliy
Rivals who are irrationally commited to the business
Price competition is the most damaging form of rivalry - you are competing to be the best. It happens when
Undifferentiated offering and low switching cost
High fixed cost and low marginal cost - creating pressure to drop prices as every new customer will const
Capacity must be added in high increments - creating supply demand misbalance
Product that is perishable - e.g airline seats
If you have competitive advantage it means you compete at lower prices or premium price or both
Any Cumulative Advantage? - like a relationship
The two types of competitive advantage in the business world are created by producing a unique product and by pr
service - durable product that can be sold 10 years from now and has been selling for past 10 years
Three basic types of businesses with durable competitive advantages:
1. Businesses that fulfill a repetitive consumer need with products that wear out fast or are used up
quickly, that have brand-name appeal, and that merchants have to carry or use to stay in business. This is a
huge world that includes every thing from cookies to panty hose.
2. Businesses that provide repetitive consumer services that people and businesses are consistently in need
of. This is the world of tax preparers, cleaning services, security services, and pest control.
3. Low-cost producers and sellers of common products that most people have to buy at some time in their
life. This encompasses many different kinds of businesses from jewelry to furniture to carpets to insurance.
Second- level thinking is deep, complex and convoluted. The second level thinker takes a great many things into acc
• What is the range of likely future outcomes?
• Which outcome do I think will occur?
• What’s the probability I’m right?
• What does the consensus think?
• How does my expectation differ from the consensus?
• How does the current price for the asset comport with the consensus view of the future, and with mine?
• Is the consensus psychology that’s incorporated in the price too bullish or bearish?
• What will happen to the asset’s price if the consensus turns out to be right, and what if I’m right?
A textile company that allocates capital brilliantly within its industry is a remarkable textile company-but not a rema
Getting the story is easier if you understand the basic business. The simpler it is, the better. "An idiot could run this
or later any idiot probably is going to be running it.
1) It sounds dull, or even better, ridiculous-The perfect stock ought to have a perfectly boring name.
2) It does something dull- It does something boring, like make cans and bottle caps.
3) It does something disagreeable - A stock that makes people shrug, or turn away in disgust is ideal.
4) It's a spin off - The institutions don't own it, and the analysts don't follow it
5) The rumors abound: It's involved with toxic waste and/or the
6) There's something depressing about it
7) It's a no-growth industry
8) People have to keep buying it
9) It's a user of technology - as technology is ad
cheaper, costs are reduced
If you find a stock with little or no institutional ownerships, you've found a potential winner. Find a company that no
visited, or that no analyst would admit to knowing about, and you've got a double winner.
For every single product in a hot industry, there are a thousand MIT graduates trying to figure out how to make it ch
doesn't happen with bottle caps, coupon-clipping services, oil-drum retrieval, or motel chains.
Niche means there is little or no competition. People can buy jewelery from anywhere - internet, out of state, acros
play, no one can compete with. Exclusive franchises are a niche, they have value. You can raise the price with an exc
Newspapers used to be niches. Drug companies and companies with patents have niches, since no one else can mak
companies have niches because getting a poison approved is as hard as a drug. Brand names are niches, like Coca-Co
In general, corporate insiders are net sellers, and they normally sell 2.3 shares to every one share that they buy. Wh
like crazy, you can be certain that, at a minimum, the company will not go bankrupt in the next six months. Long ter
owns stock, then rewarding shareholders becomes a first priority,it's more significant when employees at lower ech
positions. if you see someone with a $45,000 annual salary buying $10,000 worth of stock, you can be sure it's a me
confidence
Depending on the pace of growth or the timing of business cycle, companies can be grouped into 6 categories. They
Slow Growers: Big companies that grow at a very minimal rate. The only reason to keep them is for the regular divid
out.
Stalwarts: Big companies that grow faster than a Slow Grower but not as rapidly as a Fast Grower. They are less vola
defensive play in times of market downturn.
Fast Growers: These are small companies that grow at a high rate. You make money in stock market if you are able t
Grower early in the growth cycle. Once the growth peaks, a Fast Grower either turns to a Stalwart or fizzle out.
Turnarounds: These are companies that have gone through a series of negative events and which are bouncing back
they turn around, they make up lost ground very quickly. In addition the ups and downs of these companies are tota
market conditions.
Cyclicals: The fortunes of these companies go through regular ups and downs. Som
may be big companies and could easily be confused with Stalwarts. However what differentiate cyclicals is regularity
downturns. In Indian conditions, companies like TISCO, Auto makers, Banks, Infra companies like L&T and most of th
Crompton Greaves, Voltas etc fall into this category. It is very important to know when to get in to these stocks and
them.
Asset Plays: These are companies holding significant assets in their books of which the market is not aware of. Some
include Real Estate held at book value, Carry forward losses which provide tax benefits to the company, Investment
companies, huge customer base etc.
'Two minute drill'. Take two minutes of your time and make a case as to why you are interested in the company and
future prospects. The drill should make a sound case for investing in the specific stock. The author recommends us t
even for the stocks that we currently own.
Never investment in any idea you can’t illustrate with crayons
“If you like the store, chances are you’ll love the stock.” In other words: Invest in businesses you understand and wh
The problem with good industries are that they attract competition. These new market participants crave a piece of
why they undercut prices and create price pressure. Peter’s binoculars are thus directed at terrible industries. Next,
the ‘winner’ in said industries – those with the highest margins and lowest costs, hence enabling them to ride-out cy
competitors throw in the towel. Once the industry betters once gain, the surviving businesses are ready to gain the
market shares.
During the Gold Rush, most would-be miners lost money, but people who sold them picks, shovels, tents and blue-je
Visiting stores and testing products is one of the critical elements of the analyst’s job
Max-Min of 1-2 variables -Business success through extreme maximization or minimization of 1 or 2 variables
In business we often find that the winning system goes almost ridiculously far in maximizing and or minimizing
The Network effect results from positive feedback, where success begets success and economies of scale undermine
The bottom line is that you're most likely to find the network effect in businesses based on sharing information
together, rather than in businesses that deal in rival (physical) goods... this is not exclusively the case, but it's a
If a product or service is widely and conveniently available, consumers are less likely to try the competition. Further
change his/her behavior in order to take advantage of the easy availability.
Since there is only one cost leader, this is a powerful position for a company to hold.
As the product tends to commodity status, with price becoming the major issue for the buyer, the competitive po
leader improves. Equally, commodities come in all shapes and sizes. Consider, for example, banks and the advant
lowest cost of funds.
A good business model answers Peter Drucker’s age-old questions: Who is the customer? And what does the custom
answers the fundamental questions every manager must ask: How do we make money in this business? What is the
logic that explains how we can deliver value to customers at an appropriate cost?
Creating a business model is, then, a lot like writing a new story. At some level, all new stories are variations on old
the universal themes underlying all human experience. Similarly, all new business models are variations on the gene
underlying all businesses. Broadly speaking, this chain has two parts. Part one includes all the activities associated w
designing it, purchasing raw materials, manufacturing, and so on. Part two includes all the activities associated with
finding and reaching customers, transacting a sale, distributing the product or delivering the service. A new business
turn on designing a new product for an unmet need, as it did with the traveler’s check. Or it may turn on a process i
way of making or selling or distributing an already proven product or service.
Keynes on stock picking as a beauty contest - “It’s not a case of choosing those [faces] that, to the best of one’s judg
prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree whe
intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe,
fourth, fifth and higher degrees.”
“The difference between a good business and a bad business is that good businesses throw up one easy decision aft
“Frequently, you’ll look at a business having fabulous results. And the question is, “How long can this continue?” We
way I know to answer that. And that’s to think about why the results are occurring now—and then to figure out wha
results to stop occurring.”
“If you are in a business selling white paper for a dollar a pound, and your competitor sells it for a little less, I am pro
business with your competitor. But if you are selling me a glass of Johnnie Walker whisky for a dollar, and your comp
Uncle Joe’s whisky for a little less, I am probably still going to buy the Johnnie Walker”
“There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second e
excess cash must be reinvested—there’s never any cash. It reminds me of the guy who looks at all of his equipment
of my profit.’ We hate that kind of business.”
“If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re n
shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the tem
more philosophical about these market fluctuations.”
Characteristics of good businesses

 High Barriers to Entry
 High Margins
 Good management
 Pricing Power
What are some barriers to entry?

 High switching costs
 High capital costs
 Brands
 Lower operating costs (airline with 1 low cost fleet, by operating in a certain way, locks you in)
 Tobacco with its addicted customers
I would define a good business where you can identify specifically a reason why it should be able to earn an excess r
capital. It has to be a simple reason that you can clearly see. Typically, good businesses where you are seeing that on
you rarely see them cheap, they are not good stocks to invest in.
Operators of multi-sided platforms must ask themselves several key questions: Can we attract sufficient numbers of
side of the platform? Which side is more price sensitive? Can that side be enticed by a subsidized offer? Will the oth
generate sufficient revenues to cover the subsidies?
What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’
on every company, or even many. You only have to be able to evaluate companies within your circle of competence
is not very important; knowing its boundaries, however, is vital.
If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that giv
unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the “cig
investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the “b
make that puff all profit. Unless you are a liquidator, that kind of approach to buying businesses is foolish. Unless yo
may end up waiting a long time for that “puff” of profit. (so buy cheap businesses with atleast decent long term pro
Good business - Something that costs a penny, sells for a dollar and is habit forming.
Find a business any idiot could run because eventually one will.
If share of mind exists, the market will follow
You can learn a lot about the durability of the economics of a business by observing price behavior
It is important to know the one or two key factors in each business you own.
Experience, however, indicates that the best business returns are usually achieved by companies that are doing som
today to what they were doing ﬁve or ten years ago. That is no argument for managerial complacency. Businesses a
opportunities to improve service, product lines, manufacturing techniques, and the like, and obviously these opport
seized. But a business that constantly encounters major change also encounters many chances for major error. Furt
terrain that is forever shifting violently is ground on which it is difﬁcult to build a fortress - like business franchise. Su
usually the key to sustained high returns.
If it is not knowable, as you know there are all kinds of things that are important but not knowable, we forget about
unimportant, whether it's knowable or not, it won't make any difference. We don't care. But there are enough thing
and important that we focus on those things. And everything else, we forget about.
Economic analysis is basically marginal analysis. Marginal means additional. Economic theory is marginal analysis be
decisions are always reached by weighing additional costs against additional benefits. Nothing matters in decision m
costs and marginal benefits. Although the average cost of flying a passenger may be $500, the marginal cost is mere
peanuts and a drink. As long as the marginal passenger pays more than the marginal cost, selling him a ticket is profi
The cost of any action is the value of the opportunity forgone by taking that action.Resources have other opportuniti
employment. Hence to acquire them one must 'crowd out' the next best application. Only actions have costs. One m
incur the cost. And costs are always to someone.
Reductionism is the cornerstone of discovery in the Newtonian world, the basis for much of science's breathtaking a
seventeenth through nineteenth centuries. As scientist John Holland explains, 'The idea is that you could understan
nature, by examining smaller and smaller pieces of it. When assembled, the small pieces would explain the whole.' I
reductionism works brilliantly.
But reductionism has its limits. In systems that rely on complex interactions of many components, the whole s
properties and characteristics that are distinct from the aggregation of the underlying components. Since the w
emerges from the interaction of the components, we cannot understand the whole simply by looking at the pa
fails.
Every new era is marked and measured by key abundances and scarcities
In an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatev
information consumes. What information consumes is rather obvious: it consumes the attention of its recipien
information creates a poverty of attention and a need to allocate that attention efficiently among the overabu
sources that might consume it.
The key thing in economics, whenever someone makes an assertion to you, is to always ask, "And then what?" Actu
idea to ask it about everything. But you should always ask, "And then what?"
The 80/20 Principle- It simply maintains that a minority of causes, inputs, or effort usually lead to a majority of the r
rewards. Whilst the exact split may not be 80/20, a significant imbalance is often found in a myriad of situations.
What is strategy but resource allocation? When you strip away all the noise, that's what it comes down to. Strategy
cut choices about how to compete. You cannot be everything to everybody, no matter what the size of your busines
pockets.
Always ask where the competition might come from; and examine substitutable products. The customer group ofte
their greatest unsatisfied need
Do not focus on the product, rather keep focusing on the people who consume it (or don’t consume it) and their cha
desires, remembering that the consumer always buys to accomplish something.
If you weren't already in this business would you enter it today? If not, what are you going to do about it?
Core Competence - As a company moves along a product (or process) path, knowledge is accumulated. Since most i
rearrangement of existing knowledge units, the company is able to further innovate, and therefore move quicker, a
Companies that have developed a knowledge base valued by customers in their industry make it more difficult for a
compete.
Competitive advantage through people -There are several problems with seeking competitive advantage through in
technology. First, little of that technology is proprietary - the people who sell you robots or point-of-sale terminals o
production or service delivery will sell the robots, terminals, and software to your competitors. Your ability to obtain
alone get any advantage from, this technology - which is often widely available and readily understood - depends on
implement it more rapidly and more effectively. This almost inevitably involves the skill and motivation of the work
Specialization - Adam's smith pin factory

These waves of technology, you can see them way before they happen, and you just have to choose wisely which on
surf. If you choose unwisely, then you can waste a lot of energy, but if you choose wisely, it actually unfolds fairly slo
One of our biggest insights [years ago] was that we didn't want to get into any business where we didn't own or con
technology, because you'll get your head handed to you. We realized that for almost all future consumer electronics
technology was going to be software. And we were pretty good at software.
The great lesson in microeconomics is to discriminate between when technology is going to help you (only newspap
it's going to kill you (textile mills)
Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory
What can the company do, that the other competitors will not be able to do?
The company must recognize that the world in which it is operating is changing at an ever-increasing rate.
High margins attract competition, and competition erodes profit opportunities. The best way to mute competition is
efficiently that there is no incentive left for the potential entrant.
It is hard to introduce new, superior products in market arenas where established competitors already have a stron
new entrant is building the production, marketing power, and reputation to be competitive, existing competitors ca
defensive actions to regain the market threatened. Innovators have a better chance of success if they combine tech
electronics and nucleonics, in a way that is novel relative to existing competitive competencies.
Technology is just one avenue to industry leadership. Developing a consumer “franchise” is another. Service excelle
Whatever the case, a strong ability to defend established markets against new competitors is essential for a sound i
The minute the business starts contracting, significant assets are not there. Under social norms and the new legal ru
so much is owed to the employees, that the minute the enterprise goes into reverse, some of the assets on the bala
anymore.
We realized that some company that was selling at 2 or 3 times book value could still be a hell of a bargain because
implicit in its position, sometimes combined with an unusual managerial skill plainly present in some individual or o
or other.
If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much di
return - even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 y
an expensive looking price, you'll end up with one hell of a result.
However, averaged out, betting on the quality of a business is better than betting on the quality of management. In
have to choose one, bet on the business momentum, not the brilliance of the manager. But, very rarely, you find a m
that you're wise to follow him into what looks like a mediocre business.
In fact, any time anybody offers you anything with a big commission and a 200-page prospectus. don't buy it. Occasi
if you adopt "Munger's Rule". However, over a lifetime, you'll be a long way ahead - and you will miss a lot of unhap
might otherwise reduce your love for your fellow man.
There are actually businesses. that you will find a few times in a lifetime, where any manager could raise the return
just by raising prices - and yet they haven't done it. So they have huge untapped pricing power that they're not usin
no-brainer. That existed in Disney. It's such a unique experience to take your grandchild to Disneyland. You're not do
there are lots of people in the country. And Disney found that it could raise those prices a lot and the attendance sta
of the great record of Eisner and Wells was utter brilliance but the rest came from just raising prices at Disneyland a
through video cassette sales of classic animated movies.
At Berkshire Hathaway, Warren and I raised the prices of See's Candy a little faster than others might have. And, of c
Coca-Cola - which had some untapped pricing power. And it also had brilliant management. So a Goizueta and Keou
more than raise prices. It was perfect.
The Washington Post - we bought it at about 20% of the value to a private owner. So we bought it on a Ben Graham
fifth of obvious value - and, in addition, we faced a situation where you had both the top hand in a game that was cl
with one winner and a management with a lot of integrity and intelligence. That one was a real dream. They're very
Katharine Graham family. That's why it was a dream - an absolute, damn dream.
And in Gillette's case, they keep surfing along new technology which is fairly simple by the standards of microchips.
hard for competitors to do. So they've been able to stay constantly near the edge of improvements in shaving. There
where Gillette has more than 90% of the shaving market.
And GEICO had a perfectly magnificent business - submerged in a mess, but still working. Misled by success, GEICO h
things. They got to thinking that, because they were making a lot of money, they knew everything. And they suffere
had to do was to cut out all the folly and go back to the perfectly wonderful business that was lying there. And when
that's a very simple model. And it's repeated over and over again.
Obviously there are industries where two brands can co-exist like Ford and Chevrolet, but there are others like new
where one brand tends to destroy the other. That’s just the way it is. It’s hard to predict what will happen with two
Sometimes they will behave in a gentlemanly way, and sometimes they’ll pound each other. I know of no way to pre
compete moderately or to the death. If you could figure it out, you could make a lot of money.
The definition of a great company is one that will be great for 25 to 30 years.
Even a third-rate newspaper can generate adequate profits if it is the only paper in town. In addition to their franch
newspapers possess valuable economic goodwill. As Buffett points out, newspapers have low capital needs, so they
sales into profits. Newspapers also are able to increase prices relatively easily, thereby generating above-average re
capital and reducing the harmful effects of inflation. Buffett figures that a typical newspaper could double its price a
percent of its readership.
Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possi
Investment is an activity of forecasting the yield on assets over the life of the asset; speculation is the activity of fore
If you're an investor, you're looking at what the asset—in our case, businesses—will do. If you're a speculator, you'r
on what the price will do independent of the business.
Product differentiation and strong brand are not the same as a profitable franchise
If value of a brand is equal to the cost that it took to create the brand then branding by itself is not a source of value
Value is only created when incumbents have abilities that new comers cannot match
As long as newcomers can develop and distribute new products on an equal footing with incumbents all products eff
Simplest form of competitive advantage is government franchise - cable franchise, broadcast television, telephone c
Other competitive advantage is being a low cost producer- due to a patent, know-how, access to cheap resources,
There are situations where incumbents are at a cost disadvantage- where technology is changing rapidly
High switching cost can limit the arrival of new entrants
Economies of scale - high fixed cost and low variable cost e.g. shrink - wrapped software
Consumer franchise that are sustainable over decades must have a competitive advantage in recruiting new custom
The problem of declining profits in the face of increased price competition has challenged thousands of companies t
their goods or services from those of other players. It is a truth universally acknowledged that all sensible people ab
businesses. The standard advice for avoiding this fate is to differentiate your product or service from all the others.
Globalization of the luxury car market proved to be profitability's foe. Both in theory and in practice, product differe
brand are not the same as a profitable franchise.
These three concepts-franchises, barriers to entry, and incumbent competitive advantages-amount to the same thin
sources, in a modern market economy, of any value that exceeds the cost of reproducing a firm's assets.
In an open and competitive economy, there are only a limited number of ways in which customer behavior leads to
usually associated with high purchase frequency, is probably the most powerful.
High switching costs are the most common source of customer captivity. If it costs money, time, and effort for a cus
one supplier to another, incumbents have an advantage over entrants. For example, when a company changes softw
payroll, benefits management, internal communications, funds transfer, or other important functions, the company
on the software but also on extensive retraining of the staff. That is bad enough; even worse, the error rate on the n
goes up. The corporate graveyard is filled with firms that bet the business on introducing a new, improved, integrate
system, and lost.
In order for economies of scale to be worth something and have implications for the valuation of a particular compa
combined with customer (demand) advantages that provide the company with a predominant share of the market i
themselves, economies of scale aren't sufficient to produce meaningful competitive advantages.
Those that do not capitalize on their protected positions may be concealing substantial value in unused pricing pow
Rapid change in technology will often mean that, in the absence of economies of scale, cost structure advantages ar
the other hand, even if the technologies are long lasting, patents do expire, learning curves flatten, and the associat
advantages still disappear. Sustainable cost advantages are confined to an intermediate range of technological envir
too fast and not too slow and even they have limited lives.
The HMO that has a 60 percent share of households in the New York metropolitan area will be able to benefit from
a much greater extent than would considerably larger HMOs with 30 percent shares of the Chicago, Miami, Dallas, S
Structural competitive advantages come in only a few forms: exclusive governmental licenses, consumer (demand)
(supply) position based on long-lived patents or other durable superiorities, and the combination of economies of sc
share in the relevant market with consumer preference.
The history of the luxury car market suggests that this kind of brand-mediated pricing power does not create a signi
that would protect Daimler from the ravages of competition. Even a marque as illustrious as Mercedes-Benz is not a
advantage in this regard.
The brand may be an essential element of the perceived value of the product. But by itself the brand does not const
establish competitive advantages, or create a franchise. The aspects of consumer behavior that do create franchise
have described in this chapter-habit, search costs, and switching costs-as leading to customer captivity.
Also, the value of brands is greatly enhanced by the presence of economies of scale. A sticker on a computer that sa
little by itself to establish a strong brand, but when accompanied by powerful economies of scale in chip design and
weak brand becomes an essential part of a powerful franchise.
Dealmaking beats working. Dealmaking is exciting and fun, and working is grubby. Running anything is primarily an e
grubby detail work . . . dealmaking is romantic, sexy. That’s why you have deals that make no sense.”
I don’t think anyone should buy a bank if they don’t have a feel for the bankers. Banking is a business that is a very d
investor. Without deep insight, stay away.”
Great products rarely make a moat, though they can certainly juice short-term results.
The question to ask is not whether a firm has high market share, but rather how the firm achieved that share, which
MOATS-A company can have intangible assets, like brands, patents, or regulatory licenses that allow it to sell produc
can’t be matched by competitors.
The products or services that a company sells may be hard for customers to give up, which creates customer switch
firm pricing power.
Some lucky companies benefit from network economics, which is a very powerful type of economic moat that can lo
for a long time.
Finally, some companies have cost advantages, stemming from process, location, scale, or access to a unique asset,
offer goods or services at a lower cost than competitors.
If a company can charge more for the same product than its peers just by selling it under a brand, that brand very lik
The only time patents constitute a truly sustainable competitive advantage is when the firm has a demonstrated tra
innovation that you’re confident can continue, as well as a wide variety of patented products.
Regulations can limit competition—isn’t it great when the government does something nice for you? The best kind o
one created by a number of small-scale rules, rather than one big rule that could be changed.
The higher the level of fixed costs relative to variable costs, the more consolidated an industry tends to be, because
Is this company providing a win-win for its entire ecosystem?
How could this business be affected by changes in other parts of the value chain that lie beyond the company’s cont
its revenues perilously dependent on the credit markets or the price of a particular commodity?
Moat Sources:
Intangible assets include brands, patents, or government licenses that explicitly keep competitors at bay.
Firms that have the ability to provide goods or services at lower cost have an advantage because they can und
price. Alternatively, they may sell their products or services at the same prices as rivals, but achieve fatter profi
consider economies of scale to be a type of cost advantage,
Switching costs are those one-time inconveniences or expenses a customer incurs to change from one product
Customers facing high switching costs often won’t change providers unless they are offered a large improveme
performance, and even then, the risk associated with making a change may still prevent switching in some ind
The network effect occurs when the value of a particular good or service increases for both new and existing u
use that good or service, often creating a viscious circle that allows strong companies to become even stronge
Efficient scale describes a dynamic in which a market of limited size is effectively served by one or just a few co
companies involved generate economic profits, but potential competitors are discouraged from entering beca
result in insufficient returns for all players.
Successful cloning is what turns a local taco joint into a Taco Bell or a local clothing store into The Limited, but there
stock until the company has proven that the cloning works
When looking at the same sky, people in mature industries see clouds where people in immature industries see pie.
Fact based - rigidly structured - hypothesis driven
MECE - Mutually exclusive completely exhaustive
A good McKinsey issue list contains neither fewer than two nor more than five top-line issues (of course, three is best).
Structure, structure, structure. MECE, MECE, MECE.
The essence of the initial hypothesis is “Figure out the solution to the problem before you start.”
It is a road map, albeit hastily sketched, to take you from problem to solution. If your IH is correct, then solving the prob
details of the map through factual analysis.
The IH emerges from the combination of facts and structure.
To structure your IH begin by breaking the problem into its components—the key drivers. Next, make an actionable recomme
driver.
Issue tree: In other words, you start with your initial hypothesis and branch out at each issue.
The only way to figure out if the problem you have been given is the real problem is to dig deeper. Get facts. Ask questions. Po
An initial hypothesis is not a prerequisite for successful problem solving.
80/20 is all about data.
“Don’t boil the ocean” means don’t try to analyze everything. Be selective; figure out the priorities of what you are doing. Kno
There may be a 100 different factors affecting the sales of our widgets—weather, consumer confidence, raw material prices—
important ones are X, Y, and Z - Key drivers. We’ll ignore the rest.
Know your solution (or your product or business) so thoroughly that you can explain it clearly and precisely to your client (or c
Sometimes in the middle of the problem-solving process, opportunities arise to get an easy win, to make immediate improvem
overall problem has been solved. Seize those opportunities!
In most cases, a complex problem can be reduced to a group of smaller, simpler problems that can be solved individually.
Logic tree, a hierarchical listing of all the components of a problem, starting at the “20,000-foot view” and moving progressive
sure, whichever view you take, that your logic tree is MECE, so that you miss nothing and avoid confusion.
Quick and Dirty Test (QDT) of your hypothesis. The QDT is simply this: what assumptions are you making that need to be true
hypothesis to be true? If any of these assumptions is false, then the hypothesis is false. Much of the time, you can knock out fa
few minutes with the QDT.
An issue tree is the evolved cousin of the logic tree. Where a logic tree is simply a hierarchical grouping of elements, an issue
tree is the series of questions or issues that must be addressed to prove or disprove a hypothesis. Issue trees bridge the gap b
hypothesis.
• Let your hypothesis determine your analysis.

• Get your analytical priorities straight.
• Forget about absolute precision.
• Triangulate around the tough problems - triangulation is the method of determining the precise location of an unknown poin
measurements from two known points
If you’re directionally correct and in the right order of magnitude, chances are that’s enough to make a decision.
Don’t accept “I have no idea.” People always have an idea if you probe a bit. Ask a few pointed questions, and you’ll be amaze
Make a chart every day.
If the facts don’t fit your hypothesis, then it is your hypothesis that must change, not the facts.
What’s the so what?” for a particular analysis. What does it tell us, and how is that useful? What recommendation does it lead
When you’re analyzing the data, just be sure that you’re stepping back from it and doing a high level sanity check.
Data without intuition are merely raw information, and intuition without data is just guesswork. Put the two together, howeve
basis for sound decision making.
80/20 rule doesn’t necessarily lead directly to insight. Rather, it prompts you to ask new questions and possibly perform new a
you put the story together.
Keep it simple—one message per chart.
ypically not good
ering overhead
s you’re crazy about yourself.
auss) made a nice profit.
w variables—like the discount warehouses of Costco
he bad businesses throw up painful decisions time after time.”

the foe whom he is facing.
t is what we're trying to do,
psychology of the market
commodities
ectric utilities
s retaining existing ones
u insight into how defensible that dominant position will be.
es a formidable economic moat.
of size are greater.

ave done enough, then stop.
vestor) in 30 seconds.
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Finance
In many businesses-particularly those that have high asset/profit ratios-inflation causes some or all of the reported
The ersatz portion-let's call these earnings "restricted"-cannot, if the business is to retain its economic position, be d
The first point to understand, is that not all earnings are created equal
For every dollar retained by the corporation, at least one dollar of market value will be created for owners.
This will happen only if the capital retained produces incremental earnings equal to, or above, those generally availa
Outstanding businesses by definition generate large amounts of excess cash.
Since the long-term corporate outlook changes only infrequently, dividend patterns should change no more often.
Major repurchases at prices well below per-share intrinsic business value immediately increase, in a highly significa
When companies purchase their own stock, they often find it easy to get $2 of present value for $1.
Earnings can be as pliable as putty when a charlatan heads the company reporting them. Eventually truth will surfac
The goal of each investor should be to create a portfolio (in effect, a "company") that will deliver him or her the high
The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital e
leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share.
Managers and investors alike should view intangible assets from two perspectives:
(1) In analysis of operating results-that is, in evaluating the underlying economics of a business unit-amortization ch
What a business can be expected to earn on unleveraged net tangible assets, exclud- ing any charges against earnin
Goodwill, is the best guide to the economic attractiveness of the operation. It is also the best guide to the current va
economic Goodwill.
(2) In evaluating the wisdom of business acquisitions, amortization charges should be ignored also. They should be d
earnings nor from the cost of the business.This means forever viewing purchased Goodwill at its full cost, before an
Furthermore, cost should be defined as including the full intrinsic business value-not just the recorded accounting v
given, irrespective of market prices of the securities involved at the time of merger and irrespective of whether po
allowed. For example, what we truly paid in the Blue Chip merger for 40% of the Goodwill of See's and the News wa
the $51.7 million entered on our books. This disparity exists because the market value of the Berkshire shares given
less than their intrinsic business value, which is the value that defines the true cost to us.
Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business durin
Intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if in
Does the company have a worthwhile profit margin?
What is the company doing to maintain or improve profit margins?
In the foreseeable future, will the growth of the company require sufficient equity financing so that the larger numb
outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth?
The promised benefits from these textile investments were illusory. Many of our competitors, both domestic and fo
to the same kind of expenditures and, once enough companies did so, their reduced costs became the baseline for r
industrywide. Viewed individually, each company's capital investment decision appeared cost-effective and rational
decisions neutralized each other and were irrational Just as happens when each person watching a parade decides h
he stands on tiptoes. After each round of investment, all the players had more money in the game and returns rema
Is the business’s balance sheet strong or weak?

Are the accounting standards that management uses conservative or liberal?
Does the business generate revenues that are recurring or from one- off transactions?
To what degree does operating leverage impact the earnings of the business?
How does working capital impact the cash flows of the business?
Does the business have high or low capital- expenditure requirements?
Have the managers been buying or selling the stock?
Do the CEO and CFO issue guidance regarding earnings?
Once a business begins to set guidance, it may also adopt a short- term outlook at the expense of long- term growth
Does the management team focus on cutting unnecessary costs?
Are the CEO and CFO disciplined in making capital allocation decisions?
Do the CEO and CFO buy back stock opportunistically?
EBITDA is bullshit earnings
“In financial terms it's easy to describe a high-quality business. They generate high returns on unlevered capital and
on an after-tax basis. They produce free cash flow or have attractive enough reinvestment opportunities to invest ca
Steady cash flows comes from one reason or another, from indespensability of companys products - either from bra
Best kind of business to own is one with high profit margins and high inventory turnover. Second-best kind of busine
either high profit margins or achieve enough inventory turnover to compensate for lower profit margins
Stock splits have three consequences: they increase transaction costs by promoting high share turnover; they attrac
short-term, market-oriented views who unduly focus on stock market prices; and, as a result of both of those effect
depart materially from intrinsic business value
Company that sells its stock at a price less than its value is stealing from its existing shareholders.
Sellers in stock acquisitions measure the purchase price by the market price of the buyer's stock, not by its intrinsic
trading at a price equal to, say, half its intrinsic value, then a buyer who goes along with that measure gives twice as
as it is getting. Its manager, usually rationalizing his or her actions by arguments about synergies or size, is elevating
optimism above shareholder interests
Acquisitions paid for in stock are too often (almost always) described as "buyer buys seller" or "buyer acquires seller
clearer thinking would follow from saying "buyer sells part of itself to acquire seller," or something of the sort
Best value-enhancing transactions requires concentrating on opportunity costs, measured principally against the alt
pieces of excellent businesses through stock market purchases. Such concentration is alien to the manager obsessed
It is common on Wall Street to value businesses using a calculation of cash flows equal to (a) operating earnings plus
expense and other non-cash charges. Buffett regards that calculation as incomplete. After taking (a) operating earni
non-cash charges, Buffett argues that you must then subtract something else: (c) required reinvestment in the busin
"the average amount of capitalized expenditures for plant and equipment, etc., that the business requires to fully m
competitive position and its unit volume." Buffett calls the result of (a) + (b) - (c) "owner earnings."
When (b) and (c) differ, cash flow analysis and owner earnings analysis differ too. For most businesses, (c) usually ex
analysis usually overstates economic reality.
If options aren't a form of compensation, what are they? If compensation isn't an expense, what is? And, if expense
calculation of earnings, where in the world should they go?"
Parochial positions on accounting can be economically disastrous, as the debate over accounting for retiree health c
1992, businesses that promised to pay for health care services to retired employees were not required by GAAP to r
obligation as a liability on their balance sheets. It thus made it easy to make such financial commitments, and many
more generous commitments to cover retiree health benefits than they would have had they been required to repo
consequence was a wave of bankruptcies, as businesses failed to meet their mounting and maturing obligations.
Policies of the corporation in attracting shareholders to those of a restaurant attracting potential customers. A resta
clientele-patrons of fast foods, elegant dining, Oriental food, etc.-and eventually obtain an appropriate group of dev
expertly done, that clientele, pleased with the service, menu, and price level offered, would return consistently. But
change its character constantly and end up with a happy and stable clientele. If the business vacillated between Fre
chicken, the result would be a revolving door of confused and dissatisfied customers
Berkshire has access to two low-cost, non-perilous sources of leverage that allow us to safely own far more assets th
alone would permit: deferred taxes and "float," the funds of others that our insurance business holds because it rec
needing to payout losses
Most investors think quality, as opposed to price, is the determinant of whether something’s risky. But high quality
low quality assets can be safe. It’s just a matter of the price paid for them.
An excellent investor may be one who— rather than reporting higher returns than others— achieves the same retur
risk (or even achieves a slightly lower return with far less risk). Of course, when markets are stable or rising, we don
much risk a portfolio entailed. That’s what’s behind Warren Buffett’s observation that other than when the tide goe
swimmers are clothed and which are naked.
Diversification is effective only if portfolio holdings can be counted on to respond differently to a given developmen
Risk control lies at the core of defensive investing. Rather than just trying to do the right thing, the defensive investo
emphasis on not doing the wrong thing. Because ensuring the ability to survive under adverse circumstances is inco
maximizing returns in good times, investors must decide what balance to strike between the two. The defensive inv
emphasize the former.
Hold any security indefinitely, so long as the prospective return on equity capital of the underlying business is satisfa
competent and honest, and the market does not overvalue the business.
To evaluate arbitrage situations you must answer four questions: (1) How likely is it that the promised event will ind
(2) How long will your money be tied up?
that something still better will transpire-a competing takeover
bid, for example? and (4) What will happen if the event does not take place because of anti-trust action, financing g
The other way we differ from some arbitrage operations is that we participate only in transactions that have been p
do not trade on rumors or try to guess takeover candidates. We just read the newspapers, think about a few of the
by our own sense of probabilities.
The primary factors bearing upon this (equtiy investment) evaluation are:
1) The certainty with which the long-term economic characteristics of the business can be evaluated;
2) The certainty with which management can be evaluated, both as to its ability to realize the full potential of the bu
employ its cash flows;
3) The certainty with which management can be counted on to channel the reward from the business to the shareh
itself;
4) The purchase price of the business;
5) The levels of taxation and inflation that will be experienced and that will determine the degree by which an inves
return is reduced from his gross return.
The theoretician bred on beta has no mechanism for differentiating the risk inherent in, say, a single-product toy co
or hula hoops from that of another toy company whose sole product is Monopoly or Barbie
By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most inv
Paradoxically, when "dumb" money acknowledges its limitations, it ceases to be dumb.
Growth is always a component in the calculation of value, constituting a variable whose importance can range from
and whose impact can be negative as well as positive.
Similarly, business growth, per se, tells us little about value. It's true that growth often has a positive impact on valu
spectacular proportions. But such an effect is far from certain. For example, investors have regularly poured money
business to finance profitless (or worse) growth. For these investors, it would have been far better if Orville had faile
at Kitty Hawk: The more the industry has grown, the worse the disaster for owners.
Growth benefits investors only when the business in point can invest at incremental returns that are enticing-in oth
each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return b
incremental funds, growth hurts the investor.
Searching for operations that we believe are virtually certain to possess enormous competitive strength ten or twen
fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek.
Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable
earnings are virtually certain to be materially higher five, ten and twenty years from now.
A great investment opportunity occurs when a marvelous business encounters a one-time huge, but solvable, probl
years back at both American Express and GEICO.
The banking business is no favorite of ours. When assets are twenty times equity-a common ratio in this industry-m
a small portion of assets can destroy a major portion of equity.
Huge debt, we were told, would cause operating managers to focus their efforts as never before, much as a dagger
wheel of a car could be expected to make its driver proceed with intensified care. We'll acknowledge that such an a
produce a very alert driver. But another certain consequence would be a deadly-and unnecessary-accident if the car
pothole or sliver of ice. The roads of business are riddled with potholes; a plan that requires dodging them all is a pl
We suspect three motivations-usually unspoken to be, singly or in combination, the important ones in most high pre
takeovers:
(1) Leaders, business or otherwise, seldom are deficient in animal spirits and often relish increased activity and chal
(2) Most organizations, business or otherwise, measure themselves, are measured by others, and compensate their
the yardstick of size than by any other yardstick. (Ask a Fortune 500 manager where his corporation stands on that f
invariably, the number responded will be from the list ranked by size of sales; he may well not even know where his
the list Fortune just as faithfully compiles ranking the same 500 corporations by profitability.)
(3) Many managements apparently were overexposed in impressionable childhood years to the story in which the im
prince is released from a toad's body by a kiss from a beautiful princess. Consequently, they are certain their manag
for the profitability of Company T(arget).
During an inflationary period, companies with a core business characterized by extraordinary economics can use sm
incremental capital in that business at very high rates of return. But, unless they are experiencing tremendous unit g
businesses by definition generate large amounts of excess cash. If a company sinks most of this money in other busi
returns, the company's overall return on retained capital may nevertheless appear excellent because of the extraord
earned by the portion of earnings incremental invested in the core business.
While deals often fail in practice, they never fail in projections-if the CEO is visibly panting over a prospective acquis
consultants will supply the requisite projections to rationalize any price.
Current earnings per share (or even earnings per share of the next few years) are an important variable in most bus
from all-powerful.
The sad fact is that most major acquisitions display an egregious imbalance: They are a bonanza for the shareholder
increase the income and status of the acquirer's management; and they are a honey pot for the investment bankers
on both sides. But, alas, they usually reduce the wealth of the acquirer's shareholders, often to a substantial extent.
the acquirer typically gives up more intrinsic value than it receives.
Accounting numbers are the beginning, not the end, of business valuation.
A business may be well liked, even loved, by most of its customers but possess no economic goodwill. (AT&T, before
generally well thought of, but possessed not a dime of economic Goodwill.) And, regrettably, a business may be disl
possess substantial, and growing economic Goodwill.
When we purchased See's in 1972, it will be recalled, it was earning about $2 million on $8 million of net tangible as
our hypothetical mundane business then had $2 million of earnings also, but needed $18 million in net tangible asse
operations. Earning only 11% on required tangible assets, that mundane business would possess little or no econom
A business like that, therefore, might well have sold for the value of its net tangible assets, or for $18 million. In con
for See's, even though it had no more in earnings and less than half as much in "honest-to-God" assets. Could less re
our purchase price implied? The answer is "yes"-even if both businesses were expected to have flat unit volume- as
as we did in 1972, a world of continuous inflation.
To understand why, imagine the effect that a doubling of the price level would subsequently have on the two busine
to double their nominal earnings to $4 million to keep themselves even with inflation. This would seem to be no gre
same number of units at double earlier prices and, assuming profit margins remain unchanged, profits also must do
But, crucially, to bring that about, both businesses probably would have to double their nominal investment in net t
is the kind of economic requirement that inflation usually imposes on businesses, both good and bad. A doubling of
correspondingly more dollars must be employed immediately in receivables and inventories. Dollars employed in fix
more slowly to inflation, but probably just as surely. And all of this inflation-required investment will produce no im
return. The motivation for this investment is the survival of the business, not the prosperity of the owner.
Remember, however, that See's had net tangible assets of only $8 million. So it would only have had to commit an a
finance the capital needs imposed by inflation. The mundane business, meanwhile, had a burden over twice as large
of additional capital. After the dust had settled, the mundane business, now earning $4 million annually, might still b
tangibleassets, or $36 million. That means its owners would have gained only a dollar of nominal value for every new
the same dollar-for-dollar result they would have achieved if they had added money to a savings account.)
See's, however, also earning $4 million, might be worth $50 million if valued (as it logically would be) on the same b
of our purchase. So it would have gained $25 million in nominal value while the owners were putting up only $8 mil
over $3 of nominal value gained for each $1 invested.
Asset-heavy businesses generally earn low rates of return, rates that often barely provide enough capital to fund the
the existing business, with nothing left over for real growth, for distribution to owners, or for acquisition of new bus
In contrast, a disproportionate number of the great business fortunes built up during the inflationary years arose fro
operations that combined intangibles of lasting value with relatively minor requirements for tangible assets. In such
bounded upward in nominal dollars, and these dollars have been largely available for the acquisition of additional b
phenomenon has been particularly evident in the communications business. That business has required little in the
investment-yet its franchises have endured. During inflation, Goodwill is the gift that keeps giving.
Assume a company with $20 per share of net worth, all tangible assets. Further assume the company has internally
magnificent consumer franchise, or that it was fortunate enough to obtain some important television stations by or
Therefore, it earns a great deal on tangible assets, say $5 per share, or 25%. With such economics, it might sell for $
and it might well also bring that price in a negotiated sale of the entire business.
Assume an investor buys the stock at $100 per share, paying in effect $80 per share for Goodwill Just as would a cor
the whole company). Should the investor impute a $2 per share amortization charge annually ($80 divided by 40 yea
earnings per share? And, if so, should the new "true" earnings of $3 per share cause him to rethink his purchase pric
Most managers probably will acknowledge that they need to spend something more than (b) on their businesses ov
hold their ground in terms of both unit volume and competitive position. When this imperative exists-that is, when
earnings overstate owner earnings. Frequently this overstatement is substantial. The oil industry has in recent years
example of this phenomenon. Had most major oil companies spent only (b) each year, they would have guaranteed
terms.
Absurdity of the "cash flow" numbers that are often set forth in Wall Street reports. These numbers routinely includ
subtract (c). Most sales brochures of investment bankers also feature deceptive presentations of this kind. These im
being offered is the commercial counterpart of the Pyramids-forever state-of-theart, never needing to be replaced,
Indeed, if all U.S. corporations were to be offered simultaneously for sale through our leading investment bankers-a
describing them were to be believed-governmental projections of national plant and equipment spending would ha
"Cash Flow," true, may serve as a shorthand of some utility in descriptions of certain real estate businesses or other
huge initial outlays and only tiny outlays thereafter. A company whose only holding is a bridge or an extremely long-
an example. But "cash flow" is meaningless in such businesses as manufacturing, retailing, extractive companies, an
them, (c) is always significant. To be sure, businesses of this kind may in a given year be able to defer capital spendin
ten-year period, they must make the investment-or the business decays.
Why, then, are "cash flow" numbers so popular today? In answer, we confess our cynicism: we believe these numbe
by marketers of businesses and securities in attempt to justify the unjustifiable (and thereby to sell what should be t
that is, GAAP earnings-looks by itself inadequate to service debt of a junk bond or justify a foolish stock price, how c
salesmen to focus on (a) + (b). But you shouldn't add (b) without subtracting (c): though dentists correctly claim that
they'll go away, the same is not true for (c). The company or investor believing that the debt-servicing ability or the
enterprise can be measured by totalling (a) and (b) while ignoring (c) is headed for certain trouble.
The greater the number of economically diverse business operations lumped together in conventional financial stat
those presentations are.
In the case of unregulated businesses blessed with strong franchises: the corporation and its shareholders are then
of tax cuts.
In the price-competitive industry, whose companies typically operate with very weak business franchises. In such in
"regulates" after-tax profits in a delayed and irregular, but generally effective, manner. The marketplace, in effect, p
function in dealing with the price-competitive industry as the Public Utilities Commission does in dealing with electr
industries, therefore, tax changes eventually affect prices more than profits.
Return-on-capital metrics measure the effectiveness of a company’s capital allocation decisions and are also arguab
expression of its industrial positioning and competitive advantages. Theoretically, returns on capital should equal th
capital. An industry or a company generating economic profit normally draws competition, and competitive pressur
profitability to erase economic profit. Thus, in perfectly competitive markets, companies earn no economic profit. T
returns on capital requires possessing features that protect returns from competition; namely, competitive advanta
Three elements drive corporate cash return on investment: asset turns, profit margins and cash conversion. Asset tu
efficiently a company generates sales from additional assets, which can vary greatly depending on the asset intensit
margins reflect the benefits of those incremental sales; and cash conversion reflects a company’s working capital in
conservatism of its accounting policies.
The simplest and most commonly used tool for measuring returns is return on equity: net income as a percentage o
While useful as a general proxy, the figure is crude for two reasons. Most obviously, the return part of the equation
measures, whose application leaves managers with considerable discretion over the treatment of important measu
and provisioning. The calculation can also be distorted by factors that affect the value of shareholders’ equity, such
levels.
Measures such as return on invested capital (measured as net after-tax operating profit divided by invested capital)
achieving this. Better yet is a metric zeroing in on cash returns on cash capital invested (CROCCI);this is measured as
divided by capital invested after adjusting for accounting conventions such as amortization of goodwill. CROCCI mea
return on all capital a company has deployed.
Asset-light industries are attractive since they require less capital to be deployed in order to generate sales growth.
franchise operations, such as Domino’s Pizza, where growth is funded by franchisees rather than by the company. O
software businesses, such as Dassault Systèmes, a leading European developer of design software.
Although gross margin is a partial function of a company’s industry and high gross margins can reflect low asset inte
gross profit margins relative to industry peers tends to indicate durable competitive advantage. Businesses with high
typically stronger than those with lower ones. A company that consistently achieves both high gross and high opera
strong competitive advantage sustainable at tolerable cost.
Opportunities for growth maximize the benefits derived from high returns on capital. Such opportunities can arise f
either cyclical or structural, or through a firm grabbing share from rivals in existing markets or expanding geographic
companies enjoy a diversified set of growth drivers through ingenuity in the design of products, pricing, and produc
A more common source of growth comes through price/mix optimization. For example, a boxed chocolate maker m
package line a premium package and increase its price by more than its additional cost. As total revenues rise, the e
income.
Five ways a company can increase earnings:
1) Reduce costs
2) Raise prices - You can raise the price with an exclusive franchise.
3) Expand into new markets
4) Sell more of its product in old markets
5) Revitalize, close or otherwise dispose of a losing operation
Avoid "diworseifications" - "Instead of buying back shares or raising dividends, profitable companies often prefer to
foolish acquisitions. The dedicated diworseifier seeking out merchandise that is (1) overpriced and (2) completely be
understanding. This ensures that losses will be maximized."
The company that sells 20 to 25 percent of its wares to a single customer is in a precarious situation.... short of canc
customer has incredible leverage in extracting price cuts and other concessions that will reduce the supplier's profit
investment could result from such an arrangement.
Percent of Sales' tells you how much percentage a specific product is contributing to the overall revenue of the com
The cash position also tells you the floor to which the stock price could fall. When it comes to Cash Position, it is also
what the company is proposing to do with the cash that it has got.
If the business dividends out all free cash flow, a long-term shareholder will earn a return equal to the free cash flow
original purchase price. The return on capital earned by the business is irrelevant when the payout ratio is 100 perce
declines, the economics of the business becomes increasingly important.
I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punc
investments that you got to make in a lifetime. And once you'd punched through the card, you couldn't make any m
There is a huge amount of difference between business that requires a large amount of capital to grow and the busi
The CEO who misleads others in public would mislead himself in private
“[Projections] are put together by people who have an interest in a particular outcome, have a subconscious bias, an
Forecasts tell you a gread deal about the forecaster, they never tell you anything about the future
Many corporate compensation plans reward managers handsomely for earnings increases produced solely, or in lar
earnings-i.e., earnings withheld from owners. For example, ten-year, fixed-price stock options are granted routinely
whose dividends are only a small percentage of earnings.
It’s fine for a CEO to have his own internal goals and, in our view, it’s even appropriate for the CEO to publicly expre
future, if these expectations are accompanied by sensible caveats. But for a major corporation to predict that its per
grow over the long term at, say, 15% annually is to court trouble.
When things go bad, all kinds of things correlate that you wouldn’t think of. Buffett said this is deadly. If you are not
correlations, you have an unrecognized concentration of risk
Why is the stock price depressed?
Are they selling below book value?
Is goodwill in book value?
What has been the high-low over past 10 years?
Have they any cash flow?
Have they any net income?
How have they done over the past 10 years?
What is their debt level?
What kind of industry are they in?
What are their profit margins?
How are their competitors doing?
Has the company done poorly with respect to their competitors?
How much is the downside and upside potential?
How much stocks do the insiders own?
What is the company product? Can the company continue selling it for years? Prefer product over service
Be aware of the level of stock market- are yields low and P-E ratios too high, are too many IPOs , are people overopti
Does the company have a worthwhile profit margin?
Companies with less profit margin more rapidly increase their earnings in abnormally good years but they do not ma
investments, these earnings will decline more rapidly when the business tide turns
Sometimes companies deliberately speed up growth by spending all of their earnings on even more research or eve
What is the company doing to maintain or improve profit margins?

Wages and salaries go up every year, which in turn affect raw material and supplies cost, as a result profit margin ar
Some companies maintain profit margins by rasising prices but that is temporary
Some companies maintain margin by capital improvement or product engineering department - to reduce cost to off
Whenever an investment banker starts talking about EBDIT—or whenever someone creates a capital structure that
interest, both payable and accrued, to be comfortably met out of current cash flow net of ample capital expenditure
The lower the government bond yield, the more valuable stocks will be, all else equal.
If your actions are sensible, you are certain to get good results; in most such cases, leverage just moves things along
Our endorsement of repurchases is limited to those dictated by price/value relationships and does not extend to the
repurchase—a practice we find odious and repugnant. In these transactions, two parties achieve their personal end
innocent and unconsulted third party. The players are: (1) the “shareholder” extortionist who, even before the ink o
dries, delivers his “your-money-or-your-life” message to managers; (2) the corporate insiders who quickly seek peac
as the price is paid by someone else; and (3) the shareholders whose money is used by (2) to make (1) go away. As t
mugging, transient shareholder gives his speech on “free enterprise,” the muggee management gives its speech on
company,” and the innocent shareholder standing by mutely funds the payoff.
Though historical volatility is a useful—but far from foolproof—concept in valuing short-term options, its utility dim
duration of the option lengthens. In my opinion, the valuations that the Black-Scholes formula now place on our lon
overstate our liability, though the overstatement will diminish as the contracts approach maturity.
The efficient market hypothesis does not live or die by investor rationality. In many scenarios where some investors
markets are still predicted to be efficient. In one commonly discussed case, the irrational investors in the market tra
there are a large number of such investors, and when their trading strategies are uncorrelated, their trades are likel
out. In such a market . . . prices are close to fundamental values
Where you have complexity, by nature you can have fraud and mistakes. . . . This will always be true of financial com
run by governments. If you want accurate numbers from financial companies, you’re in the wrong world
Use price/cash flow as an indicator along with P/E and P/B
Sell a stock when its PE ratio apporaches that of an overall market, regardless of how favorable prospects may appe
another contrarian stock
2.5 to 3 years is an adequate waiting period, if after that time the stock still dissapoints, sell it
Do not sell a stock which achieves a high PE ratio solely because of decline of earnings, either due to one time charg
If we assume all earnings are paid out and we ignore the impact of tax, a business returning 20 percent on invested
“good” business—is four times as valuable as another earning 5 percent on invested capital in perpetuity—a “bad” b
taxable government bonds yield 10 percent, then the good business earning 20 percent on equity is worth no more
10 percent = 2×) its invested capital, and the bad business
earning 5 percent on invested capital is worth no more than half its invested capital (5 percent ÷ 10 percent = 0.5×).
With the long bond earning 10 percent, each dollar of earnings reinvested in the good business earning a 20 percen
immediately return up to 200 cents on the dollar in business value (20 percent ÷ 10 percent), which is a very good re
the return to the owner of the bad business returning 5 percent on capital. Each dollar of earnings reinvested in tha
50 cents on the dollar in business value (5 percent ÷ 10 percent), thereby chewing up half the value of any dollar inv
the good business earning 20 percent on invested capital wants the business to reinvest, and grow because that gro
owner of the bad business earning 5 percent on invested capital wants all the earnings paid out because the “growt
If the yield on the government bond falls to 5 percent, the value of the bad business rises to no more than its invest
percent = 1×), and the value of the good business rises to no more than four times its invested capital (20 percent ÷
other hand, if the yield on the government bond rises to say 20 percent, the value of the bad business falls to no mo
invested capital (5 percent ÷ 20 percent = 0.25×), and the value of the good business falls to no more than one time
percent ÷ 20 percent = 1×)
Skilled managers maximize a business’s intrinsic value by maximizing its return on invested capital, which means ma
numerator (the return) and the denominator (the invested capital) over the course of the business cycle. In practice
as much of the return as possible, and any fallow invested capital, to minimize the invested capital employed in the
the size of the invested capital denominator and increases the ratio of return on invested capital. It also means avoi
might incrementally increase earnings, but offer a return on invested capital below the threshold rate of return set b
managers, through their employment contracts, bonuses, and option grants, are de facto incentivized not to maxim
invested capital, but to maximize only the growth in the numerator—the earnings.
The autos and the airlines, the tire companies, steel companies, and chemical companies are all cyclicals. Even defe
like cyclicals, since their profits’ rise and fall depends on the policies of various administrations.
Cyclicals are the most misunderstood of all the types of stocks. It is here that the unwary stockpicker is most easily p
and in stocks that he considers safe.
The p/e ratio can be thought of as the number of years it will take the company to earn back the amount of your ini
When cash increases relative to debt, it’s an improving balance sheet. When it’s the other way around, it’s a deterio
In general, a p/e ratio that’s half the growth rate is very positive, and one that’s twice the growth rate is very negati
Find the long-term growth rate (say, Company X’s is 12 percent), add the dividend yield (Company X pays 3 percent)
ratio (Company X’s is 10). 12 plus 3 divided by 10 is 1.5.
Less than a 1 is poor, and 1.5 is okay, but what you’re really looking for is a 2 or better. A company with a 15 percen
dividend, and a p/e of 6 would have a fabulous 3
Among turnarounds and troubled companies, I pay special attention to the debt factor. More than anything else, it’s
which companies will survive and which will go bankrupt in a crisis. Young companies with heavy debts are always a
In cases where you have to spend cash to make cash, you aren’t going to get very far.
Occasionally I find a company that has modest earnings and yet is a great investment because of the free cash flow.
with a huge depreciation allowance for old equipment that doesn’t need to be replaced in the immediate future. Th
enjoy the tax breaks (the depreciation on equipment is tax deductible) as it spends as little as possible to modernize
With a manufacturer or a retailer, an inventory buildup is usually a bad sign. When inventories grow faster than sale
On the bright side, if a company has been depressed and the inventories are beginning to be depleted, it’s the first e
Only growth rate that really counts: earnings.
20-percent grower selling at 20 times earnings (a p/e of 20) is a much better buy than a 10-percent grower selling at
Before you invest in a low-priced stock in a shaky company, look at what’s been happening to the price of the bonds
At the time, Exxon was able to borrow money at 8–9 percent to buy back millions of these dividend-paying shares. S
loan was tax-deductible, Exxon was really paying only about 5 percent to save 8–9 percent on dividends. This simple
company’s earnings without its having to refine an extra drop of oil.
ome ersatz.
eantime a lot of money can change hands.

ok-through earnings a decade or so from now.
ove or forecasts of future cash flows are revised.

tive barriers
precision makes it fallacious".
temporary business conditions
hings have turned around.
ngs (a p/e of 10).

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Operations
To be a truly conservative investment a company—for a majority if not for all of its product lines—must be the lowe
as low a cost producer as any competitor
How good are the company’s cost analysis and accounting controls?
Institutional Imperative: (1) As if governed by Newton's First Law of Motion, an institution will resist any change in it
Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available fun
craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies pre
(4) The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or wha
imitated.
Braun's Five W's: Who, what, where, when and why.

If you tell people why, they'll be much more likely to comply.
What are the operating metrics of the business that you need to monitor?
One mistake many companies make is applying the same performance metrics to all their businesses and strat
logic is usually driven by a desire to please the financial markets… but these measures tend to be more approp
mature businesses and may not give an appropriate picture of newer, more experimental ventures.
In such businesses, milestone measures such as hiring a key executive, winning early customers, and meeting b
more appropriate. Second, financial measures are often lagging indicators of the market’s feedback. Other, mo
such as customer satisfaction, assembly time, sales per square foot, employee turnover, and rework time, whe
may provide a more complete, realtime picture...
Does the management team improve its operations day- to- day or does it use a strategic plan to conduct its busine
Day to day improvement is better than a straightjacket strategic plan
Is the business managed in a centralized or decentralized way?
Centralized is typically more bureaucratic
“You’ve got a complex system and it spews out a lot of wonderful numbers that enable you to measure some factor
factors that are terribly important, [yet] there’s no precise numbering you can put to these factors.”
We delegate to the point of abdication
Management changes, like marital changes are expensive, time consuming and chancy
Many corporate managers are told to submit budgets and quarterly estimates. This leads to a short-term focus and
quarter. A manager who does not want to let the boss down may fudge the numbers
He suggests the “newspaper” standard: behave as if your actions will be on the front page of the local newspaper.
A firm with a strong financial team has several important advantages:
a. Good cost information enables management to direct its energies toward those products with the highest potenti
b. The cost system should pinpoint where production, marketing, and research costs are inefficient even in sub-part
c. Capital conservation through tight control of fixed and working capital investments.
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HR
Does the company have outstanding labor and personnel relations?
Relative labor turnover with respect to other companies
Realtive waiting list of candidates waiting to join a company
Above average profits while paying above average wages
Profit sharing and pension plans can play a role in improving relations
Good communication to and from from all levels of employees
Does the company have outstanding executive relations?
Does the company have depth to its management?
“In any big business, you don’t worry whether someone is doing something wrong, you worry about whether it’s big
whether it’s material. You can do a lot to mitigate bad behavior, but you simply can’t prevent it altogether."
“ ‘One solution fits all’ is not the way to go. . . . The right culture for the Mayo Clinic is different from the right cultur
Hollywood movie studio. You can’t run all these places with a cookie-cutter solution.”
“The highest form that civilization can reach is a seamless web of deserved trust—not much procedure, just totally
reliable people correctly trusting one another. . . . In your own life what you want is a seamless web of deserved tru
There must always be a conscious and continuous effort, based on fact, not propaganda, to have employees at ever
level, from the most newly hired blue-collar or white-collar worker to the highest levels of management, feel that th
company is a good place to work
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Legal and Governance
Many annual meetings are a waste of time, both for shareholders and for management. Sometimes that is true
because management is reluctant to open up on matters of business substance. More often a non-productive sessio
is the fault of shareholder participants who are more concerned about their own moment on stage than they are
about the affairs of the corporation. What should be a forum for business discussion becomes a forum for theatrics,
spleen-venting and advocacy of issues.
Relations between the Board and the CEO are expected to be congenial. At board meetings, criticism of the CEO's
performance is often viewed as the social equivalent of belching. No such inhibitions restrain the office manager
from critically evaluating the substandard typist.
First, stock options are inevitably tied to the overall performance of a corporation. Logically, therefore, they should
be awarded only to those managers with overall responsibility. Managers with limited areas of responsibility should
have incentives that payoff in relation to results under their control.
Second, options should be structured carefully. Absent special factors, they should have built into them a retained-
earnings or carrying- cost factor. Equally important, they should be priced realistically.
The combination of a ten-year option, a low dividend payout, and compound interest can provide lush gains to a
manager who has done no more than tread water in his job.
Investment risk is largely invisible before the fact— except perhaps to people with unusual insight— and even after
an investment has been exited.
Having first-rate people on the team is more important than designing hierarchies and clarifying who reports to
whom about what and at what times
Director power is weakest in the case where there is a controlling shareholder who is also the manager. When
disagreements arise between the directors and management, there is little a director can do other than to object
and, in serious circumstances, resign. Director power is strongest at the other extreme, where there is a controlling
shareholder who does not participate in management. The directors can take matters directly to the controlling
shareholder when disagreement arises.
The most common situation, however, is a corporation without a controlling shareholder. This is where managemen
problems are most acute, Buffett says. It would be helpful if directors could supply necessary discipline, but board
congeniality usually prevents that.
Many corporations pay their managers stock options whose value increases simply by retention of earnings, rather
than by superior deployment of capital. As Buffett explains, however, simply by retaining and reinvesting earnings,
managers can report annual earnings increases without so much as lifting a finger to improve real returns on capital
Stock options thus often rob shareholders of wealth and allocate the booty to executives. Moreover, once granted,
stock options are often irrevocable, unconditional, and benefit managers without regard to individual performance
Executive performance should be measured by profitability, after profits are reduced by a charge for the capital
employed in the relevant business or earnings retained by it. If stock options are used, they should be related to
individual performance, rather than corporate performance, and priced based on business value. Better yet, as at
Berkshire, stock options should simply not be part of an executive's compensation. After all, exceptional managers
who earn cash bonuses based on the performance of their own business can simply buy stock if they want to; if they
do, they "truly walk in the shoes of owners,"
Earnings are often retained for non-owner reasons, such as expanding the corporate empire or furnishing operation
Buffett’s view is that the most important job of the board is to pick the right CEO. The second most important job is
to prevent the CEO from overreaching, which often happens in acquisitions.
perational comfort for management
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Sales
BD is the final frontier, it involves seeing all the functions of both the parties
Does the company have an above average sales organization?
Sales is all about relationship - you like us and we like you - rest just follows - half of the time it boils down do -I d
Be genuinely interested in other people - don’t be self absorbed
Social exchange based on affirmation - thinking is based on negation - don’t make people think - don’t argu
Three of the most powerful words in the English language are “YOU ARE RIGHT!” Two other powerful
When dealing with people, let us remember we are not dealing with creatures of logic. We are dealing with
and motivated by pride and vanity.
Smile - trade a smile with someone who is blue now (emotions are contagious) - when you smile the whole
Remember names - name is the sweetest sound to a person
Make the conversation about the other person - listen - let the other person do a great deal of talking- talk
Interact - Interact - Interact - do not miss any chance of having a conversation
The only way on earth to influence other people is to talk about what they want and show them how to ge
Cognitive empathy - emotional empathy - empathic concern or caring (seed of compassion)
Sales or BD funnel - take the client through different stages - AIDA - Cold, warm, hot, sold
Prospecting
Building rapport
Identifying needs
Presenting
Answering objections
Closing the sale
Getting resales and referrals
First, arouse in the other person an eager want.

Appeal to interest, not to reason - talk in terms of other people's interest
Logic makes people think, but it is emotion that makes then act
The fear of loss is often greater than the desire for gain - two main reason people buy or don’t buy are desire f
Connectors (See every person as an opportunity), Maven and Salesman (exude enthusiasm about your product)
The most effective sales call is 25% talking / questioning and 75% listening
The prospect is persuaded more by the depth of your conviction than he is by the height of your logic - exude en
People believe more of what they see than what they hear – use testimonials - social proof
You are not selling what it is…you sell what it does. Prospects do not buy products. Prospects buy products of th
Start your presentation with the strongest benefit and end with the second strongest benefit
Always ask for the order - AAFTO
Have an absolute and total belief that what you're selling is worth more than the price you ask for it. Your belief
Mentally prepare yourself. Review your product knowledge and selling skills before every call. Try to write down
many words, that you drift away from the point, or that you are not specific enough. Writing will remind you of s
selling ideas.
Use emotion and logic in your presentation. Logic makes people think; emotion makes them act.
You need to balance these keys. If you use all logic, you end up with the best-educated prospect in town. If you u
the buyer's remorse and a canceled order.
When you get a referral contact them as soon as possible.
People buy because they either need or want something. If we can give someone a reason for buying (satisfying
chances are dramatically improved that they will do so.
Never lead with a product, lead with need
Don’t waste people time telling them what a product is, tell them what it can do and why it will do it for them
Needs Solution:
Everything you talk about with prospects should translate to customer benefits.
Personalize benefits for the prospect. Paint the picture for them so they can see it.
Clearly articulate the features, functions and benefits of your product.
Investing time in the right place - prospecting - like OP in RK hall - multiple power centers, your connects , in
- always one decision maker. “A prospect is an individual capable of making the decision on the product or servic
It’s unwise to make assumptions about others - instead - do darshan
Arrogant people seldom meet others on common ground. Why? Because they don’t make the effort—they belie
higher ground than others. They don’t want to lower themselves to other people’s level. They expect everyone e
Communicators who are indifferent are focused on themselves and their own comfort instead of on extending t
Keep it simple - short sentences and simple words

On average, prospects retain only half of what we tell them. Before an hour has passed, they lose 10 percent of t
what? Another 20 percent evaporates. By the time the breakfast rush has subsided, they have avoided two near
their bosses, and they have forgotten another 10 percent. So the entire time we have assumed a prospect has be
forgetting about it.
People will not always remember what you said or what you did, but they will always remember how you made
The sale is emotionally driven and emotionally decided. Then it is justified logically.
When I meet a prospect on a sales call, the first thing I do is establish some kind of rapport that includes finding
about them. I establish some credibility with them and then I begin my sales presentation.
Negotiation - If within 15 minutes you don’t know who the patsy is, you are the patsy
Favourite opening question - where are you from?
After someone hears your pitch . . .

1. What do you want them to know?
2. What do you want them to feel?
3. What do you want them to do?
The big three emotions - anger, anxiety (fear), depression
Any conversation operates on two levels, high road and low. The high road traffics in rationality, words, and mea
beneath the words, holding the interaction together through an immediately felt connection. The sense of conne
intimate, unspoken emotional link.
Social skill depends on mirror neurons. For one thing, echoing what we observe in another person prepares us to
Self-absorption in all its forms kills empathy, let alone compassion
When we are in the I-It mode, we treat other people as means to some other end. By contrast, in the I-You mod
Mindsight amounts to peering into the mind of a person to sense their feelings and deduce their thoughts—the
Scripts should always end with a question. Don’t forget to stop talking. A script should be no more than a minute
Never call a prospect if you have nothing to say.
The more you know about your client, their organizations, and the environment in which they operate, the bette
meeting - do research - they should help you to design right questions
Three stages of a sales meeting: establish credibility - explore needs - deliver value
Good communicators—whether they’re telling tales or making sales—tailor their words, their gestures, and even
—not to be manipulative, but to be effective.
Both place and small talk can have an impact on how successful your meeting will be.
The primary purpose of your presentation is not to transmit content. Rather, it’s to trigger questions—either you
Offering insightful and novel perspectives on current industry trends can be a powerful way to build credibility.
Every man I meet is my better in some way - in that I learn from him
Length of words matter in a conversation - don’t reply in monosyllables and gist
Good opening question - where are you from?
The only way to receive is to give first - Give and Get (Yagna)
People are moved by positive and confident people, more than by great products.
How you act toward others will be how they’ll act toward you.
We think we can easily see into the hearts of others based on the flimsiest of clues. We jump at the chance to ju
course. We are nuanced and complex and enigmatic. But the stranger is easy.
Ask and disclose part of social exchange - be open and authentic so others can understand you - talk about your
Communication is like dancing with a partner: No matter how skilled you are, success depends on the other pers
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Marketing
A strong marketer must be constantly alert to the changing desires of its customers so that the company is supplyin
desired today, not what used to be desired.
In the competitive world of commerce it is vital to make the potential customer aware of the advantages of a produ
Brand names are not guarantees. But they do reduce the range of uncertainty. Since brand names are a substitute f
knowledge, how valuable they are depends on how much knowledge you already have about the particular product
Someone who is very knowledgeable about photography might be able to get a bargain on an off-brand camera or l
second-hand camera or lens. But the same person might be well advised to stick with well known brands of new ste
if his knowledge in that field falls far short of his expertise in photography.
Owning a piece of consumers mind - which means you don’t have to change the product very often
80% of advertising is about creating pavlovian associations
The bottom line is that brands can create durable competitive advantages, but the popularity of the brand matters m
whether it actually affects consumers' behavior. If consumers will pay more for a product - or purchase it with regul
because of the brand, you have strong evidence of a moat. But there are plenty of wellknown brands attached to pr
companies that struggle to earn positive economic returns.
Popular brands aren't always profitable brands. If a brand doesn't entice consumers to pay more, it may not create a
Product brand continumm - is it a product or a brand
Cost of creating value < price < perceived value
A firm must have a strong enough customer orientation to recognize changes in customer needs and interests and t
promptly to those changes in an appropriate manner. This capability should lead to generating a flow of new produc
than offset lines maturing or becoming obsolete.
Some companies do indeed charge higher prices than their competitors, but that merely reflects a higher cost of pro
brand to be moatworthy, it must confer pricing power that at least offsets any difference in costs.
petitive advantage.

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Shiv is Silence - Silence is Shiv - Bhanu as the off button

Oneness (Sattva) Selfishness (Rajas)

Blind and Thoughtless

Overcooked impure food

Giving with regrets

Sleep & Violence

Slothful (instant gratification)

Characteristics of good businesses

What are some barriers to entry?

Specialization - Adam's smith pin factory

• Let your hypothesis determine your analysis.

auss) made a nice profit.

w variables—like the discount warehouses of Costco

he bad businesses throw up painful decisions time after time.”

es a formidable economic moat.

of size are greater.

Is the business’s balance sheet strong or weak?

What is the company doing to maintain or improve profit margins?

eantime a lot of money can change hands.

ove or forecasts of future cash flows are revised.

ngs (a p/e of 10).

Braun's Five W's: Who, what, where, when and why.

First, arouse in the other person an eager want.

Keep it simple - short sentences and simple words

After someone hears your pitch . . .

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