Warren Buffett and Charlie Munger, the iconic investing duo behind Berkshire Hathaway Inc., revealed their unique approach to sizing up businesses and acquisitions during their 1997 annual meeting. The key takeaway? A five-minute test that circumvents the typical due diligence process, focusing instead on the core economic characteristics of a business.
According to Buffett, he and Munger can evaluate a company in five minutes. They don’t need exhaustive studies, legal examinations or checking leases and titles to make an investment decision. "We really can tell you in five minutes whether we’re interested in something," Buffett said. The test is a culmination of their collective wisdom gathered over decades in the business, alongside a series of mental filters that they’ve developed to assess companies.
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Buffett likens their knowledge to that of a baseball aficionado, stating that being in the business for over 40 years has made them familiar with virtually every significant company. "We’ve got a fix on what we don’t understand, and then we don’t care to know any more about them," Buffett said.
One example Buffett cited was Flight Safety, a company Berkshire had never invested in but had known about for over 20 years. When they finally decided to make a move, they did so without the conventional rigors of due diligence. Buffett said they never looked at leases, set foot in any of their global training centers, or visited the headquarters. Yet, this strategy has never cost them significantly. "What costs us money is when we mis-assess the fundamental economic characteristics of the business," Buffett said.
While the average person may not have the resources or the experience of Buffett and Munger, the concept of a quick assessment can still apply, particularly when looking at investing in startups. Investors can use a simplified version of the five-minute test to gauge their initial interest in a new venture. For example, Mode Mobile, a new company that aims to offer side-hustle opportunities using smartphones, could catch your eye for its innovative approach. While you may need more than five minutes to make an investment decision, the test can at least help you quickly identify ideas that pique your interest, warranting further investigation.
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Munger, the vice-chairman of Berkshire Hathaway, affirmed Buffett’s comments, "People underrate the importance of a few simple big ideas." Munger believes that it’s essential to focus on key aspects that make or break a business. According to him, these simple but critical filters have worked effectively for Berkshire Hathaway.
Buffett and Munger’s philosophy seems to underscore the importance of understanding the core economic aspects of a business over traditional methods of due diligence. This approach minimizes dependence on external evaluations, which, according to Buffett, usually affirm what the hiring company wants to hear. It also allows them to act quickly, an often underrated quality in the investment world.
Their strategy seems to pose an intriguing question for investors and analysts: could understanding the essential, economic characteristics of a business be more valuable than conventional due diligence? As the track record of Berkshire Hathaway suggests, Buffett and Munger’s five-minute test could hold merit for those willing to look beyond the conventional wisdom of acquisitions and investments.
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