Tuesday, February 19, 2013

Alice Schroeder on Warren Buffett’s filtering process

Thanks to Will for bringing this back up to me. This quote is from my friend Miguel Barbosa’s interview with Alice Schroeder (HERE).

“Typically, and this is not well understood, his way of thinking is that there are disqualifying features to an investment. So he rifles through and as soon as you hit one of those it’s done. Doesn’t like the CEO, forget it. Too much tail risk, forget it. Low-margin business, forget it. Many people would try to see whether a balance of other factors made up for these things. He doesn’t analyze from A to Z; it’s a time-waster.”


That comment from Schroeder is in line with a comment Mr. Buffett made at the Berkshire Hathaway Annual Meeting last year, when he said: "Charlie and I have a number of filters that things have to get through before we'll think about them."

I’ve mentioned filters on a couple of occasions (HEREand HERE), and I’ll reiterate that I think it is one of the most important things to spend time developing well in order to achieve “mastery” in the investment business (note that mastery still means you’ll make plenty of mistakes, especially in the field of investing). If your filters are good enough, it will also make it difficult to attend conferences where you network with a lot of other investors. Many people will try to talk to you (sometimes endlessly) about their favorite stock idea; it won’t pass one or more of your filters, so you will lose interest; and yet they will likely keep talking.