More Jewels:Buffett on Valuation

As the build up to the BRK shareholder meeting continues,i would like to share more excepts from a previous Buffett interview( this time taken from Harvard Investment Magazine).Here, Buffett outlines his criteria for valuing companies and gives us a peak into his thought processes.Indeed, its a fascinating look into one of the greatest investment minds ever and gives us invaluable advice into how to value companies which is crucial for successful investing.


Q: What do you stay away from when valuing a company?

Buffett: What I donʼt understand. Get a  x on your own limita-tions of knowledge. Ted Williams [the only Major League Base-ball player to hit .400, or a 40% success rate, over an entire sea-son] divided the strike zone into 77 areas. You only swing at the pitches you can hit with an average of .400. Also, I donʼt want to know the price of a stock as I value it. Knowing the price anchors your thoughts.

Q: What is the more valuable area of academic study, accounting or nance?

Buffett:Accounting is the more valuable. It is the language of business… A number of CEOs donʼt understand accounting. Some people have an intuitive grasp, [but] some people will try to cheat you and lie to you.

Q: Explain your business evaluation criteria.

Buffett: Where is this business going to be in 5 to 10 years? What is the moat? What protects it? With Coca-Cola, the moat is the brand name in the mind. Seeʼs Candies [a Berkshire Hathaway company] owns the boxed chocolates business in California and has been there since 1921. A boy buys a box of chocolates, and she kisses him: We own him. Other examples of moats: Microsoft operating systems; and Meg Whitman [CEO of pioneering online auction company eBay Inc., who] has all of the buyers and sellers. Businesses with moats are easy to value. How do you knock off Wrigley? — the Internet doesnʼt change the way people chew gum

(Excerpted from Harvard Investment Magazine)