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Buying a Business
B
erkshire Hathaway, Inc., is complex but not complicated. It owns
(at the moment) just shy of 100 separate businesses—the insurance
companies described in the previous chapter, and a wide variety
of noninsurance businesses acquired through the income stream from
the insurance operation. Using that same cash stream, it also purchases
bonds and stocks of publicly traded companies. Running through it all is
Warren Buffett’s down-to-earth way of looking at a business: whether
it’s one he’s considering buying in its entirety or one he’s evaluating for
stock purchase.
There is no fundamental difference, Buffett believes, between the
two. Both make him an owner of the business, and therefore both deci-
sions should, in his view, spring from this owner’s point of view. This is
the single most important thing to understand about Buffett’s investment
approach: Buying stocks means buying a business and requires the same
discipline. In fact, it has always been Buffett’s preference to directly own
a company, for it permits him to inf luence what he considers the most
critical issue in a business: capital allocation. But when stocks represent a
better value, his choice is to own a portion of a company by purchasing
its common stock.
In either case, Buffett follows the same strategy: He looks for com-
panies he understands, with consistent earnings history and favorable
long-term prospects, showing good return on equity with little debt,
that are operated by honest and competent people, and, importantly, are