62 THE WARREN BUFFETT WAY
that have guided his decisions. If we extract these tenets and spread them
out for a closer look, we see that they naturally group themselves into
four categories:
- Business tenets.Three basic characteristics of the business itself
- Management tenets.Three important qualities that senior man-
agers must display - Financial tenets.Four critical f inancial decisions that the com-
pany must maintain - Value tenets.Two interrelated guidelines about purchase price
Not all of Buffett’s acquisitions will display all the tenets, but taken
as a group, these tenets constitute the core of his investment approach.
They can also serve as guideposts for all investors. In this chapter, we
look at the f irst group—the characteristics of the business—and study
how some of Buffett’s investment decisions ref lect those tenets.
For Buffett, stocks are an abstraction.^3 He does not think in terms of
market theories, macroeconomic concepts, or sector trends. Rather, he
makes investment decisions based only on how a business operates. He
believes that if people choose an investment for superf icial reasons instead
of business fundamentals, they are more likely to be scared away at the
f irst sign of trouble, in all likelihood losing money in the process. Buffett
concentrates on learning all he can about the business under considera-
tion, focusing on three main areas:
- Is the business simple and understandable?
- Does the business have a consistent operating history?
- Does the business have favorable long-term prospects?
I want to be in businesses so good even a dummy can make
money.^2
WARRENBUFFETT, 1988