Warren Buffett: What It Means To ‘Understand’ A Business

Johnny HopkinsStock Screener2 Comments

In this interview in Switzerland, Warren Buffett discussed what he means by buying a business he understands. Here’s an excerpt from the interview:

We don’t look for specific sectors. We do look for businesses that I can understand.

Now when I say understand that means where I feel that I have a high degree of confidence in my ability to see what they’re going to look like 5,10, 20 years from now.

It isn’t that I don’t understand say the software products in general of a Microsoft you know but I don’t know how that industry is going to develop over 10 or 20 years.

I don’t… I didn’t know that Google was going to come along in terms of search, or all kinds… so anything that’s rapidly developing, that has lots of change embodied in it, by my definition I won’t understand.

It may do wonders for society. It may have what appears to be a very bright future but I don’t bring anything to that game where I know… not only I don’t know more than the other fellow. I don’t know as much as the other fellow in evaluating what the industry will look like in 10 years.

I look at businesses that are reasonably easy to evaluate. Where their products… how they will fit into the economic picture. How their economics will look in a five or 10 or 20 year period.

Take an extreme example. I can understand Nestle you know I mean obviously… and you can understand that, anybody can that’s had any experience in business can look at that company and figure out in a general way where it will be in five or ten years.

And we’re looking… Nestle isn’t going to be on the list but we’re looking for businesses like that that are quite understandable. I don’t go out and say I’m looking for the steel industry or I’m looking for the you know whatever it maybe office equipment industry, or something of the sort.

You can watch the Q&A session here:

 

 

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2 Comments on “Warren Buffett: What It Means To ‘Understand’ A Business”

  1. Just a heads up this wasn’t that recent per the opening paragraph, I believe it took place in 2008.

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