There 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.

For 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]

Three quick tests to identify the best companies to work for are as follows:

Earning Test: Check the yearly per share figure. Look at the per share earnings for a 10 year competitive advantage. Warren looks for a per share earnings that is consistent. Per share earnings of $1.3 1990, and 2001, $1.6, 2005, $2.35, 2007, $2.68, 2008 $2.95 = a promising company. So you can see a long-term upward trend. So the company must have a competitive advantage. Consistent earnings is a good sign that the product is good. The companies economics are promising. If the yearly earnings are wildly unstable, then you are working in the wrong company. You might even see a downward industry, the boom increases demand which increases prices, this increases costs, and supply increases causing the prices within the industry to drop. There are 1000s of companies with this problem of competitive advantage which will destroy your results.

Debt Test: companies that have a low debt, surplus of cash with self-financing, and they can weather a recession. You need to gauge debt based on a given industry, but the general rule is that if a company that has more than 5 times the debt versus earnings then you are in bad shape. High levels of debt is due to uncompetitiveness. The company that is highly leveraged means that the company will eat any excess cash, and even your own job. There will be no excess capital, and little growth in managerial opportunities.

Gross Margin Test: you can look at the companies gross profit margin, you need to look at the financial forum. You look at revenue, and then cost of goods sold. Gross profit divided by revenue = gross profit margin. 10,000 total revenue – 6,000 cost of goods sold = 4,000 Gross Profit / 10,000 = 40% Gross Profit margin.

Coca-Cola 60% Gross profit margin, Wrigley Gum has a Gross profit margin of  51%

Versus

United Airlines has a gross profit margin 14%, US Steal has a gross profit margin of 14%, Goodyear has a gross profit margin of 20%.

Microsoft has a 79% gross profit margin, Microsoft produces better software.

• You need to price yourself way higher than the cost of goods sold. If you are working for poor inherent economics then you should consider leaving that company now.

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