Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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No exit but only entry

Posted by Muthu on October 12, 2010

I’m trying out something new. The blog postings would be made shorter. I’m going to also try writing perspective on news rather than merely reproducing them, with due acknowledgement of source. This would be a challenge, as I’ve to improve my creative writing skills. Let me give it a try. In worst case scenario, I would fail and have to revert to old ways. No problem.

Edited excerpts of speeches like Buffett, Munger, some articles etc. duly acknowledging the source with link also would continue. The size of the articles would be consciously kept smaller.

I sent SMS to you last evening at around 9.30p.m in regarding above. I received only very few responses. As you are the ultimate reader, your opinions would be of great help. Please write. The blog would take a new shape based on your inputs.

It looks like that one of my good friend in an AMC is offended as I escalated some unresolved issues I’ve with that AMC. Relationship is different and escalation of issues based on its merit is different. I hope he understands.

Bloomberg reports that Warren Buffett wants to avoid buying companies from LBOs  (Leveraged Buy Out) firms as they focus on exit strategies whereas Berkshire Hathaway, Warren Buffett’s investment vehicle focus on ‘entrance strategy’.

In Buffett’s opinion, LBOs do not understand the business. He cannot be more than right. LBOs were the craze in 1980’s, where a company was bought in total at a lesser price and sold into pieces at a higher price, using debt (leverage), destroying the organization and throwing millions of people out of their livelihood.

You may see the movie ‘Wall Street’ (not the recent one but the one which came in 1980’s) to understand this better.

Bloomberg quotes Buffett “I look in their eyes and see if they love the money or love the business,“Everyone likes money,” he said. “We count on people loving the business.”

Buffett’s track record reflects the above. None of his managers, people who run his companies need money. They all made it big when they sold their business to Buffett. Infact in many instances, Buffett coaxed them in selling to him assuring that they would continue to run the business while being wealthier.

Buffett buys companies only from owners who would continue to enjoy running it, as an owner-manager. Most of them like Mrs.Blumkin of Nebraska Furniture mart ran the company till she died beyond the age of 100. He has never bought a company from LBO.

Buffett never interferes in top management or running of the business. The one and only thing he takes care is ‘capital allocation’.

There are companies which he has bought but have never visited, speaks to his CEOs only once a year or so, there are his CEOs who have never ever visited their head quarters, which is Berkshire Hathaway at Omaha.

He is an example for extreme delegation and trust.

Buffett also shuns debt and mostly buys by paying cash. He is debt averse, both in his personal as well as corporate life.

Few decades ago when his wealth became too huge to buy individual stocks, he instead started buying companies with his favourite phrase ‘our holding period is forever’.

He believes in right entry and mostly does not prefer exits, unless a business becomes really lousy.

LBO firms can learn a lesson or two from him.

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