VALUE: After Hours (S07 E15): Warren Buffett – Balance Sheets Before Income Statements

During their recent episode, Taylor, Carlisle, and Rich Pzena discussed Warren Buffett – Balance Sheets Before Income Statements. Here’s an excerpt from the episode:

Jake: I don’t know though, because he gets monthly basically financial statements from, I think it was 49 companies he said that are internally and that he loves going through it. Another thing he said that I thought, and Rich, you probably appreciate this is he said that he likes to sit down– I’ve never heard him say this before. He likes to sit down eight- or nine-years’ worth of balance sheets and just go through the balance sheets of whatever company he’s looking at.

Tobias: Before he looks at the income statement.

Jake: Yeah. The income statement’s secondary and of course, you could imagine he’s building his own income statement as he’s looking the change in balance sheet year over year. But I thought that was interesting. I’ve never heard him say that before.

Tobias: What do you think, Rich?

Rich: I was going to say, I think there are people who, it’s a gift, I’ll say, to be able to look at a page of numbers and create a picture of what’s going on in the business. And for me, that’s always been second nature. But it’s not for everybody. So, I can understand about getting excited doing that.

Jake: Mm-hmm.

Tobias: You started with a net-net paper at least. Does that mean that you’re a balance sheet guy, first and foremost?

Rich: I’m much more of a balance sheet guy as the downside protection case than I am as– You don’t find the opportunity very often to buy hard assets below penny on the dollar. A dollar on the dollar. Usually there’s something associated with it like this giant cash drain going on or there’s evidence of historical unwise capital allocation or something. So, the idea that there are profitable businesses less than their net-net working capital just doesn’t exist.

Tobias: Not without some serious heir.

Jake: Yeah.

Rich: Correct.

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