Warren Buffett, the billionaire chief executive officer of Berkshire Hathaway, says he rates businesses on their ability to raise prices and sometimes doesn't even consider the people in charge.
Warren Buffett, the billionaire chief executive officer of Berkshire Hathaway, says he rates businesses on their ability to raise prices and sometimes doesn’t even consider the people in charge.
“The single most important decision in evaluating a business is pricing power,” Buffett told the Financial Crisis Inquiry Commission (FCIC) in an interview released by the panel last week. “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
Buffett, 80, accumulated the world’s third-largest personal fortune through a career of stock picks and takeovers. He has bought companies such as railroads and electricity producers, whose pricing power stems from a dearth of competitive options available to clients. Buffett has also built stakes in firms like Coca-Cola and Kraft Foods, which rely on the appeal of their brands to attract and keep customers.
“The extraordinary business does not require good management,” Buffett said in the interview, which was conducted on May 26 in Omaha, Neb.
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The FCIC investigators focused on Buffett’s investment in Moody’s, the bond-ratings firm blamed by lawmakers for handing out inflated credit grades during the housing boom. Buffett said he held stock in Moody’s because the company’s leading market share, along with that of rival Standard & Poor’s, a subsidiary of McGraw-Hill, gave the two firms flexibility in setting prices.
“I knew nothing about the management of Moody’s,” said Buffett.
“In the short run, good management can make a stock pop but I follow what Warren’s saying, especially because his point of view looks at the fundamentals,” said Terry Connelly, dean of the Ageno School of Business at Golden Gate University in San Francisco, and a former managing director at Salomon Brothers. “Good management can’t do anything with a bad case.”