Warren Buffett On Buying Companies

Warren(ˈwôrən) Buffett(ˈbəfət) On Buying Companies

Excerpted(ˈekˌsərpt) from Buffett’s 2019 Letter to Berkshire(ˈbərkSHər) Hathaway(ˈhaTHəwā) Shareholders

Tom Murphy(ˈmərfē), a valued director of Berkshire and an all-time great among business managers, long ago gave me some important advice about acquisitions(ˌakwəˈziSH(ə)n): “To achieve a reputation as a good manager, just be sure you buy good businesses.”

Over the years Berkshire has acquired many dozens of companies, all of which I initially(iˈniSH(ə)lē) regarded(rəˈɡärd) as “good businesses.” Some, however, proved disappointing; more than a few were outright disasters. A reasonable number, on the other hand, have exceeded my hopes.

In reviewing my uneven(ˌənˈēvən) record, I’ve concluded that acquisitions are similar to marriage: They start, of course, with a joyful wedding – but then reality tends to diverge(dəˈvərj) from pre-nuptial(ˈnəp(t)SHəl) expectations. Sometimes, wonderfully, the new union delivers bliss(blis) beyond either party’s hopes. In other cases, disillusionment(ˌdisəˈlo͞oZHənmənt) is swift. Applying those images to corporate(ˈkôrp(ə)rət) acquisitions, I’d have to say it is usually the buyer who encounters unpleasant(ˌənˈplezənt) surprises. It’s easy to get dreamy(ˈdrēmē)-eyed during corporate courtships(ˈkôrtˌSHip).

Pursuing that analogy(əˈnaləjē), I would say that our marital(ˈmerədl) record remains largely acceptable, with all parties happy with the decisions they made long ago. Some of our tie-ups have been positively idyllic(īˈdilik). A meaningful number, however, have caused me all too quickly to wonder what I was thinking when I proposed(prəˈpōz).

Fortunately, the fallout from many of my errors has been reduced by a characteristic shared by most businesses that disappoint: As the years pass, the “poor” business tends to stagnate(ˈstaɡˌnāt), thereupon(ˌT͟Herəˈpän) entering a state in which its operations require an ever-smaller percentage of Berkshire’s capital(ˈkapədl). Meanwhile, our “good” businesses often tend to grow and find opportunities for investing additional capital at attractive(əˈtraktiv) rates. Because of these contrasting trajectories(trəˈjekt(ə)rē), the assets(ˈaset) employed at Berkshire’s winners gradually(ˈɡrajo͞oəlē) become an expanding portion(ˈpôrSH(ə)n) of our total capital.