One simple test is whether the company’s financial statements are easily understandable or are full of obfuscation. Are non-recurring or extraordinary or unusual charges just that, or do they have a nasty habit of recurring?
If management talks more about the stock price than about the business, we are not interested. What the company said one year & what happened the next.
Warren’s Way franchise companies with strong consumer brands, easily understandable business, robust financial health, and near-monopolies in their markets. Buffett also wants to see managers who set & meet realistic goals, build their businesses from within rather than through acquisition, allocate capital wisely, & do not pay themselves 100 million dollar jackpots of stock options. Buffett insists on steady & sustainable growth in earnings. Companies that grow primarily through acquisitions are called ‘serial acquirers’ & the similarity to the term ‘serial killer’ is no accident.
The intelligent investor should recognize that market panics can create great prices for good companies & good prices for great companies.
Shareholders are justified in raising questions as to the competence of the management when the results are unsatisfactory in themselves when results are poorer than those obtained by other companies that appear similarly situated.
A company’s cash belongs to shareholders, not its managers.
When you buy a stock, you become an owner of the company. Its managers, all the way up to the CEO work for you. Its board of directors must answer to you. Its cash belongs to you. Its business is your property. If you don’t like how your company is being managed, you have the right to demand that the managers be fired, the directors be changed, or property be sold.
You should judge the efficiency of management by comparing each company’s profitability, size & competitiveness against similar firms in its industry.
In short, most managers are wrong when they say that they can put your cash to better use than you can. Paying out a dividend does not guarantee great results, but it does improve the return of the typical stock by yanking at least some cash out of the managers’ hands before they can either squander it or squirrel it away.
