Buffett Q&A -25：What filters do you use when looking at companies?

[CM: Well, opportunity cost is a huge filter in life. If you've got two suitors who are eager to have you, but one is way better than the other, you're going to choose that one rather than the other. That's the way we filter stock buying opportunities. Our ideas are so simple. People keep asking us for mysteries, but all we have are the most elementary ideas.]

We know instantly whether a business is something we're going to understand, and whether it's a business that's going to have a sustainable edge, and that gets rid of a very significant percentage of opportunities. I'm sure people regard me and Charlie as very arbitrary--in the middle of the first sentence, we'll say, "We appreciate the call, but we're not interested." I'm sure that if they explain something I might get buttered on it, but we really can tell in the middle of the first sentence whether those two factors exist ... We can sometimes tell by who we're dealing with, whether a deal is ever going to work out or not. I mean, if there's an auction going on, we have no interest in talking about it. If someone is interested in doing that with their business, then they're going to want to sit down and renegotiate everything with us all over again after the deal is done ...We don't want to listen to stories all day, and we don't need brokerage reports. There's other things to do with your time.

[CM: Another filter is the concept of the quality person, which most people define as someone very much like themselves. (laughter) There are so many wonderful people out there, and there are so many awful people out there. And there are signs, like flags, waving over the awful people. And generally speaking, those people are to be avoided.]

[Q - Besides the type of management that you look for, when you look at financials you make decisions rather quickly. In regards to the financial information and the business overall what factors do you look at?]

We make quick decisions because we have filters before we get to the point of making a decision.

Filter #1 – Can we understand the business? What will it look like in 10-20 years? Take Intel vs. chewing gum or toilet paper. We invest within our circle of competence. Jacob’s Pharmacy created Coke in 1886. Coke has increased per capita consumption every year it has been in existence. It’s because there is no taste memory with soda. You don’t get sick of it. It’s just as good the 5th time of the day as it was the 1st time of the day.

Filter #2 – Does the business have a durable competitive advantage? This is why I won’t buy into a hula-hoop, pet rock, or a Rubik’s cube company. I will buy soft drinks and chewing gum. This is why I bought Gillette and Coke.

Filter #3 – Does it have management I can trust?

Filter #4 – Does the price make sense?

Since 1972 we have made no change in the marketing, process etc. Take See’s candy. You cannot destroy the brand of See’s candy. Only See’s can do that. You have to look at the brand as a promise to the customer that we are going to offer the quality and service that is expected. We link the product with happiness. You don’t see See’s candy sponsoring the local funeral home. We are at the Thanksgiving Day Parades though.