Big Brain Business@BigBrainBizness
Warren Buffett on how to spot a bad business before it destroys your capital:
Buffett has spent over 70 years studying what destroys capital. And he says the clearest warning sign has nothing to do with the numbers.
"When you really know you've got a bad business is when you have a good manager and you're getting bad results."
Bad manager, bad results? That's a people problem. You can fix that.
But good manager, bad results? That's the business itself and no hire in the world will save it.
He has a line he's repeated for decades that captures this perfectly:
"When a management with a reputation for excellence encounters a business with a reputation for bad economics, it's the reputation of the business that remains intact."
He learned this firsthand through his own textile mills. At their peak, they made over half of the suit linings in the United States, won industry awards, and were named supplier of the year by Sears Roebuck.
By every measure, they looked like a success. But there was a fatal flaw hidden underneath all of it.
Every time they tried to raise prices even slightly, Sears would simply replace them with a cheaper supplier. And no customer ever walked into a store asking for a suit based on the quality of its lining.
It was a commodity business with no pricing power, no brand loyalty, and no moat to speak of.
He knew it was a bad business. And he stayed anyway.
"I went into the textile business by accident in 1965 and I threw in the towel about 20 years later and that was about 20 years too late."
The reason he stayed so long?
The same reason most investors hold on to losing positions far longer than they should.
"There's a great tendency to want to justify old decisions. I mean, that's a human trait."
But even after learning that lesson the hard way, he made the same mistake again.
"I bought a company called Dexter Shoes in the early 90s. I paid 400 plus million dollars for it. It made a lot of money before I bought it. But soon as I bought it, they pulled some switch or something and it immediately started losing money."
His conclusion after a lifetime of learning this lesson over and over:
"There are lots of lousy businesses and there are lots of wonderful businesses. My job over the years has been to try and figure out which is which and I've made plenty of mistakes."