1994: How can investors find companies with good management?

AUDIENCE MEMBER: You talk about good management with corporations and that you try and buy companies with good management.

I feel that I have about as much chance of meeting good managers, other than yourself, as I do bringing Richard Nixon back to life.

How do I, as an average investor, find out what good management is?

WARREN BUFFETT: Well, I think you judge management by two yardsticks.

One is how well they run the business and I think you can learn a lot about that by reading about both what they’ve accomplished and what their competitors have accomplished, and seeing how they have allocated capital over time.

You have to have some understanding of the hand they were dealt when they themselves got a chance to play the hand.

But, if you understand something about the business they’re in — and you can’t understand it in every business, but you can find industries or companies where you can understand it — then you simply want to look at how well they have been doing in playing the hand, essentially, that’s been dealt with them.

And then the second thing you want to figure out is how well that they treat their owners. And I think you can get a handle on that, oftentimes. A lot of times you can’t. I mean it — they’re many companies that obviously fall in — somewhere — in that 20th to 80th percentile and it’s a little hard to pick out where they do fall.

But, I think you can usually figure out — I mean, it’s not hard to figure out that, say, Bill Gates, or Tom Murphy, or Don Keough, or people like that, are really outstanding managers. And it’s not hard to figure out who they’re working for.

And I can give you some cases on the other end of the spectrum, too.

It’s interesting how often the ones that, in my view, are the poor managers also turn out to be the ones that really don’t think that much about the shareholders, too. The two often go hand in hand.

But, I think reading of reports — reading of competitors’ reports — I think you’ll get a fix on that in some cases. You don’t have to — you know, you don’t have to make a hundred correct judgments in this business or 50 correct judgments. You only have to make a few. And that’s all we try to do.

And, generally speaking, the conclusions I’ve come to about managers have really come about the same way you can make yours. I mean they come about by reading reports rather than any intimate personal knowledge or — and knowing them personally at all.

So it — you know, read the proxy statements, see what they think of — see how they treat themselves versus how they treat the shareholders, look at what they have accomplished, considering what the hand was that they were dealt when they took over compared to what is going on in the industry.

And I think you can figure it out sometimes. You don’t have to figure out very often.

Charlie?

CHARLIE MUNGER: Nothing to add.