Buffett: Why You Shouldn’t Invest In A Business That Even A Fool Can Run

Buffett: Why You Shouldn’t Invest in a Business That Even a Fool Can Run by Fundoo Professor

A post in a Facebook Inc (NASDAQ:FB) group called Charlie Munger Fan Club prompted me to write this note on that group. I thought of reproducing it here (with minor changes).

“You should invest in a business that even a fool can run, because someday a fool will.” Warren Buffett’s famous quote, is often misunderstood. When he spoke those words, I don’t think he meant them strictly. Some investors I know, however, disagree with me. They cite other quotes which reinforces the viewpoint.

Here is the first one, from his 2007 letter:

“A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the low- cost producer (GEICO, Costco COST) or possessing a powerful world-wide brand (Coca-Cola KO, Gillette, American Express Company (NYSE:AXP)) is essential for sustained success. Business history is filled with “Roman Candles,” companies whose moats proved illusory and were soon crossed.

Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.

Additionally, this criterion eliminates the business whose success depends on having a great manager. Of course, a terrific CEO is a huge asset for any enterprise, and at Berkshire we have an abundance of these managers. Their abilities have created billions of dollars of value that would never have materialized if typical CEOs had been running their businesses.

But if a business requires a superstar to produce great results, the business itself cannot be deemed great. A medical partnership led by your area’s premier brain surgeon may enjoy outsized and growing earnings, but that tells little about its future. The partnership’s moat will go when the surgeon goes. You can count, though, on the moat of the Mayo Clinic to endure, even though you can’t name its CEO.”