Warren Buffett on Circle of Competence and Business

In this video Warren Buffett talks about businesses, circle of competence, Coke and Asian crisis. Someone in the audience asks him if he ever bought a company where the numbers told him not to. Warren Buffett says that the best deals are those when numbers tell you not to. You buy a wonderful company and in 20 or 30 years it will be worth more. He once bought a windmill company, but these companies are cigar butts. It is just a one time sale with windmill companies. He also bought a street car company. The point is that the best buys are companies that are so good that you think you are overpaying.

Buffett bought Net Jets after he was a client for three years. He did not need a consultant because he knows the service from using it. He usually sees the quality of a business in 5-10 minutes, if you are not able to do this, you will not understand it in two months. This is a "Circle of Competence". It is important to stay in your circle, to be honest about what you do and do not understand. In his early years, Warren tried to become familiar with businesses, by talking to customers and employees.

The interesting thing about investing is that you don't need to learn anything new. If you learn something about a company 40 years ago, you still understand it, it's like a database in your head. Another person asks Warren Buffett how he thinks the Asian crisis affect companies like Coke. Coke recently announced that was going to miss projections. Coke market is growing faster outside US than in the US.

People don’t understand about Coke is that it does not have any taste memory. Even if you drink one every hour, you don't get sick of it. This is not true for orange soda or beer. So, people outside US can become heavy users. The average person in the US drinks 64 ounces of liquid a day, but you can have all 64 ounces by drinking Cola. This is the reason that sales of Coke will increase over time.

This video is Part 5 of 10 videos of this MBA Q&A Lecture with Warren Buffett. Watch Part 6 of Warren Buffett's Lecture.

Warren Buffet Quotes from this Video:

  • When buying a company privately, there are no negotiations. He will either take or reject your offer and you will either accept or reject his. In terms of his decision making, if he was happy yesterday not owning a company, he will be happy the next day if he still doesn’t own it.
  • You’re not just getting a cigar butt on the cheap
  • In terms of qualitative I probably understand the qualitative the moment I get the phone call
Submitted by YouTube Trader on Sun, 04/04/2010 - 09:58

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