Warren Buffet, chairman and chief executive officer of Berkshire Hathaway Inc., plays bridge at an event on the sidelines of the Berkshire Hathaway annual shareholders meeting in Omaha, Nebraska, U.S., on Sunday, May 6, 2018. Buffett said he doesn't want Berkshire Hathaway Inc. being a leader on cyber insurance because neither he nor others in the industry really know the risk. Photographer: David Williams/Bloomberg
Warren Buffett invests in businesses, not stocks. Warren only invests in a business he understands. Warren also wants to know the company's competitive advantage, and he wants to make sure the business will be worth more in 5-10 years than what he pays for it today. If he can check those boxes he is more inclined to invest in the business. I'm often asked how do I know what a company is worth investing in. Here are three things I look for:
1. The Leaders Do Not Have Clarity
I am very fortunate to have access and advise a lot of senior management in a slew of different industries. When I sit down with a company's top leaders I dive in deep and want to see if they have a strong understanding of their business, the industry and the broader economy. If the CEO and other executives do not have a strong grasp on these points, I can not in good faith recommend people invest in the business.
2. Flawed Growth Strategy
Every business needs to grow. Over the long run, the most successful businesses in the world are able to innovate and constantly grow. The second point I look for when determining if a business is worth investing in is to see if the company's leaders know how to scale and grow their business. In today's world it is not enough to know what to do- you actually have to know how to do it (proper execution). From where I sit, it is paramount that senior leaders know how to grow and execute on multiple levels.
Alex Shvarts, CTO of FundKite, a fast growing FinTech that provides funding to businesses across the U.S. told me via email, "Investing in a business is a lot more than algorithms and revenue charts. A business can look great on paper but be going up in flames internally, which is why it’s so important to do research into the types of people running the company as well as how the industry overall is operating. The business of investing can be a buyers and sellers’ market, so always pay attention to indicators of a struggling company during any market, bear or bull, that won’t be able to return your investment. Business is never just about business. It’s a people game and you need to be able to read others and their body language if you want to make smart decisions with your money. If you’re considering investing in a business, look beyond the company and into the industry and the employees." Alex brings up a few good points and he understands the importance of finding the right people before investing in the company.
3. Lousy Culture
The third criteria I look for is the company's culture. Are people happy, sad or blase? What is the overall mood like of the employees? Are people motivated and compensated properly? I don't mean just physical compensation, the culture needs to address the emotional, mental and physical needs of the people that work there as well. If the culture is sour, I prefer to look elsewhere because even if the numbers make sense, in the long-term a healthy culture provides a strong R.O.I.
Remember, these are just a few things I look for before investing in a new business. The world is full of opportunities and the key is to find them. Setting a high bar usually pays off very well for your money.
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