The Warren Buffett Way, + Website, 3rd Edition

Chapter 3

Buying a Business

THE TWELVE IMMUTABLE TENETS

There is no fundamental difference, according to Warren Buffett, between buying a business outright and buying a piece of that business, in the form of shares of stock. Of the two, he has always preferred to directly own a company, for it permits him to influence the business’s most critical issue: capital allocation. Buying its common stock instead has one big disadvantage: You can’t control the business. But this is offset, Buffett explains, by two distinct advantages: First, the arena for selecting noncontrolled businesses—the stock market—is significantly larger. Second, the stock market provides more opportunities for finding bargains. In either case, Buffett invariably follows the same strategy. He looks for companies he understands, with favorable long-term prospects, that are operated by honest and competent people, and, importantly, are available at attractive prices.

“When investing,” he says, “we view ourselves as business analysts, not as market analysts, not as macroeconomic analysts, and not even as security analysts.”1 This means that Buffett works first and foremost from the perspective of a businessperson. He looks at the business holistically, examining all quantitative and qualitative aspects of its management, its financial position, and its purchase price.

If we go back through time and review all of Buffett’s purchases, looking for commonalities, it is possible to discern a set of basic principles, or ...