Taking Sage advice from Warren Buffett

Businesses can learn a lot from Warren Buffett. Grovelands’ Mark Davies focuses on what he’s learnt in relation to management, investment, corporate finance and communication.

Grovelands’ Chairman and co-founder, Mark Davies, will be releasing a short series of blogs illustrating what he (and others) have learnt and can learn from Warren Buffett. This is the first blog in the series, prompted by Berkshire Hathaway’s recent purchase of Precision Castparts.

Photo of Warren BuffettThis short series of blogs sets out the things Warren Buffett (who I love) has taught me. These lessons have been principally focused on: management, investment, corporate finance and communication.

I am prompted to write this because of Berkshire Hathaway’s $32.5Bn purchase of Precision Castparts. By any standards, Warren has had a long and successful career. He is 83, has given away more money than I can imagine, and has built Berkshire to a $354Bn market cap firm. His investment track record is superb.

Take a look at: http://www.berkshirehathaway.com/. I particularly commend: http://www.berkshirehathaway.com/ownman.pdf

Warren runs a complex business and to do this he has some simple concepts that he uses. Grovelands is a much simpler and smaller business, which means we have taken Warren’s logic and simplified it even more.

One of the most important decisions we (and any firm) makes is who we will partner with or acquire, and what businesses we will start-up. The list below is based on Warren’s Owners Manual, and from his letters to shareholders. It works like a waterfall; point 1 needs to be satisfied before we move on to point 2 etc…

1. We want to be in business with people that we trust, we like, and we have similar principles to

2. Business must be primarily focused on service and quality and be open with our customers

3. Developing a new business needs to make strategic sense, but must also be in an area where we want to be

4. The business needs to (but not necessarily achieving immediately): grow strongly and steadily, be able to achieve a decent return and demonstrate that earning capacity will continue

5. Be big enough that the new business is worth the effort

6. The company should be soundly managed

7. And we want to work with businesses that are simple and we understand

Finally …

8. Assuming the above are satisfied, the investment should only be made at a reasonable price, with a margin of safety.

Based on the above principles, I get about 1 in 3 decisions right. For me this is a decent hit rate but I think Warren may do better!

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