Investing and the Art of Due Diligence
Buffett: Well, what we’re doing in investment – and what everybody does – is we’re laying out money now to get more money back later on.
Now, let’s leave the market aspect of the asset out of it. When you buy a farm, you really aren’t thinking about what the market on it is going to be tomorrow, next week, or next month. You’re thinking about how many bushels of beans or corn per acre you can get, and what the price is likely to be. You’re looking to the asset itself.
And in the case you lay out, the first question you have to ask is, do I understand enough about thus business so that the financial statements can tell me the information that is useful to me to make a judgement about what the future financial statements are going to look like? And in a great majority of cases, the answer would probably be no.
But I’ve bought stocks the way you’re describing many times. And they were in businesses that I thought I understood where if I knew enough about the financial past, it would tell me enough about the financial future that I could buy. Now, I couldn’t say the stock was worth X or 105% of X or 95% of X. But if I could buy it at 40% of X, I would feel that I had this margin of safety that Graham talked about, and I could make a decision.
Munger: I think there’s one metric we use that others should use more. We tend to prefer the business that makes so much money, that it drowns in cash. One of the main reasons for owning it is you have all of this cash coming in.
Buffett: It’s a lot easier to understand a business that’s bringing you a check every month…But I bought a lot of things off of financial statements. And there are a lot of things that I wouldn’t buy if I knew the management was the most wonderful in the world – because if there in the wrong business, it really doesn’t make much difference how good the management is.
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