During the 2001 Berkshire Hathaway Annual Meeting, Warren Buffett highlights a common issue among CEOs who struggle to assess the value of businesses they aim to acquire.
Feeling unsure about asset allocation, they often turn to investment bankers for advice. However, this advice is typically biased, as investment bankers are financially incentivized to recommend deals that benefit them, not necessarily the CEOs or their companies.
Buffett attributes this problem to inadequate business school education, which fails to teach practical skills in business valuation. To address this knowledge gap, Buffett and his partner Charlie Munger write and speak on the subject, hoping to improve understanding of valuation principles.
Here’s an excerpt from the meeting:
Buffett: Yeah, see, Charlie and I see CEOs all the time who, in a sense, don’t know how to think about the value of businesses they’re acquiring. And then, you know, so they go out and hire investment bankers.
And guess what? The investment banker tells them what to do, tells them to do it because they get 20X if they do it and X if they don’t do it. And guess how the advice comes out.
So it’s a — when a manager of a business feels helpless, which he won’t say out loud, but inwardly feels helpless in the question of asset allocation, you know, you’ve got a real problem.
And there aren’t — they have not gone to business schools that have given them any real help, I think, in terms of learning how to think about valuation in businesses. And, you know, that’s one of the reasons that we write and talk about it some, because there’s a gap there.
You can watch the entire discussion here:
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