The importance of buying good companies.

Warren Buffett, despite his prowess, required 20 years to recognize how important it was to buy good businesses.


Warren Buffett and Charlie Munger do not see many fundamental differences between the purchase of those companies that ended up in their control (controlled company) and the purchase of shares of other holdings in the market (marketable security).

• In each case, they try to buy into businesses with favourable long-term economics.
• Their goal is to find an outstanding business at a sensible price, not a mediocre business at a bargain price.

"Charlie and I have found that making silk purses out of silk is the best that we can do; with sow's ears, we fail."

Warren Buffett, despite his prowess, required 20 years to recognize how important it was to buy good businesses. In the interim, he searched for "bargains" (true to the teaching of his teacher, Benjamin Graham) - and had the "misfortune" to find some.

"My punishment was an education in the economics of short-line farm implement manufacturers, third-place department stores, and New England textile manufacturers."

Warren Buffett and Charlie Munger may misread the fundamental economics of a business. When that happens, they will encounter problems whether that business is a wholly-owned subsidiary or a marketable security, although it is usually far easier to exit from the latter. (Indeed, businesses can be misread. Witness the European reporter, who, after being sent to this country to profile Andrew Carnegie, cabled his editor, "My God, you'll never believe the sort of money there is in running libraries.")

In making both control purchases and stock purchases, they try to buy not only good businesses, but ones run by high-grade, talented and likeable managers. If they make a mistake about the managers they link up with, the controlled company offers a certain advantage because they have the power to effect change. In practice, however, this advantage is somewhat illusory. Management changes, like marital changes, are painful, time-consuming and chancy.

"In any event, at our three marketable-but-permanent holdings this point is moot: With Tom Murphy and and Dan Burke at Cap Cities, Bill Synder and Lou Simpson at GEICO, and Kay Graham and Dick Simmons at The Washington Post, we simply couldn't be in better hands."