Warren Buffett’s talent for understanding the intricacies of business and using that knowledge to build an empire is nothing short of legendary. With a portfolio that has brought Berkshire Hathaway to a value of nearly a trillion dollars, his approach is not only good; it’s awe-inspiring. But what does Buffett say is the secret ingredient to success in the business world? If you guessed “accounting,” you were right on the money.
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“People ask me what they should take in business school,” Buffett once said during a speech to graduates at his alma mater, the University of Nebraska-Lincoln. “You have to understand the accounting. It’s the language. It’s like being in a foreign country without knowing the language if you’re doing business and not understanding the accounting.” He emphasized: “There is nothing more important.”
For Buffett, accounting is more than just numbers on a page. It’s a toolbox, a lens through which he evaluates potential investments. He doesn’t just stop at understanding financial statements; he uses them as a window into the soul of a company.
His ability to read between the lines of 10-Ks, 10-Qs and annual reports fueled some of his most legendary deals, often with just a few key insights that tipped the scales in his favor.
One of the best examples? In the University of Nebraska-Lincoln speech, Buffett recounted a time in 2003 when he was considering an acquisition of Clayton Homes, a leader in the industrial housing industry.
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“We agreed to pay $1.7 billion for it,” Buffett said, emphasizing that accounting insights drove the decision. He explained, “I made that deal over the phone without ever meeting the people there, but I had seen enough from reading 10-Ks, 10-Qs and annual reports.” Buffett continued, “By looking at the numbers, I was able to discern what they were telling me in terms of the types of people running the business and the types of accounting decisions they were making.” His confidence in understanding the numbers enabled him to successfully execute the transaction, demonstrating the critical role that thorough financial research plays in high-stakes business decisions.
A week after his board approved the deal, he met with the team in person. It is a testament to his faith in numbers and their ability to tell a story if interpreted correctly.
Fast forward to today and Clayton Homes continues to reflect the fruits of Buffett’s strategic thinking. Under the leadership of Kevin Clayton, who took over as CEO in 1999, the company thrived as part of the Berkshire family. Clayton Homes’ first quarter 2024 results showed revenue rose to $2.7 billion, up 9.1% from the prior year. The company’s expansion is proof that Buffett’s instincts were, as usual, spot on. A 12.2% spike in new home sales fueled this growth, demonstrating continued demand for Clayton’s modern and energy efficient designs.
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Buffett’s method isn’t just about reading financial statements; it’s about knowing when these numbers add up to a business worth owning. He once noted, “I regularly encounter CEOs who really don’t get it [accounting]. They try to bluff their way through. You can see on their faces that they are almost scared when someone hands them a balance sheet.’ This keen insight sums up why Buffett insists on having the firsthand knowledge – no middlemen, no advisors. He said: ‘We don’t call on investment bankers… to their disgust.”
This philosophy is what makes Buffett’s leadership at Berkshire Hathaway so distinctive. He believes in equipping himself and his team with the knowledge to make decisions that align with long-term goals.
The “Oracle of Omaha” has never been shy about the tools of his trade. For those who want to follow in his footsteps, mastering accounting is not only a good idea, but essential. After all, as Buffett once noted, it made him “a lot of money.”
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This article Warren Buffett bought a $1.7 billion company ‘over the phone’ without meeting the founder by using what he calls the ‘most important’ skill. Originally appeared on Benzinga.com
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