What are Berkshire Hathaway's acquisition criteria? What core judgments did Charlie Munger contribute?

What Are Berkshire Hathaway's Acquisition Criteria?

Hey, I’ve always been fascinated by value investing, especially the philosophy of the dynamic duo, Buffett and Munger. When Berkshire Hathaway acquires companies, they don’t just pick randomly—they follow strict criteria to ensure the businesses they buy generate long-term profits, not just short-term hype. I’ll break it down simply: these standards are pretty down-to-earth, much like how regular people look for high value and durability when shopping.

Their acquisition criteria mainly include the following (repeatedly emphasized by Buffett in shareholder letters and refined by Munger):

Exceptional Management: They place huge importance on whether a company’s leaders or team are trustworthy, honest, and capable. Buffett often says he’d rather buy a mediocre business with outstanding management than a great business with poor management. Simply put, great people secure a company’s future.
Sustainable Competitive Advantage (Economic Moat): The business must have unique strengths to fend off competitors—like a powerful brand (e.g., Coca-Cola), low costs (e.g., Walmart), or proprietary technology. This ensures long-term profitability and market resilience.
Reasonable Price: They never overpay. As Buffett puts it, it’s about "buying a dollar for 50 cents." It’s not about low stock prices but assessing intrinsic value to ensure a worthwhile purchase.
High Returns and Cash Flow: The business must generate steady cash, not just paper profits. Ideally, it should grow without heavy additional investments—like insurance or consumer goods companies.
Simple, Understandable Business: They avoid overly complex industries. Munger famously advises, "Never invest in something you don’t understand," to sidestep pitfalls.
Scale and Long-Term Potential: The company must be sizable enough to contribute meaningfully to Berkshire’s profits and possess enduring relevance—not something easily outdated.

These criteria aren’t rigid; they’re applied flexibly. But the core principle is buying high-quality businesses to hold forever. For example, See’s Candies was acquired for its strong brand and excellent management—it’s not high-tech but has delivered profits for decades.

What Core Judgments Did Charlie Munger Contribute?

As Buffett’s golden partner, Munger’s biggest contribution was shifting Buffett’s strategy from "cigar-butt investing" (buying cheap but low-quality businesses) to acquiring truly great companies. Munger isn’t just theoretical; he applies multidimensional wisdom like a seasoned veteran teaching you to avoid traps.

Here’s a breakdown of Munger’s key judgments and contributions:

Multidisciplinary Thinking: Munger insists on blending insights from psychology, biology, history, and beyond—not just finance. For instance, he coined "economic moat" to visualize competitive advantage, making durability easier to assess. During acquisitions, he’d ask: "Why will this business endure? Is customer loyalty driven by psychological factors?"
Inversion and Error Avoidance: Munger stresses "inverting" problems—e.g., instead of chasing gains, focus first on avoiding losses. His "Psychology of Human Misjudgment" outlines cognitive biases (like herd mentality or overconfidence), helping Berkshire dodge bad deals. They skipped the dot-com bubble because Munger warned against hype.
Quality Over Quantity: Munger pushed Berkshire to shift from textiles to acquiring exceptional businesses like The Washington Post and GEICO. His core judgment: a company must have an "economic franchise"—innate profit power, not luck.
Long-Termism and Patience: Munger often says investing is about "keeping your bottom in the seat"—meaning winners stay put. He reinforced Buffett’s buy-and-hold philosophy, ensuring acquisitions target businesses built to thrive for decades.

In short, Munger acted as a strategic advisor, broadening Berkshire’s perspective beyond number-crunching to include human and societal insights. In my own investing, I try to emulate his layered thinking to avoid blunders. If you’re new to this, read Poor Charlie’s Almanack—it’s packed with his timeless wisdom!