More Praise for The Warren Buffett Way, First Edition

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7 6
quality. Both divisions of Justin have managed to turn them-
selves into a franchise, through a combination of top quality,
good marketing, and shrewd positioning.
Acme sells a product that most people consider a commodity.
Who, after all, can name the brand of bricks they prefer? Acme
customers, that’s who. With a skillful marketing campaign fea-
turing football legend Troy Aikman, Acme has made itself so
well known that when Texans were recently asked to name their
favorite brand of brick, 75 percent of respondents said Acme.
That brand consciousness is reinforced every time a consumer
picks up a brick and sees the Acme logo stamped into it.
The boots, too, have established themselves as franchises.
Spend a few minutes in any Western-apparel retail outlet, and
you’ll hear customers say things like “My son is ready for some
new Justins” or “Show me what you’ve got in Tony Lamas”
more often than you hear “I’m looking for some cowboy boots.”
When they mention the boots by name, and when they’re will-
ing to pay top price for top quality, that’s a franchise.
After the improvements of its new management team in
1999 and 2000, Justin began attracting attention. According to
Bear Stearns analyst Gary Schneider, there was widespread in-
terest from many buyers, including Europeans, but Buffett’s
was the f irst offer the company seriously contemplated.
20
Berkshire’s offer was for $22 per share in cash. That repre-
sented a 23 percent premium over closing stock price, but Buf-
fett was not fazed. “It was a chance to get not only one good
business but two good businesses at one time,” he remarked.
“A double dip, in effect. First-class businesses with f irst-class
managements, and that’s just what we look for.” Nor, he
added, did he have plans to change anything. “We buy business
that are running well to start with. If they needed me in Fort
Worth, we wouldn’t be buying it.”
21
The day after the deal
was announced, Justin’s stock price jumped 22 percent, and
Warren Buffett returned to Omaha with a brand-new pair of
ostrich-skin Tony Lamas.

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7 7
way to make a commodity business prof itable, then, is to be the low-
cost provider.
The only other time commodity businesses turn a prof it is during
periods of tight supply—a factor that can be extremely diff icult to
predict. In fact, a key to determining the long-term prof itability of
a commodity business, Buffett notes, is the ratio of “supply-tight to
supply-ample years.” This ratio, however, is often fractional. The most
recent supply-tight period in Berkshire’s textile division, Buffett quips,
lasted the “better part of a morning.”
The Coca-Cola Company
Shortly after Berkshire’s 1989 public announcement that it owned 6.3
percent of the Coca-Cola Company, Buffett was interviewed by Mel-
lisa Turner, a business writer for the Atlanta 
Constitution.
She asked
Buffett a question he has been asked often: Why hadn’t he purchased
shares in the company sooner? By way of answer, Buffett related what
he was thinking at the time he f inally made the decision.
“Let’s say you were going away for ten years,” he explained, “and
you wanted to make one investment and you know everything that you
know now, and you couldn’t change it while you’re gone. What would
you think about?” Of course, the business would have to be simple and
understandable. Of course, the company would have to have demon-
strated a great deal of business consistency over the years. And of
course, the long-term prospects would have to be favorable. “If I came
up with anything in terms of certainty, where I knew the market was
going to continue to grow, where I knew the leader was going to con-
tinue to be the leader—I mean worldwide—and where I knew there
would be big unit growth, I just don’t know anything like Coke. I’d be
relatively sure that when I came back they would be doing a hell of a lot
more business than they do now.”
22
But why purchase at that particular time? Coca-Cola’s business at-
tributes, as described by Buffett, have existed for several decades. What
caught his eye, he confesses, were the changes occurring at Coca-Cola,
during the 1980s, under the leadership of Roberto Goizueta.
Goizueta, raised in Cuba, was Coca-Cola’s f irst foreign chief exec-
utive off icer. In 1980, Robert Woodruff, the company’s 91-year-old
patriarch, brought him in to correct the problems that had plagued the

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7 8
T H E W A R R E N B U F F E T T W AY
company during the 1970s. It was a dismal period for Coca-Cola—dis-
putes with bottlers, accusations of mistreatment of migrant workers at
the company’s Minute Maid groves, environmentalists’ claim that
Coke’s “one way” containers contributed to the country’s growing pol-
lution problem, and the Federal Trade Commission charge that the
company’s exclusive franchise system violated the Sherman Anti-Trust
Act. Coca-Cola’s international business was reeling as well.
One of Goizueta’s f irst acts was to bring together Coca-Cola’s top
f ifty managers for a meeting in Palm Springs, California. “Tell me
what we’re doing wrong,” he said. “I want to know it all and once it’s
settled, I want 100 percent loyalty. If anyone is not happy, we will make
you a good settlement and say goodbye.”
23
Goizueta encouraged his managers to take intelligent risks. He
wanted Coca-Cola to initiate action rather than to be reactive. He began
cutting costs. And he demanded that any business that Coca-Cola owned
must optimize its return on assets. These actions immediately translated
into increasing profit margins. And captured the attention of Warren
Buffett.
The Washington Post Company
“The economics of a dominant newspaper,” Buffett once wrote, “are
excellent, among the very best in the world.”
24
The vast majority of
U.S. newspapers operate without any direct competition. The owners of
those newspapers like to believe that the exceptional profits they earn
each year are a result of their paper’s journalistic quality. The truth, said
Buffett, is that even a third-rate newspaper can generate adequate prof-
its if it is the only paper in town. That makes it a classic franchise, with
all the benefits thereof.
It is true that a high-quality paper will achieve a greater penetration
rate, but even a mediocre paper, he explains, is essential to a community
for its “bulletin board” appeal. Every business in town, every home seller,
every individual who wants to get a message out to the community needs
the circulation of a newspaper to do so. The paper’s owner receives, in ef-
fect, a royalty on every business in town that wants to advertise.
In addition to their franchise quality, newspapers possess valuable
economic goodwill. As Buffett points out, newspapers have low capital
needs, so they can easily translate sales into prof its. Even expensive

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I n v e s t i n g G u i d e l i n e s : B u s i n e s s Te n e t s
7 9
computer-assisted printing presses and newsroom electronic systems are
quickly paid for by lower f ixed wage costs. Newspapers also are able to
increase prices relatively easily, thereby generating above-average re-
turns on invested capital and reducing the harmful effects of inf lation.
Buffett f igures that a typical newspaper could double its price and still
retain 90 percent of its readership.
The McLane Company
McLane is perched on the edge of great growth potential. Now that it
is no longer part of Wal-Mart, it is free to pursue arrangements with
Wal-Mart’s competitors, such as Target and other large stores in the
United States. This, combined with the company’s focus on efficiency
and investment in enterprise-wide software systems, freight manage-
ment, and point-of-sales systems among other automated processes, will
enable McLane to maintain price efficiency and service quality.
At the time Buffett bought McLane, some of the industry players,
such as Fleming and U.S. Food Service, a division of Royal Ahold,
were going through diff icult times for various reasons. Although it is
doubtful that this inf luenced Buffett’s decision, it was said at the time
that if Fleming did indeed go under, an extra $7 billion worth of busi-
ness would be up for grabs.
The Pampered Chef
The Pampered Chef has demonstrated a consistency that many older
businesses might well envy, with a growth rate of 22 percent each year
from 1995 to 2001. And the long-term outlook is strong. According to
the Direct Selling Association, party plan businesses raked in more than
$7 billion nationwide in 2000, an increase of $2.7 billion since 1996.
Christopher herself is not slowing down. She believes that Ameri-
can cupboards have plenty of room for more products and points out
that Mary Kay, a direct-sell cosmetics company, has a sales force of
600,000 —giving her plenty of room to grow. Christopher is develop-
ing new products, such as ceramic serving ware, and is expanding into
Canada, the United Kingdom, and Germany. Finally, the company is
structured in such a way that it does not need a lot of capital to expand
and it has no sizable competition in its category.

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8 1
6
Investing Guidelines
Management Tenets
W
hen considering a new investment or a business acquisition,
Buffett looks very hard at the quality of management. He tells
us that the companies or stocks Berkshire purchases must be
operated by honest and competent managers whom he can admire and
trust. “We do not wish to join with managers who lack admirable qual-
ities,” he says, “no matter how attractive the prospects of their business.
We’ve never succeeded in making a good deal with a bad person.”
1
When he f inds managers he admires, Buffett is generous with his
praise. Year after year, readers of the Chairman’s Letter in Berkshire’s
annual reports f ind Buffett’s warm words about those who manage the
various Berkshire companies.
He is just as thorough when it comes to the management of com-
panies whose stock he has under consideration. In particular, he looks
for three traits:
1. Is management rational?
2. Is management candid with the shareholders?
3. Does management resist the institutional imperative?
The highest compliment Buffett can pay a manager is that he or she
unfailingly behaves and thinks like an owner of the company. Managers

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8 2
T H E W A R R E N B U F F E T T W AY
who behave like owners tend not to lose sight of the company’s prime
objective—increasing shareholder value—and they tend to make rational
decisions that further that goal. Buffett also greatly admires managers
who take seriously their responsibility to report fully and genuinely to
shareholders and who have the courage to resist what he has termed the