In this interview with Carol Loomis at Fortune MPW, Warren Buffett explains that a good business earns a high return on tangible assets, whether it grows or not. However, overpaying can turn a good business into a bad investment.
He acknowledges his early mistake of buying cheap, underperforming businesses, which took decades to recognize as a poor strategy. Buffett highlights the car dealership industry as a strong business model due to minimal receivables, floor-planned inventory, and the potential to lease real estate.
He notes that Van Tuyl, with 78 dealerships, generates significant revenue and achieves high returns even with narrow margins, making it a solid investment opportunity.
Here’s an excerpt from the interview:
Buffett: A good business is the one that earns a high rate of return on tangible assets. (Laughs)
It’s pretty simple, yeah. The very best businesses are the ones that earn a high rate of return on tangible assets and grow. But even ones that don’t grow, if they earn a high return on tangible assets, and, of course if you don’t pay too much, they can be a good investment.
They are a good business to start with, by the high returns, if you pay too much for them you can turn a good business into a bad investment. But if you pay an appropriate price, you can do alright.
Now the big mistake which we made in the early years was to try and buy a bad business at a really cheap price. It took me about 20 or 30 years to figure out that wasn’t a good idea. (Laughs)
The car dealership business, if run well, can be a very good business. You have no receivables to speak of. You floor plan your inventory. You can lease your real estate, we don’t do that, we’ll own 95% of our real estate. So you can have very little capital actually invested in the business—and you do a large volume.
Van Tuyl, which we bought, has 78 dealerships. They’ll average over $100 million a dealership, so you can work on fairly narrow margins and still earn a high return on capital if you don’t tie up much capital into $100 million of business.
You can watch the entire interview here:
Warren Buffett Interview – Fortune MPW
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