2005: What are your most important criteria for selecting managers?

AUDIENCE MEMBER: Simon Denison-Smith from London.

You talk a lot about the importance of selecting terrific managers.

I’d just like to understand what your three most important criteria are for selecting them, and how quickly you can assess that.

WARREN BUFFETT: Yeah. I’ll give you two different answers.

The most important factor, subject to this one caveat I’m going to give in a second, is a passion for their business.

We are frequently buying businesses from people who we wish to have continue manage than them and where we are, in effect, monetizing a lifetime of work for them.

I mean, they’ve built this business over the years. They’re already rich but they may not be rich in the liquid sense. They may have all their money, or a good bit of it, tied up in the business, so they’re monetizing it. They may be doing it for estate reasons or tax reasons or family reasons, whatever.

But we really want to buy from somebody who doesn’t want to sell. And they certainly don’t want to leave the business.

So we are looking for people that have a passion that extends beyond their paycheck every week or every month for their business.

Because if we hand somebody a hundred million or a billion dollars for their business, they have no financial need to work. They have to want to work. And we can’t stand there with a whip. We don’t have any contracts at Berkshire. They don’t work, as far as I’m concerned.

So we hope that they love their business and then we do everything possible to avoid extinguishing, or in any way dampening, that love.

I tell students that what we’re looking for when we hire somebody, beyond this passion, we’re looking for intelligence. We’re looking for energy. And we’re looking for integrity.

And we tell them, if they don’t have the last, the first two will kill you.

Because if you hire somebody without integrity, you really want them to be dumb and lazy, don’t you? I mean, the last thing in the world you want is that they are smart energetic. So we look for those qualities.

But, we have generally — when we buy businesses, it’s clear to us that those businesses are coming with managers with those qualities in them. Then we need to look into their eyes and say, do they love the money or do they love the business?

And if they love — there’s nothing wrong with liking the money. But if — what it’s really all about is that they built this business so they can sell out and cash their chips and go someplace else, we have a problem, because right now we only have 16 people at headquarters and we don’t have anybody to go out and run those businesses.

So we — it’s necessary that they have this passion and then it’s necessary that we do nothing to, in effect, dampen that passion. Charlie?

CHARLIE MUNGER: Yeah. The interesting thing is how well it’s worked over a great many decades and how few people copy it. (Laughter and applause)