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4 Key Criteria Warren Buffett Looks For In His Investments

Warren Buffett’s track record makes him one of the investing community’s all-time greats. From 1965 to 2016, he generated an incredible annual return of 19%. In Buffett’s 1989 letter to his shareholders, he shared his key considerations when evaluating a company as an acquisition opportunity.

Given his accomplishments, it would be useful for any investor to learn from Buffett. (Since Buffett looks at stocks as a piece of a business, stock market investors can still benefit from understanding how Buffett thinks through whole acquisitions.) There are six criteria in Buffett’s checklist.

In previous articles, I’ve looked at the first, second, and third criteria. They can be found here, here, and here. In this article, let’s study the fourth criterion:

“Management in place (we can’t supply it)”

Buffett’s fourth criterion is one of the most important in his list of six, in my opinion. Having a capable management team is critical for the success of any business.

It is essential because management is the one that makes business decisions which give direction to a company. If the management team of a company is not capable, or can’t keep up with changes in said company’s industry (either due to inaptitude or wilfulness), it could spell disaster for the company over the long term.

One of the most common issues observed in companies is the problem of executives not being able to voice their opinions or concerns on business issues. This often leads to the company being a one-man show, where only the top brass is calling the shots and everyone below is only there to reassure him or her that the decision made is a correct one. This issue is often cited as the reason for the downfall of once-great companies.

To avoid this fate, it is important that a company’s management recognise that multiple brains are better than one. Executives’ opinions and thoughts should be seen as important. This is because executives are usually younger, and can bring a fresh view to the table which could lead to new ideas.

Another important reason for Buffett to have this fourth criterion is not really applicable to us as stock market investors. When Buffett makes acquisitions, he wants the acquired companies’ senior leaders to stay on. He does not want a situation where he has to search for a team of leaders to manage a company he has just acquired.

As stock market investors, a listed company will often have a management team in place, so this is not something we have to worry about. But, do make sure that any company you’re interested to invest in has a good management team in place. If you enjoyed this, stay tuned for more on Buffett’s acquisition criteria in the coming days!

[Editor’s note: Articles on Buffett’s fifth and sixth criteria have been published. They can be found here and here.]

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