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CHAPTER ONE 1
Introduction
arren E. Buffett, the celebrated chairman and chief executive officer
Wof Omaha, Nebraska–based Berkshire Hathaway, Inc., started an
investment partnership with $100 in 1956 and has gone on to accumulate a
worth in excess of $30 billion. As both a manager and an investor,
Buffett is renowned for focusing on the economics of businesses.
Berkshire’s collection of operating businesses, including the GEICO
pany, International Dairy Queen, Inc., the Nebraska Furniture
Mart, and See’s Candies, commonly earn 30 percent to 50 percent per year on
invested capital. This is astonishingly good performance in light of the 10
percent to 12 percent return typical of industry in general. A second and
equally important contributor to Berkshire’s outstanding performance is a
handful of substantial holdings in publicly mon stocks, such as
The American pany, The Coca-pany, and The
Washington pany, among others. As both manager and investor,
Buffett looks for “wonderful businesses” with outstanding economic charac-
teristics: high rates of return on invested capital, substantial profit margins on
sales, and consistent earnings growth. Complicated businesses that face
petition or require large capital investment are
Buffett’s ess is powerful testimony to the practical usefulness of man-
agerial economics. Managerial economics answers fundamental questions.
When is the market for a product so attractive that entry or expansion
es appealing? When is exit preferable to continued operation? Why do
some professions pay well, while others offer only meager pay? essful
managers make good decisions, and one of their most useful tools is the
methodology of managerial economics.
1 Information about Warren Buffett's investment philosop