Finance
by Warren Buffett, edited by Lawrence Cunningham
How does Buffett judge a business?
Every year Warren Buffett writes a long, plain-spoken letter to Berkshire Hathaway's shareholders. Lawrence Cunningham, a law professor, cut decades of them up and sorted them by subject. The result reads like a course in owning businesses, taught by a man who has done it since the 1960s.
Hear a sample · read by Laura
The first of Buffett's owner-related principles says Berkshire is a corporation in form and a partnership in attitude. He writes to shareholders as partners, and wants them to see a share as a slice of a real business they mean to keep.
Buffett began as a bargain hunter, buying poor businesses because they were cheap. Experience changed his mind. He concluded it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Book value records what has gone into a business. Intrinsic value is the cash it will produce from here on, discounted back to today. Buffett compares it to a college education. What it costs is its book value. The extra a graduate earns over a lifetime is its worth.
Should a company keep its profits or pay them out? Buffett's test is that every dollar kept back should, over time, create at least a dollar of market value for shareholders. If managers can't manage that, the owners would be better off with the cash.
Owners
Treat a share as a piece of a real business you'd be happy to own for years.
Managers
Back honest, able managers who run the company as if they owned all of it.
Mr. Market
The market is a moody partner. Use his wild prices, but never let them tell you what to think.
Your circle
Stick to businesses you really understand, and know where that circle ends.
Moats
Look for a company with a lasting edge that keeps rivals away, like a moat around a castle.
A story from the book
When Buffett took control of Berkshire Hathaway in 1965, it was a struggling New England textile maker. He spent twenty years trying to make it pay before closing the mills in 1985. His conclusion was that a brilliant manager rarely beats a business with bad economics.
One thing to try
Pick one share you own or want to. Write a paragraph on how the business makes money and why that should last ten years. If you can't, Buffett would say it sits outside your circle of competence, and you should leave it alone.
Knotd has the key ideas from 250+ non-fiction books, each in a few minutes, in plain words. The Essays of Warren Buffett comes with a Name That Idea round to make it stick.
Get the whole book on KnotdOpen in the appHow does Buffett judge a business? Every year Warren Buffett writes a long, plain-spoken letter to Berkshire Hathaway's shareholders. Lawrence Cunningham, a law professor, cut decades of them up and sorted them by subject. The result reads like a course in owning businesses, taught by a man who has done it since the 1960s.
Think like a partner; A wonderful company, fairly priced; What it's worth to you; The one-dollar test.
Pick one share you own or want to. Write a paragraph on how the business makes money and why that should last ten years. If you can't, Buffett would say it sits outside your circle of competence, and you should leave it alone.
Yes. Knotd has the key ideas from The Essays of Warren Buffett in a few minutes, in plain words, plus a Name That Idea round to test them. It's one of 250+ non-fiction books in the app.
