The Buffett/Munger Investment Checklist

“When investing, we view ourselves as business analysts—not as market analysts, not as macroeconomic analysts, and not even as security analysts.”

—Warren Buffett, Letter to Shareholders, 1987

The Buffett/Munger Investment Checklist: A Framework for Business Analysis and Valuation

How to go about when performing a business analysis, and what to look for in doing so, is nothing but the holy grail of investing. A business analysis could be carried out in a number of different ways. You just have to make sure that you have a way that works for you, a process for analyzing and evaluating businesses that is continually updated along the way as you learn about new facts and circumstances.

When building your own framework for business analysis, you should always remember to keep things simple, since it most likely will tend to get hard enough anyway in the end. Also, you don’t have to come up with your own stuff, you are perfectly free to use everything there is from great men that’s come before, as Charlie Munger noted when he said: 

I believe in the discipline of mastering the best that other people have figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.

To set the scene to sort of create an investing map to follow it’s worth considering what Warren Buffett once wrote:

In our view, though, investment students need only two well-taught courses—How to Value a Business, and How to Think About Market Prices.

To be able to value a business, you have to understand the business. And to be able to say that you understand a business you would likely want to know about its products/services and revenue sources, operating leverage, financial leverage, competitive position, industry characteristics, etc. These questions all belong to the first section of the Buffett/Munger Investment Checklist, i.e., understanding the business.

When you understand a business and its management, and have evaluated the long-term prospects as favorable, the next step is to value the business, i.e., come up with an estimate of intrinsic business value that is to be compared to the current market price of the business. If you manage to, and have the luck, to check each of the four main parts of the checklist, you most likely have an investment worth making.

In his 1977 letter to shareholders Warren Buffett explained his and Charlie’s process for analyzing and evaluating businesses.

We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term.  In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.

So, already back in 1977 Warren Buffett laid out the checklist that he and Charlie go through when evaluating a business. This will serve as a good starting foundation for anyone who wants to build their own investment checklist. Each checklist point could then be expanded to included a number of supporting sub-questions needed for coming up with a conclusion about the “main” checklist question being evaluated.

From the above quote and discussion, keep in mind the foundations of our Buffett/Munger Investment Checklist:

  1. Understand the business
  2. Favorable long-term prospects
  3. Operated by honest and competent management
  4. Very attractive price

To make it easier to remember the top four checklist points, memorize the acronym “UFOV.” That’s easy to remember, right? It’s just “UFO” plus a “V.”

As always, when talking about the subject of checklists, make sure to use them in an appropriate wat and also remember Warren Buffett’s words that “A checklist is no substitute for thinking.”

BMBC

“Take a simple idea and take it seriously.”

—Charlie Munger

Berkshire Hathaway 2016 Annual Shareholders Meeting + Transcripts

Transcripts

Guy Spier on Checklists for Investors

“A checklist is a way of managing your own mind and guarding against your own proclivities, so it needs to be based on this kind of self-awareness.” ―Guy Spier, The Education of a Value Investor

TEOAVI1Investment Checklists and Surgeons

In The Education of a Value Investor Guy Spier discusses the subject of checklists, and how to develop and use them in investing. This is the main subject of chapter 11―An Investor’s Checklist: Survival Strategies from a Surgeon. Spier shares some of his own insights and his view of checklists as a tool to prevent investors from making mistakes.

What’s the Use in Using an Investment Checklist?

Let’s consider a few points before moving on, to get a quick refresher on the subject of investment checklists, and why a checklist could serve you as an investor good in your investing process.

All quotes below are taken from Guy Spier’s book as referred to above.

Who? An investment checklist for you yourself as an investor.

“…it’s important to recognize that my checklist should not be your checklist.”

What? An investment checklist containing broader categories (“including themes such as leverage and corporate management”) made up of individual checklist items (such as “has this management team previously done anything self-serving that appears dumb?”).

“…design checklist items that would help to prevent us from repeating […] mistakes.”

When? As a tool to be used before we make a final decision to buy or not buy into a certain business.

“Before pulling the trigger on any investment, I pull out the checklist from my computer or the filing cabinet near my desk to see what I might be missing.”

Where? As an integral part of your ongoing investment process, and as a tool in your business analysis and investing.

“The checklist is invaluable because it redirects and challenges the investor’s wandering attention in a systematic manner. I sometimes use my checklist in the middle of the investing process to deepen my understanding of a company, but it’s most useful right at the end as a way of backstopping myself.”

Why? Minimize the probability of permanent loss of capital. Our mind sometimes plays tricks on us and we better watch out and do our best to mitigate these so-called biases (or heuristics) that affects our decision making. As Warren Buffett once said: “Rule No. 1: Never loose money. Rule No. 2: Never forget rule number one.”

“The brain is simply not designed to work with meticulous logic through all of the possible outcomes of our investment decisions.” 

“The goal in creating a checklist is to avoid obvious and predictable errors.”

“…the items on [pilots’] checklists are designed to help them avoid mistakes that have previously led to plane crashes. In investing too, the real purpose of a checklist is to serve as a survival tool based on the haunting remembrance of things past.”

An Investment Checklist as a Way to Avoid “Cocaine Brain”

Spier talks about a certain problem, a mental state that he refers to as the “cocaine brain” and explains as…

“…the intoxicating prospect of making money can arouse the same reward circuits in the brain that are stimulated by drugs, making the rational mind ignore supposedly extraneous details that are actually very relevant. Needless to say, this mental state is not the best condition in which to conduct a cool and dispassionate analysis of investment risk.”

To keep it simple. Each checklist item you chose to put up on your checklist, you include for one reason, and one reason only. That is, to avoid the cocaine brain mental state, and to make your best effort in trying to make sure not to break the two rules mentioned above by Buffett.

Checklist Items: The Warren Buffett Way

The Oxford Dictionaries defines the word “Checklist” as:

A list of items required, things to be done, or points to be considered, used as a reminder. (Source: Oxford Dictionaries

As any checklist, an investment checklist is often made up of individual checklist items, that together constitute broader categories, that in turn form the checklist as a whole. Let’s look at an example to see what these broader categories may look like, by looking at a well-known quote from Warren Buffett taken from his 1977 letter to shareholders, where he lays out four things that he looks for in a business (emphasis added).

“We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive priceWe ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term.  In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.”

The quote above contains four points (or broader categories): 1) an understandable business, 2) favorable long-term prospect, 3) honest and competent people, and 4) an attractive price. For each one of these points one needs to determine what factors (individual checklist items) to consider to be able to reach a conclusion. Another quote from Buffett could give some advice on what to look for when evaluating management (emphasis added).

Passion is the number one thing that I look for in a manager. IQ is not really that important. They need to be able to work well with others and the ability to get people to do what you want them to do. I’d say intelligence, energy, integrity. If you don’t have the last one, the first two will kill you. All you have is a crook who works hard. If a person doesn’t have integrity, you want them dumb and lazy.” (Source: Buffett FAQ)

And how could you find the information you need to make a judgement call like this? Again, let’s turn to Buffett for some advice (emphasis added).

“Almost everything we learn is from public documents. I read Jim Clayton’s book, for example. There is adequate information out there to evaluate businesses. We do not find it particularly helpful to talk to managements. Often managements want to come to Omaha to talk, and they come up with all sorts of reasons, but what they really hope is that we become interested in their stock. That never works. The numbers tell us a lot more than the managements. We don’t give a hoot about anyone’s projections. We don’t want even want to hear about it.” (Source: Buffett FAQ)

Checklist Items: A Few Examples from Guy Spier

In the book Spier gives a few examples of different kinds of checklist items in connection to different case studies that he goes though to show the reader the reasoning behind how he derived the items in question.

To put each checklist item below in the proper context, I urge everyone to check out Spier’s book and to read each of the case studies. In this post I will just briefly quote the questions as examples of what a checklist item could look like.

The first case study called “The Man Who Lost His Cool” is about the author’s investments in different for-profit education companies. Here the reader gets two checklist items that seem to belong in the corporate management category.

CHECKLIST ITEMS

“Are any of the key members of the company’s management team going through a difficult personal experience that might radically affect their ability to act for the benefit of their shareholders?”

“Also, has this management team previously done anything self-serving that appears dumb?”

The second case study is called “A Tortuous Tale of Tupperware,” and it’s about the Tupperware Plastics Company. This investment turned out to be a failure, and a failure that failed slowly. The reason? Because “…there was too much competition, and the high price of its products had become a serious obstacle to growth.” In this case, Spier concludes that he “…failed to ask the most obvious question: does this product offer good value for money?” Spier further concludes that “This misadventure taught me an invaluable lesson: I want to invest only in companies that are a win-win for their entire ecosystem.” With ecosystem Spier refers to “the value chains.”

CHECKLIST ITEM

“Is this company providing a win-win for its entire ecosystem?”

In case study number three “What Lies Beneath?” Spier goes on to discuss his investment in CarMax―“the Wal-Mart or Cotsco of secondhand cars.” CarMax business is heavily dependent on the company being able to provide its customers with financing, since without financing customers won’t be able to buy a car. In other words, debt markets was (and is) of utmost importance for CarMax’s business model. So, what happened? The financial crisis happened, and customers were not able to obtain the credit needed to buy a car, and as a result sales dropped and the stock price dropped too.

Spier’s greatest insight from his CarMax investment was that the “…situation taught [him] how critical it is to discern whether a business is overly exposed to parts of the value chain that it can’t control.” 

CHECKLIST ITEM

“How could this business be affected by changes in other parts of the value chain that lie beyond the company’s control? For example, are its revenues perilously dependent on the credit markets or the price of a particular commodity?”

The fourth, and the last, case study is “How I Lost My Balance.” This case study is about a food company called Smart Balance (since renamed Boulder Brands), and about the author’s “narcissistic hubris” that led him to pay too high a price for the business.

CHECKLIST ITEMS

“Is this stock cheap enough (not just in relative terms)?”

“Am I sure that I’m paying for the business as it is today—not for an excessively rosy expectation of where it might be in the future? Does this investment satisfy me psychologically by meeting some unmet personal need? For example, am I keen to buy it because it makes me feel smart?”

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

Are You Stuck In the Past? Or Is Benjamin Graham Still Relevant in 2015?

Is Benjamin Graham still relevant in 2015? Or is he not? Maybe just to some extent, or is Benjamin Graham more relevant now than he has ever been before?

Maybe these are just another redundant questions, or could they be the most important ones to ask yourself. Asking questions often means trying to find new answers, new answers regarding circumstances not considered earlier, or as a way of questioning your own beliefs and the way you look at things around you.

Why am I asking this question to myself—Is Benjamin Graham still relevant in 2015? Does it really matter? Maybe not everyone. But to all of us trying to improve our value investing skills by following the investment concepts laid out by Benjamin Graham, the question is of utmost relevance I believe. Why? Because if they are not relevant today in 2015, we have to go looking for other sources of knowledges to serve as our main guide out in the investing sphere.

Albert Einstein said:

The important thing is not to stop questioning. Curiosity has its own reason for existing.

John Maynard Keynes said:

When my information changes, I alter my conclusions. What do you do, sir?

Keynes also said:

The difficulty lies not so much in developing new ideas as in escaping from old ones.

From the above quotes, we should keep in mind the importance of “not to stop questioning” from Einstein, and also that we always have to be prepared to “alter [our] conclusions” when “[our] information changes” from Keynes. But, this may be easier said than done, as implied by the last Keynes quote, that the greatest danger when it comes to new ideas, even if our new ideas are hard to come by, might be escaping from the old ones. Why is that?

In his speech—The Psychology of Human Misjudgment—at Harvard Bussiness School in June 1995 Charlie Munger was, among other kinds of biases, talking about the bias from commitment and consistency tendency as (emphasis added) “…a superpower in error-causing psychological tendency: bias from consistency and commitment tendency, including the tendency to avoid or promptly resolve cognitive dissonance. Includes the self-confirmation tendency of all conclusions, particularly expressed conclusions, and with a special persistence for conclusions that are hard-won.”

Charlie also said that (emphasis added) “The human mind is a lot like the human egg, in that the human egg has a shut-off device. One sperm gets in, and it shuts down so that the next one can’t get in. The human mind has a big tendency of the same sort … According to Max Plank, the really innovative and important new physics was never really accepted by the old guard. Instead, a new guard came along that was less brain-blocked by its previous conclusions. And if Max Plank’s crowd had this consistency and commitment tendency that kept their old conclusions intact despite disconfirming evidence, you can imagine what the crowd that you and I are a part of behaves like … What people are shouting out they are pounding in.” 

The most important thing (as Howard Marks would have said) is to:

  1. Never stop asking questions.
  2. Be aware of the consistency and commitment bias and how it affects us.
  3. Be willing to change your mind when the facts change. The “truths” of yesterday may, or will certainly, not be the “truths” of today or the future.

So, is Benjamin Graham relevant? I do think so. Of course not everything he said or put down on paper or in his books is relevant, but the main ideas still seem to serve the ones willing to listen rather good.

For the article that sparkled my mind about the topic of this post, see Net Net Hunter’s article Is Benjamin Graham Still Relevant in 2015?

To read about some of the concepts of Benjamin Graham, see here:

Another great read is What Has Worked in Investing from Tweedy, Browne Company LLC.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

Notes From The 2014 Berkshire Hathaway Annual Meeting

“When people talk, listen completely. Most people never listen.” ― Ernest Hemingway

Yesterday night I encountered the transcript of the comments made by Warren Buffett and Charlie Munger at the 2014 Berkshire Hathaway Annual meeting. Go here to read the transcript. 

The notes were a great read and I picked out some interesting parts which are shown below. All markings in the quotes below made by me.

PO14

Intrinsic value vs book value

Q5: Jay Gelb (JG): Intrinsic value, you signal undervalued versus intrinsic value. What can you do about it? Would you consider an IPO of the operating units?

WB: No on the second part of that. We try to explain intrinsic value (and I’ve never seen an annual which uses that term) where there is a difference between carrying value and real value. GEICO is carried at $1bil over tangible, but it is really worth $20bil over. We are eager to buy stock at 120% of book value. Book is $230bil. And obviously I think that $45bil over that figure we are getting a bargain over intrinsic. It changes from day to day, but not a lot, but changes over the quarters and years. If you ask Charlie and me to write down a figure as to intrinsic value, I think we’d be within 5% of each other, but not 1%. We will continue to try to give information to shareholders on the important units at Berkshire. Some of our small businesses may be worth $1bil or even $2bil, but the small ones don’t have a big impact. Railroad, utility and insurance are big, and we try to use the words and numbers that we use when thinking about those businesses ourselves. We only believe in repurchasing shares when we can buy at a discount to intrinsic value. The 120% is a loud shout out as to a figure that we think is significantly below intrinsic. Some companies buy in shares to cover options. You shouldn’t buy it in if shares are overvalued. Negating dilution isn’t right when shares are expensive. If management can buy a dollar bill for 90 cents, they are doing shareholders a good job. If spend $1.10, not helping.”

About Marmon and Iscar: “WB: Those were two important acquisitions, partly due to accounting peculiarities. Carry value is much lower than intrinsic.

Earning power

“WB: … Our goal is to buy big businesses. We are about building earning power. We are looking to add earning power to Berkshire. We don’t get opportunities that often. If opportunity is large enough, we can dip into huge reservoir of securities.”

Interest rates

“CM: … At Berkshire not many long term bonds are being bought.”

Risk of technology change

“WB: … All businesses should think about what can mess up their position. We look at all of our businesses as subject to changeGEICO set out in 1936 to operate with low costs and pass on those prices to the customer, on a necessity being auto insurance. They originally did it with mail offerings to government employees. They’ve adapted over the years, to widening classifications, to US mail, to telephone, to internet and social media. And in there they stumbled, when they left government employees and got too aggressive about expanding, and they really did go broke. We want managers who are thinking about change, and what is needed for the business model in the future. We know it won’t look the same. BNSF is looking at LNG for locomotives. Our businesses are strong and are generally not subject to rapid change, but sometimes slow change can be harder to see and lull you to sleep easier versus rapid change which you can see. I will make mistakes in future, that is guaranteed. We never make bet‐the‐company decisions that cause real anguish. Occasionally they work out very well. In 1966, we bought a department store in Baltimore. There was nothing dumber. The $6mil in that store became $45bil over time in Berkshire. You have to be very alert, and Charlie and I and our directors think about it.”

CM: I spoke earlier about the desirability of removing ignorance piece by piece. Another trick is scrambling out of your mistakes, it is enormously useful. We had a sure to fail department store, a trading stamp business sure to fold and a textile mill. Out of that comes Berkshire. Think about how we would have done if we had better start! [laughter]

WB: My uncle wrote a letter in 1942 that the day of the chain store was over. Our grocery store went out of business in 1969. The wish being father to the thought.”

Heinz earnings 

“WB: It was a reasonably run food company with 15% pretax margins for many years, not an unusual operating margin in food business. I think the margins will significantly improved from historical figures, have to watch quarter to quarter. What Bernardo has done is restructure the business model and the brands are as strong as ever, and they will have structurally lower costs. I don’t want to name a number, you will find it out soon enough.”

What to do and where to look if 23 years old

Q39: Station 2, New Jersey. Tech and entrepreneurship, if you were 23 year old, in what non‐tech industry would you start a business and why?

WB: I’d probably do what I did when I was 23. I would look at lots of companies, and talk to lots of people, and learn about lots of industries. I would see CEOs of 8 or 10 coal companies. I often didn’t make appointments, but they almost always would see me. I would ask them, if they had to put all of their money into any coal company except their own, and go away for 10 years, which one would it be? And which would they sell short over 10 years and why? If I did that, I would know more about the coal companies than any manager would. But you wouldn’t learn about how to start Google or Facebook that way. You need real curiosity about it, it has to turn you on. Asking questions about coal companies? I mean really, you have to be a little odd too. I might find an industry that particularly interested you, and you might become very well equipped, and can start or go to work for someone good. If you are open to things and keep learning things you’ll find something.

But it is not a bad system to use. You really learn a lot by asking. I sound like a Yogi Berra quote perhaps. But if you talk to enough people about something they know a lot about, people like to talk. Here we are talking ourselves. You will find your spot. I was very lucky, I found what fascinated me when I was 7 or 8 years old. If you are lucky you will find it early.

WB: I have everything in life I wanted. Standard of living does not equate with cost of living. There is point where you get inverse correlation. My life would be worse if I had 6 or 8 houses. It doesn’t correlate. You can’t have more than that. It makes a difference up to a point. You can start thinking differently at x dollars. But it doesn’t make a difference at 10x or 1000x.”

Inflation

…How does management factor into valuing instrinsic value. Which company do you fear the most, as even Coca‐Cola has their Pepsi?

WB: Actually Ben Graham didn’t get too specific about intrinsic value in terms of calculations. Now it is equated rightly with private business value. Aesop was the first who came up with it. It is intrinsic value if you can foresee the future, the present value of all cash that will be distributed between now and Judgment Day. You put money in and you take money out. One in hand is worth two in bush. The question is how sure are you that two are in the bush, how far away is bush, what are the interest rates ‐‐ Aesop wanted to leave us something to play with over next two thousand years so he didn’t spell it all out. In calculating it, Ben would say he wanted two dollars of cash in the bush and pay a dollar. Fischer would use qualitative factors to estimate the number of birds in the bush. I started out very influenced by Graham, so more quantitative, but Charlie came along and said look more at qualitative. If you buy McDonald’s franchise, you think about the cash in, the cash out, when, and at what discount.

CM: There is nothing in business school that teaches people to do what we do at Berkshire.”

“WB: Inflation would hurt us, but other businesses more. Some assets would do better under inflation. If drones set off and drop $1mil in every household, would everyone be better off? Berkshire would be worse off. Trick is to find out you have $1m before anyone else does. You don’t create wealth with inflation, but you can move it around. You don’t with a firm like Berkshire, our earnings per share up, intrinsic value per share would be up but, unless we leveraged the businesses, the value per share in real terms would go down.”

CCD

Acquisitions

“CM: Sum total of all acquisitions in America has been lousy. It is the nature of successful companies that they will be talked into dumb deals. It has been path to wealth for us, but luckily many don’t want to be peculiar in our way.

WB: When we read that a company we own but don’t control is going to make an acquisition, I’m more likely to cry than smile. But we love them ourselves. I have sat in on hundreds of acquisition discussions conducted by people I didn’t control. Most have been disasters

CM: Some are mediocre.

WB: Look at GEICO ‐ it had been an incredible business until the 1970s. They made acquisitions after getting back on track and then took their eyes off the ball. Accounting cost of those two acquisitions was poor but not disastrous. But secondary effects were huge. It was a dozen years there that they couldn’t get back. We bought half the company, so it was wonderful for Berkshire. It is human nature, CEOs have animal spirits and supporting staff senses that they like to do things. They keep coming in with deals. Investment bankers are calling them daily. All these forces push towards deals. We’ve tried very hard to not be eager to do deals, just to be eager to do deals that make sense. That would be harder if we had strategy departments pushing us. The setting in which you operate can be very important.

Worst case scenarios and BP

“CM: Big surprise was British Petroleum. No one thought loss from one well would be many billions of dollars. After that I would have less enthusiasm for drilling in Gulf. Such a big loss can offset any possible gain. The biggest rail accident cost $200m.”

Returns and capital spending

Q55: Station 8, New Hampshire. Looking at page 64 segment data for the energy business, when I take ebitda less capex, the result is negative operating cashflow. When I repeat exercise in each of last five years, in best years, $300m of operating cash flow. Divide by tangible assets, 0.8% return, why allocating capital to a business with such low returns?

WB: You were doing great until return on tangible assets. We love the math you describe, as long as we get return on capital investment. We are looking forward to putting more capital in, as long it is treated fairly, and we will get appropriate returns on that. It is not cash minus increased capex, it is operating earnings less depreciation. There are times when no net investment is required, but we prefer where net investment must be higher because we get more capital in and our bet is that regulators will treat us fairly in future. One reason we believe this is true is that we have done so much better than many at delivering electricity at lower rates than charged by most. In Iowa there is a public utility, and our rates are significantly below competitors. A friend with a farm who is served by two utilities tells me that rate from us is dramatically lower than the competitors. We have a deserved good reputation with regulators, including safety. They welcome us when we come to new states. If we can put new money into those projects, we will get good return. But you will get negative returns if you include adding to capital spending. This is somewhat similar at the railroad.

CM: if numbers you recited come from a declining department store, we would hate it. But we have confidence that the reinvested capital will give us a good return from a growing energy business. It is that simple.

WB: Greg, can you quote some rates?

Greg Abel: We are generally lowest quartile, if not cheapest. We recently took the first rate increase in Iowa in 16 years, and we don’t see one in near future. There is a 1000 megawatt project adding up to $1.9billion, and deploying over 2 years and we are earning an 11.6% return on it. We try to keep our capital close to depreciation. But the lion share of our capex is growth capital.”

Habits

“Habits are such a powerful force in everyone’s life.”

Mental Model: Compound interest

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” ― Albert Einstein

“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.” ― Charlie Munger

“We’ve going to compound it at a reasonable rate without taking unreasonable risk or using leverage. If we can’t do this, then that’s just too damn hard.” ― Charlie Munger

Back in 1963 in his letter to partners Warren Buffett wrote about the joys of compounding explaining the difference of compounding depending on the level of growth over different time periods – see image below. Click on image to enlarge.

CompInt

In the Snowball Warren said Anything times zero is zero.” So, the lesson here is to always remember Warren’s advice Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

Corporate Governance According to Charles T. Munger

When analyzing a business as a possible future investment an investor needs to form an opinion about corporate governance, i.e. whether the business is run in the interest of shareholders or not.

In his shareholder letter for fiscal year 2007 Warren Buffett wrote about what kind of businesses that turn him and Charlie, and summarized it as follows.

“Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag.”

Today I read a paper titled Corporate Governance According to Charles T. Munger. The paper discusses corporate governance and “How […] an organization [should] be structured to encourage ethical behavior among organizational participants and motivate decision-making in the best interest of shareholders?” CM1

A good start to widen your circle of competence in getting a better understanding about the area of corporate governance, is to read the paper and listen carefully to what Charlie has to say.

The paper can be found here.