2005: How can investors identify great managers and entrepreneurs before they have a track record?

Gap in video recording resumes in middle of question.

AUDIENCE MEMBER: — quality is largely innate.

So if these characteristics are inherent and you were to attempt to consistently identify future great managers or entrepreneurs before there’s a track record, how would you go about doing it?

And in particular, could there be a way to know that — before someone’s made a lot of money, before they built the business that they love and feel passionate about, that they will develop those types of qualities later in life?

WARREN BUFFETT: That’s a terrific question. And we have dodged it, largely, over the years by actually buying businesses from people where we’ve seen the record.

In other words, I’m not sure I can go — in fact, I’m quite sure I can’t go — to an MBA class of 50 and sit down and talk with each one, examine their grades, examine their extracurricular activities, and whatever, talk to their parents, I’m not sure I could rank those 50 very well in terms of their potential for future business success. And, of course, some of it would depend on what areas they entered into in business.

So, I think it’s tough. I think it’s tough to go out to the practice tee, where people are not actually hitting balls but just taking practice swings, and say which one is, you know, is a 2 handicap and which one’s a 15 handicap, and which ones, you know, can make it on the tour

I think I can tell a little bit, maybe, but not — but it’s very hard to calibrate.

And I don’t think we’ve had much success, but we also haven’t tried very much, to identify people before they’ve had a record, to try and identify the ones that are superstars.

Instead, we’ve taken the easy way, and we go — and if somebody comes to us with a business that’s done phenomenally for 10 or 15 or 20 years, or maybe for 50 years, and we’ve seen how — what their batting average is — we’ve actually seen they batted .350, or whatever it may be, in the major leagues. And we just make the assumption that we won’t screw it up by hiring them.

And we also make the assumption that they’ll live to be 100 or 120 or something and we buy the business.

And that’s far easier — it is far easier to tell the great baseball batters after you’ve seen a couple seasons of their batting than it is to go to a college — in college baseball teams or high school baseball teams — and pick out the superstars.

The one interesting thing, and I wish I could remember where I saw this study and it may not even be a valid study, but I do remember seeing something many, many years ago where they tried to correlate business success with various variables.

And they took grades in school and whether they got MBAs and all that sort of thing, and they found that the best correlation was with the age at which they started their own business first.

The people that got very interested in starting a lemonade stands, or whatever, tended to have better — it tended to correlate better with business success than other variables.

We have found ourselves — we’ve got a lot of MBAs running businesses for us, but they ran them for a long time before we hired them or before we made the deal. And we’ve got others that never set foot in a business school.

And I do think there’s a lot to wiring. I think there’s also a lot to working with the wiring you have and developing it over time.

I don’t think that it’s all innate, and I don’t think you can’t improve. I know you can improve on what you’re given at birth, but I do think an awful lot of it is wiring, more so than I would have thought 30 or 40 years ago.

I’ve certainly seen it in business. I can — there are people, no formal business train — Charlie never went to business school, I mean, but he thought about it. I mean, I never heard him — Charlie say anything dumb about business yet, except when he disagrees with me. (Laughs)

The truth is I’ve never heard him say anything dumb about business, period.

And there are other people. I’ve never heard [GEICO CEO] Tony Nicely say anything dumb about business, ever.

They just — they’re wired so that they — that the, you know — it doesn’t flicker. I mean, they get the answers. It doesn’t mean they can — you know, they’d be a great ballroom dancer or a great baseball player, you know, or a great politician, but they are wired for business.

Charlie?

CHARLIE MUNGER: Yeah. Part of it is intelligence and part of it is temperament.

I don’t know if Bill Ginn is in the audience, but by the time I was 14 years of age, I knew Bill Ginn would be rich.

He was a classmate of mine in high school, and a very intelligent man, and he wanted to be rich. And he was sensible in the way he handled life.

I think sensible people with the right temperament and the right intelligence, if they live long enough in our system, will get rich. But temperament is, I think to some extent, inherited, too. Don’t you?

WARREN BUFFETT: Yeah.

His daughter, incidentally, is a partner with my daughter in a knit shop, which I hope you patronize while you’re — (Laughs)

We’ve united the Ginn and the Buffett family. (Laughs)

Charlie, when did you first think business was something of interest to you?

CHARLIE MUNGER: Very early. (Laughter)

I loved games of chance and I love trying to learn how to win at them.

WARREN BUFFETT: Yeah. It’s interesting for me, you know, simply to think about the question of whether the Final Four of the NCAA will be will be canceled, as opposed to postponed or transferred in locale, and decide if we’re going to pay out $75 million the next day if it is canceled, and how much we want to receive in today to take care of that.

And that probably wouldn’t interest — all kinds of people that wouldn’t be interesting to. And since my dad wouldn’t let me become a bookmaker, I went into investments. (Laughter)