I used to be utterly amazed at Warren Buffett’s keen stock picking abilities. I remain in awe, but I am starting to develop a theory on just how he is so good. Stories often mention an hour or 2–and many times much less–meeting with the Oracle and the head honcho of company X, and when the meeting is over, Buffett’s made a deal to either buy the company outright, or buy a major stake in it.
He tells us himself, that he looks for companies that don’t sell commodities (read: no Budweiser, no airlines, no soy beans), and companies that have or can build sustainable competitive advantage. And we know that before the meeting, Buffett’s analyzed the company’s market, market share, and future opportunities.
The key thing that amazed me, was how after 30 to 100 minutes, Warren has seen enough to make multi-million or even billion dollar decisions.
Well after working for 3 multi-billion dollar corporations, and a few small businesses thrown in, and working with a plethora of idiots at every level, I think I know how he does it:
- Research industry
- If industry has long term prospects and company has good existing or future market potential, then
- Meet with CEO/Owner
- If it becomes clear in the meeting that CEO/owner is neither an idiot nor a moron, then
- Make a deal
Okay, he probably sets the bar just a bit higher than we say in step 4, but you get the idea!