Chapter 3

Buying a Business


Answers to Multiple-Choice Questions

1. B. Buffett prefers to own a company outright as opposed to taking a minority stake through purchasing shares. The reason behind this is the ability to influence what he considers the most critical issue in a business: capital allocation.

2. D. The disadvantages of buying shares but not owning a business are offset by two distinct advantages. First, the stock market is a large arena where Buffett finds more potential opportunities for investment. Second, the stock market offers more opportunities for finding bargains.

3. B. When Warren Buffett evaluates a purchase or stock investment, he approaches the investment from the perspective of a businessperson.

4. C. There are three business tenets of the Warren Buffett Way: Is the business simple and understandable? Does the business have a consistent operating history? Does the business have favorable long-term prospects?

5. C. Warren Buffett considers stocks an abstraction, and he does not think in terms of market theories, macroeconomic cycles, or sector trends. He makes his investment decisions based only on how a business operates.

6. A. Warren Buffett is able to maintain a high level of knowledge about Berkshire’s businesses because he purposely limits his selection to companies that are within his area of financial and intellectual understanding.

7. C. Buffett avoids purchasing companies that are either solving difficult business problems ...

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