2007: How do you know who to trust in business?

AUDIENCE MEMBER: Mr. Buffett and Mr. Munger, thanks for hosting this wonderful meeting. My name is Chander Chavla (PH), and I’m visiting from Seattle, Washington.

And I think Berkshire Hathaway can contribute to the reduction of global warming if, for next year shareholder’s meeting, Mr. Gates and I fly on the same plane. (Laughter)

My question is, I have made a few mistakes in business by trusting the wrong people. So in — and I don’t know where to learn how to trust the right people.

They don’t teach you that in business school, and the people who are supposed to teach you in the corporate world sometimes betray you.

So how can I learn who to trust and who not to trust?

WARREN BUFFETT: Boy, that’s a great question. But you probably have about as good a chance of getting a good answer from me on that as you have on getting on Bill Gates’ plane next year. (Laughter)

I get letters all the time, and I hear from people who have been taken advantage of in financial transactions. And, you know, it really is — it’s sad. And a lot of it isn’t even — it’s not fraud or anything.

For one thing, I mean, just the charges involved, the frictional costs and the baloney that is presented is tough.

Charlie and I have had very good luck in terms of buying businesses and putting our trust in people. It’s been just overwhelmingly good.

But we filter out a lot of people. And then you say, “Well, how do you filter them out?”

I would say — I think Charlie will agree with this — people give themselves away fairly often. And maybe it does help to have been around as long as we have in seeing the various ways they give themselves away.

They — when somebody comes to me with a business — and I probably shouldn’t tell this publicly because they’ll probably tailor their approach subsequently — but when they come, just the very things they talk about, what they regard as important and not important, there are a lot of clues that come as to subsequent behavior.

And, like I say, we’ve really had a batting average I wouldn’t have thought we would have had in the people that we’ve joined with.

But it hasn’t been a hundred percent. It’s been well above 90. And I get asked that, you know, I mean, “How do you make those judgments?” And I don’t know.

Charlie, can you articulate the way we do it?

CHARLIE MUNGER: Well, partly we’re deeply suspicious when the proposition is too good to be true.

Warren once introduced me to a gentleman promoter who wanted to inveigle us into an insurance program. And he said, “We only write fire insurance on concrete bridges that are covered by water.” He says, “It’s like taking candy from babies.” We are able to filter out propositions like that.

WARREN BUFFETT: Yeah. Anybody that, implicit in their comments or what they kind of laugh about or — all kinds of things in terms of the fact — you know, it’s so easy and — it ain’t that easy, you know, and we get suspicious very quickly.

And the truth is, we rule out 90 percent of the times. And we may be wrong about a fair number that we’re ruling out. The important thing is whether the ones we’re ruling in we’re right about.

And so we don’t mind — we’re looking for the obvious cases of people you can trust.

I mean, go back to 1969 again. When I was thinking about who to turn my partners over to, all kinds of people with great records. That was a hedge fund — that was the first hay-day of hedge funds. And there were books written about it, “New Breed on Wall Street” and some of those. You can look them up.

And dozens and dozens and dozens of people with good records. And when I sat down and thought about, I’m going to write my partners and tell them who to turn over all their money to — because most of them had a hundred percent or close to it with me — you know, Charlie, Sandy, Bill Ruane.

I couldn’t have told you which of the three was going to do the best. And, you know, I couldn’t even tell you those three would done better than five others that somebody else might pick.

But the one thing I was sure of is that they were going to be sensational stewards of money.

They were going to care more about those people — the people that were turned over to them — in getting the best result possible than they were going to care about, you know, whether they made X or 2X this year in terms of commissions or fees or any of that sort of thing.

Anytime I find somebody with a — what I regard as an unfair fee structure, and saying, “Well, I can get it,” well, you know, I rule them out.

And I may rule out some of the wrong people. But the ones that are left in, I feel very good about. And I wish I could give you better advice than that, but that’s all I can do.