Warren Buffett is known for his shrewd business practices and cutthroat negotiating tactics. His company, Berkshire Hathaway Inc., is one of the world’s largest conglomerates and investment companies. It has acquired dozens of companies over the years with more than 75 wholly owned or controlled subsidiaries. She owns shares valued at billions of dollars in companies like Apple Inc., Amazon.com Inc., Mastercard Inc. and others.
Buffett amassed his incredible portfolio and company value of nearly $1 trillion through decades of shrewd investments, smart acquisitions, and business acumen. Buffett, a longtime Nebraska resident, earned his undergraduate degree in business from the University of Nebraska-Lincoln in 1950. Nearly six decades later, he returned to the university to deliver a speech to the promotion, talking about some of the most valuable things he learned at a young age that propelled him to where he is today.
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Buffett said there was nothing more important to understand than accounting.
“People ask me what they should take in business school,” Buffett said. “You have to understand accounting. It’s the language. It’s like being in a foreign country and not knowing the language if you’re in business and you don’t understand accounting.”
Not only is it a valuable tool for understanding the business world, but Buffet says it has made him “a lot of money.”
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Accounting is not an abstract principle used only in textbooks. Buffett recounts how he used accounting to acquire the popular home manufacturing company Clayton Homes in early 2003.
Most acquisitions require extensive due diligence, meetings, negotiations and other processes before an acquisition can take place. While much of this has probably yet happened, Buffett gave a unique, billion-dollar example of how he used accounting to acquire the company.
“We agreed on $1.7 billion for this. I made this deal over the phone without ever meeting the people there,” Buffett said. “But I had seen enough from reading the 10-K, 10-Q annual reports.”
Buffett admits to using his accounting skills and information provided by the Securities and Exchange Commission of an acquisition target to analyze the company and learn about its quality based on the decisions revealed in their filings.
Although it is likely that a series of due diligence and meetings took place after these phone calls, accounting allowed Buffett to make a multibillion-dollar decision to buy a company with minimal upfront legwork while being sure that he would get a good deal in his acquisition.
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