Warren Buffett: We Can Tell In The First Sentence Whether An Investment Is Worth Pursuing

During the 1997 Berkshire Hathaway Annual Meeting, Warren Buffett discussed the importance of understanding a business and whether it has a sustainable edge. He also points out that they can often tell in the first sentence of a conversation whether an investment opportunity is worth pursuing. Here’s an excerpt from the meeting:

CHARLIE MUNGER: Well, we’ve tried to do a good deal of that, and —

Opportunity cost is a huge filter in life. If you’ve got two suitors who are really eager to have you, and one is way the hell better than the other, you do not have to spend much time with the other. And that’s the way we filter stock buying opportunities.

Our ideas are so simple, people keep asking us for mysteries, when all we have is the most elementary idea.

WARREN BUFFETT: Yeah. The first filter we probably put it through is whether we think — and we know instantly — whether it’s a business we’re going to understand, and whether it’s a business that — if it passes through that, it’s whether a company can have a sustainable edge, you know.

And that gets rid of a very significant percentage of the things people have —

They always want to tell you some story or anything. And I’m sure they regard me and Charlie as very arbitrary, in terms of, you know, in the middle of the first sentence saying, “Well, you know, we appreciate the call, but we’re not interested.”

I mean, you know, they just think if they explain something — and I get letters on this all the time.

But we really can tell, in the middle of the first sentence, usually, whether those two factors exist. And if we can’t understand it, obviously, it’s not going to have — we can’t make a decision as to whether it has a sustainable edge.

And if we can’t understand it, we, very often, can come to the conclusion that it’s not the kind of the business where it will have a sustainable edge.

So 98 percent of the conversations we can end, you know, in the middle of somebody’s first sentence, which, of course, goes over very big with the caller, but — (Laughter)

And then, sometimes if you’re talking about an entire business, we can tell by who we’re dealing with whether a deal’s ever going to work out or not.

I mean, it — if there’s an auction going on, we don’t want to — we have no interest in talking about it. And it just isn’t going, you know, it isn’t going to work.

If someone is interested in, essentially, doing that with their business, you know, they’re going to sit down and want to renegotiate everything with us all over again after the deal is done.

And we’re going to have to buy the business two or three times before we get through.

You just see all these things coming.

You can watch the entire discussion here: