Warren Buffett tells investors what he looks for in stocks and companies to buy all the time, so it's no secret. Throughout his letters to shareholders and at Berkshire Hathaway (BRK.A -0.99%) (BRK.B -1.05%) annual meetings, he dispenses advice freely.
But while investors often discuss some of these major points, such as looking for businesses that have wide moats and whose stocks appear to be undervalued, there's something else he talks about all the time that doesn't get as much attention.
One of the keys to a great business
Whenever Buffett talks about what he looks for in a great business, great management always makes the list.
He discusses management as a an important factor in what he looks for, and he consistently credits top management with the success -- or failure -- of a business. He also constantly praises the management of many of the companies Berkshire Hathaway owns and explains that great management was a key factor in his decisions to buy certain companies.
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Here are just a few examples: "Exceptional management is a vital factor," in the 1988 shareholders' letter, and a year later, "Our favorite form of capital deployment [is] the acquisition of 80% or more of a fine business with a fine management."
In one instance, he lists two factors related to management out of four total used to evaluate a worthy business to invest in. One is how well you can evaluate management's ability to grow its business and use its cash flow advantageously, and the other is "the certainty with which management can be counted on to channel the rewards from the business to the shareholders rather than to itself."
The only kind of business Buffett will buy
One thread that emerges from Buffett's advice is that great management seeks to maximize shareholder value in contrast to its own. He also discusses integrity as a key element of excellent management.
For example, he has spoken out about management's ability to "fix" financial statements, legally, through various arrangements like "adjusted" metrics. These could make the company's performance look better than it is in reality. Buffett isn't likely to invest in companies that make this a standard practice.
Companies with great management
Berkshire Hathaway is a holding company. It owns about 60 businesses more or less completely, while it has equity positions in around 45 public companies. When Buffett encounters a business that meets his criteria, he looks for complete ownership.
Buffett mentioned Coca-Cola as an example of a company with great management. In fact, it's the company that Buffett originally referred to when he made his famous comment about his favorite holding period being forever. "We expect to hold these securities for a long time," he said about Coke and Freddie Mac. "In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."
Coca-Cola has a rock-solid commitment to shareholder value, illustrated through its annual dividend increase for the past 61 years even under the most adverse conditions, such as massive pandemic declines.
Don't forget this feature
This isn't as intuitive as Buffett's other criteria and might not seem as important, but Buffett hasn't beat the market by a wide margin over time by ignoring this key aspect of a business. Along with the rest of your assessment of a stock, evaluating management shouldn't be left out of the process.
Management changes over time, and when it changes guard, a stock might need a reevaluation. Some CEO shifts go smoothly and are barely noticeable because they promote someone from within who is already indoctrinated with company culture. One example is Buffett stock Visa, which changed CEOs early this year and didn't make any waves. That's also part of great management.
Keeping this in mind as you consider stocks to buy can help you whittle down your list and make the best decision.
