When considering whether to buy a business, Buffett, not surprisingly, looks for managers who are much like himself. That naturally makes it much easier for him to "like, trust, and admire" them, which he regards as three necessities.
Essential qualities of a manager
To earn Buffett's liking, trust, and respect, managers must show that they possess three essential qualities, all of which are exemplified by Buffett. They must be able to live up to the following statements:
* "I am candid with everybody with whom I have dealings - shareholders, colleagues, employees, customers, and others."
* "I am rational in all my management decisions and actions, analyzing every situation dispassionately before deciding on what is best."
* "I resist the 'institutional imperative' - I do what I think is right, rather than what others are doing."
Can you honestly say the same? If not, why not? Write down the reasons, and consider what changes you can make to pass the triple standard. There is no excuse for falling short.
Producing results
When considering a potential purchase, rule out any company with top managers who do not tell the whole truth, who do not think and act logically, or who follow the herd. Then look at the company's track record. Good management should produce good results.
Characteristics of Good Management
* Always puts the owners' interests before management's.
* Shows consistent increases in sales and profits from operations.
* Achieves above-average returns.
* Reinvests profits very effectively.
* Acts to ensure that long-term growth prospects are favourable and will be achieved.
The quality issue
The quality of financial results is all-important. How were the high return on equity and superior profit margins achieved? Was it through heavy debt?
Buffett prefers companies with minimal borrowings, and so should you. Do high margins result from good management or from a monopoly?
Only take an interest in companies in which quality is high. High price plus high quality should be profitable, although it is inherently unstable, since it invites competition and narrows the market.
The Three Golden Policies
1. Minimize costs
2. Maximize sales
3. Optimize ratio of sales to capital
Following these three golden policies is a sign of well-focused management, guaranteeing a company a high return on equity, high owner-earnings, good margins, and a good return on reinvested capital. Such results all point to a company that will be a good potential investment; it takes good management to mine so much gold, and a good investor to share the mining.
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