Warren Buffett's Thoughts on Finding Good Managers
Finding the right managers is a huge part of Warren Buffett (Trades, Portfolio)'s investment strategy.
When he looks for companies to invest in, he is not just looking for companies with bright prospects. He is also looking for capable, successful and honest managers who can be left alone to do their jobs and achieve good returns for shareholders.
What to look for
There is no set template investors can use to replicate Buffett's process for finding able managers, but he has spoken in the past about the traits he looks for when assessing whether or not he would like to partner up with managers and their teams.
At the 1996 Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) annual meeting of shareholders, one shareholder asked Buffett if he could discuss how you decide what good management is and how you decide whether you have a good manager.
After proclaiming that "there's an enormous difference in the talent of American business managers," Buffett went on to explain that there was a straightforward test he liked to use to see if a manager was worth investing in:
You get some very able people, some terrific people, like Bill Gates (Trades, Portfolio), that we just mentioned. But you get a lot of mediocrity, too. And the test -- I think, in some cases, that it's fairly identifiable, who has done an extraordinary job. And we like people that have batted .350 or .360, in terms of predicting that they're going to bat over .300 in the future. And some guy says, you know, "I batted .127 last year. But I've got a new bat or a new batting coach," you know, some management consultant has come in and told them how to do it, supposedly. We're very suspicious of that. So we don't like banjo hitters who suddenly proclaim that they can become power hitters.
Alongside this test, the Oracle of Omaha went on to add that he likes to asses how a manager has treated his or her shareholders in the past.
A great example of the sort of managers Buffett was interested in was Tom Murphy of Cap Cities:
I mean, no one had either the ability -- no one could top his ability or integrity, in terms of the way he ran Cap Cities for decades. I mean, and you could see it in 50 different ways. I mean, he was thinking about the shareholders. And he not only thought about them, he knew what to do to forward their interests, and -- In terms of building the business, he only built it when it made sense, not when it did something for his ego or to make it larger alone. He did it when it was in his shareholders' interests.
No template for success
This is not a set template for finding good managers, but it is a helpful roadmap.
The number of managers in the American business world that fail to uphold their promises, and put shareholders above themselves, is relatively small. Unfortunately, it is not easy to separate the wheat from the chaff.
The only way to get to know a manager and their team is to spend time reading through annual reports and letters to shareholders. In doing so, you will get some idea as to how they treat their investors, and if they make good on promises or continually fail to meet objectives.
Of course, even the best managers in the world typically cannot turn around a struggling business. Thus, finding a good business is probably the first step investors should take before they go about assessing the quality of management. That being said, even good companies can be ruined by bad managers, so perhaps it is better to start with the management team first of all.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
Warren Buffett: It Is Not Always Worth Chasing After Growth
Warren Buffett: Risk Is 'Inextricably' Tied to Time
Charlie Munger: Extrapolating the Past Is 'Massively Stupid'
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This article first appeared on GuruFocus.
