“When a chief executive officer is encouraged by his advisers to make deals, he responds much as would a teenage boy who is encouraged by his father to have a normal sex life. It’s not a push he needs.”
As Blaise Pascal, an influential French mathematician and philosopher, once said, “All man’s miseries derive from not being able to sit quietly in a room alone.” CEOs can’t sit quietly; they are predisposed to make deals, which are made easy to do by Wall Street, and create the illusion that they are doing something to justify their incredibly high salaries. Besides, it is often easier to buy a new set of problems than it is to try to fix an old set. Warren’s solution to this raging appetite to grow through acquisitions is to only buy companies that have some kind of durable competitive advantage. These companies have great underlying economics working for them as evidenced by high returns on equity and strong and consistent earnings. The other kinds of companies he has labeled commodity-type businesses, which are evidenced by low returns on equity and erratic earnings. Since most of the companies in the world fall into the commodity type, it is easy for Warren to find some rest—but when a company shows up with a durable competitive advantage, he jumps on it ten minutes after he sees the deal. Warren knows what he wants before he wants it.