Principles for Choosing the Company Your Work For: Warren Buffett

The Insights of Warren BuffettThere are Five Segments to Warren Buffett’s Management Principles:

  1. Pick the right business: own, manage, or work for the right business, you need to work for the one with the best economics.
  2. Delegate authority: learn how to give up control safely.
  3. Find a manager with the right qualities: integrity, intelligent, and a passion for the business. You need to cultivate this in yourself, and in the right candidates.
  4. Motivate your work force: you need to motivate your managers so that they are all that they can be within your company.
  5. Learn the managerial axioms for different problems: there are axioms for handling dishonest employees, and keeping costs low.

1. How to Find the Kind of Business that Offers the Greatest Career Opportunities: you need to pick the right business to be part of, and work for. You could have a life of drudgery, or success depending on this crucial choice. Certain kinds of companies that have inherent value will not even need a good manager to be successful. There are number of characteristics that identify these businesses.

There is a big difference between a business that can bootstrap, and those that cannot.* The best businesses are those that have a key service or a strong brand name product that never has to change; there is no R&D, and no retooling of the plant for design changes. The capital needed for growth can be used over the year, all the money that it saves is easy money that doesn’t need to be invested in innovation. The capital needed for growth is internal, thus making the managers look great.

Coca-Cola Has A Strong Competitive AdvantageFor example, Coca-Cola doesn’t have to redesign its product, so they can spend time to pay big bonuses, and buying other companies. General Motors on the other hand, produces automobiles and have to spend billions on new designs, and therefore needs to compete with Toyota et al. So, which one would you work for? The one that is producing excess cash or the one that is internally burning its funds on R&D? Excess cash makes management look good. Getting paid more money is always good.

*Remember that Warren Buffet hates technology companies.

Competitive Advantage: the company that is best is that one that has a lock down on its competitive landscape. These companies never really change, and are easy to sell. This equates to higher profit margins, and they are awash with cash. You need to have a durable competitive advantage. There are three kinds of such companies;

1) sell a unique product,

2) sell a unique service,

3) are a low cost buyer or seller of the products that people need daily.

1)    Sell a Unique Product: examples are Coors, Kraft, Coca-Cola, P&G, Philip Morris. Through the process of branding their products, they are what we think of when we buy. Wrigley Gum is another great example. Marlboro cigarettes owns a piece of the consumer’s mind. So these mega brands can also sell higher profits, higher inventory turnover, and therefore these companies are easy to identify because they have strong yearly earnings. These special companies, offer us the opportunity for managerial super-stardom. They also have the money to buy new businesses.

2)    Sell a Unique Service: examples are H&R Block, Amex, Wells-Fargo etc. Like lawyers and doctors, people need these services inevitably, but unlike lawyers and doctors, these companies are institution specific as opposed to people specific. The economics of selling a unique service is that you don’t have to build a production plant. You can also own a piece of the consumers mind. No matter how bad the recession, H&R Block never has much of a slow-down in tax filing business, management does not need to work around union demands, debt, or the buying whims of customers.

3)    Low Cost Buyer: example is Walmart. Instead of big margins, these companies seek out big volume. For a business like this to succeed, you need to have the highest volume, and you need to have the best price in town. The low cost buyer and seller offers the least potential for management and employment opportunities.

If you business doesn’t fit into one of these categories then you are wasting your time.

**Please note that Buffett owns stock in every company mentioned above.

[This is a précis of Warren Buffett’s Management Secrets. More is forthcoming]

About Palestine and Israel – How to Resolve the Arab-Israeli Conflict: The Territorial Dimension

The Economist has a new article on sea based urban-planning a la Venus Project, here. If the incentives are compelling, such projects will come to fruition, but the incentives for mutual gain need to be laid out clearly.

Below is another thought experiment>>>>>>>>

israel
THE ARAB – ISRAELI CONFLICT: Territory, both for religious and practical reasons, has been a significant barrier to resolving this ongoing struggle in the Middle East. The proposed solution, in part, requires that Israel build islands in the Mediterranean off the shore of Tel Aviv or elsewhere along the west coast of Israel. Such constructions might serve to entice or could at least reduce the Israeli settlers’ need for territory in the West Bank where the value of the once sacred land has continued to depreciate given the bloodshed and the cycles of violence. Instead, Israel could invest its energy into human-made islands thus expanding its fertile territorial spaces westward while simultaneously reducing contestation with Palestinians. This policy point would also help to alleviate contestation with Arab negotiators who have a strong incentive to debunk the Israeli territorial bargaining chip regarding the West Bank. In doing so, both sides sabotage the peace talks.

israel-land-mass

As outlandish as it may seem, Islands could be constructed in the shape of anything from the Star of David to massive non-descript islands. This land would be constructed for agricultural or residential or industrial purposes. The construction of these islands would require similar techniques implemented in the construction of the Tokyo International Airport. In the short-term, the cost would be immense…

israeli-cost-of-peace

THE COSTS OF PEACE: Yes, it is true that the costs to construct such islands would be immense as stated above, particularly if the Mediterranean sea is deep off the coast of Israel, further research required…BUT in the longterm, the cost of the project is far cheaper than the immense financial costs (and human cost) of the Arab-Israeli Conflict. It would also heighten Israel’s commitment to green energy, and technology since these new islands would be susceptible to changes in global sea levels. The islands could cater to tourists, school trips from abroad, and expatriots who have been displaced previously. Tourists from Jewish communities outside of Israel could enjoy Israel spiritually, while also having a relaxing vacation free from the threats-to-their-lives posed by current unrest and conflict in the region.

palestinian-cost-of-peace

The ultimate consequences of this territorial resolution would be to bridge one of the more prominent areas of contestation in the Arab-Israeli Conflict: A peace deal would allow Israel’s economy to continue to grow, while allowing Palestinians to form their own country with an emphasis on economic growth in peaceful, mutual prosperity. These islands would be instrumental in achieving that end. As long as the Israeli settlers agree to these terms, and agree to either move to better artificial land, or share the land with the Palestinians, a viable solution is within reach. This is just a thought experiment worth mentioning as it has never been raised as part of the solution to this conflict, and is worthy of some debate as to its merits.

DEBATE w/ TWO ACADEMICS. One from Oxford and the other from LSE

I can honestly say that this is not a bad idea to help deal with the settler problem in Israel. Instead of stealing land from the West Bank, Israel could ostensibly extricate the settler’s from the territories and place them on man made islands off the coast. Making islands is nothing new; the majority of Manhattan is reclaimed land, so are the islands off the coast of Dubai. I think this is something that the Israeli government should strongly consider.

With all due respect, I have to disagree with the above. I am not sure that it will solve any of the problems. This is because the problem of settlement has nothing to do with overpopulation, or other related concerns. Rather, it has everything to do with fervent normative commitments. The settlers want to expropriate the Holy Land. Not sure islands would be thought upon as being “holy.”

That is a very valid point, but if the Israeli government were to forcefully remove the illegal settler’s from Palestinian territory, they would need a place to put them that would not encroach on Palestinian territory. And let’s be honest, if you were an average Israeli, would you really want to live with such aggressively religious people?

My point is simple. Geography matters! If you were born in Chicago and took the train to New York; or if you were born in the West Bank and took the train to Jerusalem, you would be riding trains leading to very different life experiences:

It will be difficult to move these “tracks”, indeed, mountains of earth, and such a project will be costly/ extremely expensive, many people will say it impractical and many would argue that island construction is unjust or unrealistic but I think you’ll agree that leaving the tracks as they are currently laid will not resolve the situation satisfactorily.

The ‘holy territory is actually the latitude and longitude on a map’. The solution: these fervent normative commitments need to be adjusted for a resolution; painful compromise is required according to both the Israeli and Palestinian leadership. The Island proposal recognises the Holy issue in this debate, that being given a replacement family dog (that might seem better to an outsider) for the real family dog is not acceptable to the Settlers. Not to characterise the Settlers as children in a family but believing that Sparky/West Bank territories will always be the one and only dog/holy land, and that he cannot be replaced is what needs to be overcome….it’s difficult. True, but how much less holy does something need to become before it is no longer worth fighting for? It’s the historical memory that is damaging in this case, the baggage of the past and the refusal to back away because that will denigrate the lives lost in the cause. Backing down and out of the West Bank requires an inverted pride, and forgiveness.

‘The Islands would be exclusively for the Settlers’ but that is not the only purpose of these Islands because 1) these Islands would eventually expand the living space of Israel substantially which is in the interests of religious tourism, the expansion of Israel population (tax revenue), traditions, and values, and the Israeli and Palestinian States. 2) Also, the Islands cannot be seen as carrots for the Settlers since this would be damaging to their pride, they cannot feel like they are backing away unless the alternative is superior to the holy lands imagined in their pristine glory.

THERE APPEARS TO BE A nail in the coffin regarding this Island proposal but it does not have to be; the fact that, construction would have to begin before the Settlers could be compelled to ‘adjust’ their claims. The Islands need to be the carrot incentive because they are unlikely to want to back down, unless they could see the promise land, secure and superior living space in advance. People invest in major projects before they exist, that is essential for any major project: building a wall around the West Bank was an investment, these Islands are a superior use of resources. Getting into heaven, building a skyscraper, funding a movie project; they all require prior investment before they can exist. Such a commitment would be required of the State of Israel.

THE ISLANDS HAVE TO BE SOLD WELL. So the Settlers need to be compelled that the less resort Islands are even better than the West Bank. Such a case needs to be made effectively; it is in their spiritual interest to relocate, with the construction of valuable vineyards, with some of the actual dirt being transported from the contested land, they may see the superior cost/benefit of living peaceful lives. This assumes that their lives aren’t made meaningful through this conflict. That the conflict itself is not something they live for?

You’re missing the point: these people are religious extremists, with limited respect for the human or other rights of Palestinians. I mean come on, these guys sit on their porches with rifles, taking pot-shots at Palestinian kids. They will not be compelled. The problem is that these actors are religious actors – they are not rational in any meaningful sense, because positive outcomes in the here and now are outweighed by negative posthumous outcomes.


I completely agree with him. The settlers are total zealots that will stop at nothing but to attain all of Palestine as their own. The Israeli government is caught between a rock and a hard place on the settler issue in that on the one hand the religious right (which control a large portion of the government) feel obligated to protect them while on the other the settlers pose an immediate security risk because they act completely outside the law (see his comment). Hell, the same group of zealots assassinated Yitzhak Rabin for negotiating with the PLO during the Oslo Peace Process!

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