Over the years, Warren Buffett (Trades, Portfolio) has criticized business schools for the way they teach students. Buffett has disagreed with business schools' views on the cost of capital and efficient market theory, to name just two points. He's also attacked the way business schools teach students about business valuation.
Buffett was taught how to value companies by the dean of value investing, Benjamin Graham. Over the years, he's developed and refined the strategy, building his own views into Graham's fundamental base.
The Oracle of Omaha has never laid out the exact process he uses to value businesses, and that may be because there isn't one. He has so much experience evaluating companies, he knows what to look for and what to avoid without consulting a guide.
The best way to learn
Buffett has made some comments in the past about the best way to learn company valuation. Indeed, at the 1998 Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) annual meeting of investors, he proclaimed that if he were to run a business school, Buffett would get students to study business after business, rather than focusing on other topics. Here's what he said at the time:
"I were teaching a course on investments, there would be simply one valuation study after another with the students, trying to identify the key variables in that particular business, and evaluating how predictable they were first, because that is the first step."
The aim of this process, he explained, would be to get students to recognize essential qualities to help them find a handful of successful investments:
"If something is not very predictable, forget it. You know, you don't have to be right about every company. You have to make a few good decisions in your lifetime. But then when you find — the important thing is to know when you find one where you really do know the key variables — which ones are important — and you do think you've got a fix on them. Where we've been — where we've done well, Charlie and I made a dozen or so very big decisions relative to net worth, but not as big as they should have been. And we've known we were right on those going in. I mean they just weren't that complicated. And we knew we were focusing on the right variables and they were dominant. And we knew that even though we couldn't take it out to five decimal places or anything like that, we knew that in a general way we were right about them. And that's what we look for. The fat pitch. And that's what I would be teaching — trying to teach students to do. And I would not try to teach them to think they could do the impossible."
Buffett has issued similar advice many times in his career. Finding good investments isn't an exact science; it is an art. The only way to get good at this art, like any other creative business, is practice. There's no short cut to this process; that's why good investing isn't easy. It requires years of experience and learning.
Buffett has been studying businesses for decades, so he knows what makes a good company and what does not. He's built the experience through thousands of hours of investment research and study.
He has a general interest in business as well, which gives him a bit of an advantage as he's always interested in learning more about companies and sectors. This has to be one of the Oracle's top advantages compared to the rest of the investment sector.
Buffett is always learning and improving. There's no short-cut to this process. Investors have to want to do the work to get ahead.
Disclosure: The author owns shares in Berkshire Hathaway.
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