Warren Buffett's Management Tenets: Investing in Great Leaders

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Betting on the Jockey, Not Just the Horse

Warren Buffett has often said that he tries to buy good businesses run by able and honest managers. This highlights a key aspect of his investment philosophy: the importance of management. A great business can be destroyed by a bad manager, and a mediocre business can be turned into a great one by a good manager. For experienced traders, assessing the quality of management is a important part of the investment process.

The Qualities of a Great CEO

What does Buffett look for in a CEO? First and foremost, he looks for integrity. He wants to partner with people who are honest and who can be trusted to act in the best interests of shareholders. Second, he looks for talent. He wants managers who are skilled operators and who have a deep understanding of their business. Finally, he looks for passion. He wants managers who love their business and who are dedicated to its long-term success.

Case Studies in Management

Berkshire Hathaway's portfolio is full of examples of great managers. Tom Murphy and Dan Burke at Capital Cities/ABC were legendary for their operational excellence and their focus on shareholder value. The BNSF railway, under the leadership of Matt Rose, has been a model of efficiency and innovation. On the other hand, Buffett has also had his share of disappointments. His investment in the department store chain, Hochschild Kohn, was a failure, in part due to poor management.

Assessing Management as an Outsider

For individual investors, assessing the quality of management can be a challenge. You don't have the same access to management that Buffett does. However, there are still a number of things you can do. You can read the annual reports and the shareholder letters. You can listen to the conference calls. You can research the CEO's track record. And you can look at how the company is governed. Is the board of directors independent? Is executive compensation aligned with shareholder interests? These are all important questions to ask.