Warren Buffett’s track record makes him one of the investing community’s all-time greats.
From 1965 to 2021, he generated an incredible annual return of 20%.
In Buffett’s 1989 letter to his shareholders, he shared his key considerations when evaluating a company as an acquisition opportunity.
Given his accomplishments, it will be useful for any investor to learn from Buffett.
Since Buffett looks at stocks as a piece of a business, stock market investors can still benefit from understanding how Buffett thinks through whole acquisitions.
There are several criteria in Buffett’s checklist but let’s look at a very important one today.
Management in place (we can’t supply it)
Buffett believes that having a capable management team is critical for the success of any business.
It is essential because management is in charge of making business decisions that give direction to a company.
If the management team of a company is incompetent or can’t keep up with changes in the company’s industry (either due to ineptitude or wilfulness), it could spell disaster for the company over the long term.
One of the most common issues observed in companies is the problem of executives not being able to voice their opinions or concerns on business issues.
This often leads to the company being a one-man show, with only the top brass calling the shots.
The purpose of everyone below is only to reassure him or her that the decision made was a correct one.
This form of pandering is often cited as the reason for the downfall of once-great companies.
To avoid this fate, it is important that a company’s management recognise that multiple brains are better than one.
Executives’ opinions and thoughts should be treated as important and can contribute to the growth and overall prosperity of the business.
Younger executives can also bring fresh views to the table which could lead to new ideas.
Leaders staying on
Another important reason for Buffett to have this criterion is not really applicable to us as stock market investors.
When Buffett makes acquisitions, he wants the acquired companies’ senior leaders to stay on.
He dislikes a situation where he has to search for a team of leaders to manage a company he has just acquired.
It’s not a matter of convenience (as it will take considerable time to search for a new leader), but also speaks to Buffett’s trust in the acquired entity’s leadership to want them to stay on and helm the business.
Get Smart: Ensure management is capable and hardworking
As share investors, a listed company will often have a management team in place, so this is not something we have to worry about.
But, you do need to make sure that any company you’re interested in investing in has a good management team in place.
A lousy management team will end up destroying shareholder value over time while a great one can help you to compound your wealth many times over!
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Disclaimer: Royston Yang does not own any of the companies mentioned.
