The Business of Value Investing.pdf

Effective Business Valuation 111

reasoning are right. ” That ’ s also why Warren Buffett, the best inves-

tor on the planet, spends a lot of time focusing on businesses with

durable competitive advantages, such as the brand value that Coca -

Cola offers, or the monopoly - like industry that American Express

operates in. They are dominant businesses with consistent long -

term earnings power, which adds a layer of certainty when forecast-

ing future cash fl ows.

The Value of Management

No matter how much due diligence on a business is performed,

all investing requires a leap of faith. Most of that faith is placed

in the ability of corporate managers to utilize the assets of the

business to maximize shareholder value in an honest and ethi-

cal manner. While the ability and competence of management is

crucial and should be considered when making any investment,

investors should carefully read and understand these quotes from

Warren Buffett:

Our conclusion is that, with a few exceptions, when manage-

ment with a reputation for brilliance tackles a business with a

reputation for poor fundamental economics, it is the reputa-

tion of the business that remains intact.

You should invest in a business that even a fool can run,

because someday a fool will. 2

Management is important, but a good company is even more

important. You will often hear value investors speak volumes on

the superb management overseeing the companies that they have

invested in, but if you look deeper, I ’ d imagine you will fi nd that

many of these investments are already excellent businesses. Great

management at a great business is a home run. If you get both, you

will be rewarded many times over if you stick with the investment.

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