Devoted to Managers and those that seek to improve their management skills

Warren Buffett and Secrets of Management - 29
 
A conservative approach to debt and liquidity

When looking to invest in companies directly by buying them, or investing in them through the stock market, another one of the major things he looks for in management, is their approach to debt and liquidity.

Why is that so important? Because approach to debt and liquidity tells just about the entire story of a company and its managers. Things we've been talking about through this series on Warren Buffett and management gets close to being defined entirely by this specific area.

Let's look at a managers or executive's approach toward debt. If there is a very liberal approach to debt, what story is that telling about the company and management? It reveals that they're probably managing a commodity business. They need to keep pumping money into things because they don't have a strong defensive position against its competitors.

When you have a strong position against your competitors, you can afford to be very conservative in your approach to debt, along with the goals you have for the company.

A conservative approach to debt is a direct reflection of the health of the company and the mindset of the managers within that company.

If you can't afford to sit on things and see the company through, it means there's something wrong with the company and its management. It reveals that there isn't a strong defensive position that can take the company through good times and bad.

A company that has far too much debt and illiquidity is a company unsure of its future and its ability to meaningfully compete against its rivals. That directly transfers to those managing the company and their inability to fix the problem.

Buffett wants managers that are in position to be able to fix problems and face their competitive future without huge debt and plenty of cash on hand.

Other Buffett Resources:

Investment Whiz Kid: Buffett Amasses a Fortune

Management Styles - The Buffett Way: Learn from the maestro himself

Understanding the Company

Brand names Commodity companies

THE REAL GENIUS OF WARREN BUFFETT

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