Business Understanding Before Investment

“One must have a clear understanding of what a company does and how it actually makes money out of doing it, or even sometimes how it could make money out of doing it.”

“We look for businesses that possess a sustainable competitive advantage. Over time we have found that excellent businesses will possess many of the following attributes: •High returns on equity •A strong balance sheet with minimal debt •Attractive operating and profit margins •A dominant position in its industry •Significant brand recognition •Pricing power for its products •Growing revenues and earnings over time •Consistent free cash flow generation •Does it have honest capable management?”

“Most important of all, I discovered that if I was trying to solve a complex problem, I seemed compelled, *literally compelled,* to drill down to its essence, because when I got there—at the base level of understanding—my instinctual abilities would give me a surprisingly accurate sixth sense, allowing me to tease out the very core of the matter.”

“It’s a lot harder to come in on top of an organization than at the bottom if you want to know how a company actually works. And I’m no good unless I understand everything down to the smallest molecule. No one really wants to tell the chairman anything other than good news and no one at Paramount was volunteering anything given how I was dropped onto the top of the Paramount mountain.”