693 Managerial Application 17.4 Capital Allocation at Berkshire Hathaway, Inc. W

Question

693 Managerial Application 17.4 Capital Allocation at Berkshire Hathaway, Inc. Warren E. Buffett, the chairman and CEO of Berkshire Hathaway, Inc, has the uncommon ability to communicate management insights in a disarmingly modest and humorous fashion.Among his most important lessons are the following: . It is far better to buy a wonderful company at a fair price than Management does better by avoiding dragons, not slaying them. Buffett attributes his success to avoiding, rather than solving, tough business problems.As Buffett says, "We have been successful because we concentrated on identifying 1-foot hurdles that we could step over rather than because we acquired any ability to clear 7-footers. It is not a sin to miss a business opportunity outside one's area a fair company at a wonderful price. In a difficult business, no sooner is one problem solved than another surfaces. There is never just one cockroach in the kitchen." When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. According to Buffett, attractive economics include a 20 percent plus rate of return on capital without leverage or accounting gimmicks, high margins, high cash flow, low capital investment requirements, a lack of government regulation, and strong prospects for continuing growth. Good jockeys do well on good horses,"Buffett says,"but e Take a lok at Buffetts annual letters to shareholders, Theyte terfichtp not on broken down old nags." of expertise. By inference, it is a sin to miss opportunities that you are fully capable of understanding Do notion with managers who lack admirable qualities, no matter how attractive the prospects of their business When searching for businesses to buy, Buffett looks for first-class businesses accompanied by first-class management · The approach seems to work. Buffett's personal stake in Berkshire is now worth more than $50 billion! athaway.com.

Explanation / Answer

It's not a sin to miss a business opportunity outside one's area of expertise. By interference it's a Sin to miss opportunities that you are fully capable of understanding.

Comments

Missing a business opportunity which is out of the expertise area of your company is better than investing in that specific situation. Going in the wrong expertise and investing in the wrong company could be very harmful for your investment and the balance between the expertise and non expertise company would have directly reduced. This is specific situation would leave you with a proper confusion which would lead you at a loss of assets or investment. While having inability to understand the specific situation and investing in the companies of opportunities that you understand would be greatly beneficial as it would directly increase the level of implementation of your strategies as you already understand that specific market. Investment of your money in the area of interest and understanding would also provide a better working environment as you properly understand that specific term and working environment for better.

For an example, walmart never entered theatre business or never open any large scale fresh Food oriented market chain. The situation directly held walmart to maintain their own specific identity into the market and to generate huge revenues across the globe.
Walmart successfully invested and acquired smaller chains which benefited their organisation by a large margin and I've definitely increased total profits buy a better scale.

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