In the latest Graham & Doddsville Newsletter, Gavin Baker explains why Warren Buffett doesn’t need to do due diligence. Here’s an excerpt from the interview:
G&D: So, switching gears, it seems like you have a large investible universe. A lot of the companies that you own don’t necessarily fit in one thematic box. How do you think about narrowing that universe to the businesses that warrant deeper dives?
Baker: Everybody looks up to Warren Buffett, but almost no one does what he says he does. Warren Buffett has said he doesn’t do due diligence.
This was a statement about Precision Castparts which is one of his largest acquisitions ever. And everybody just ignored that comment, but it was a profound comment. And what he meant by it was that he didn’t need to do due diligence. He had been reading every 10-K published by Precision Castparts for decades. He didn’t sit down and do some 60-day deep dive. He didn’t need to because he had been doing due diligence on Precision Castparts for decades.
That idea is similar to my philosophy. If I need to do a deep dive, we are not going to invest.
You can think of my investible universe as the companies where I don’t need to do deep dives because I have been doing due diligence on them for many years or even several decades.
The goal is to grow that universe, steadily and incrementally year by year, with the understanding that I’m not going to do six months of work on a company and then suddenly it is going to be in the investible universe.
And by the way, just so you know, this idea that I only invest when I really know the company, it does not improve my batting average. It doesn’t improve the initial decision making at all. But it does help me make better decisions when I am wrong and this is a big part of investing.
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