Warren Buffett, the billionaire chief executive officer of Berkshire Hathaway Inc., says he rates businesses on their ability to raise prices and sometimes doesn't even consider the people in charge.
"The single most important decision in evaluating a business is pricing power," Buffett told the Financial Crisis Inquiry Commission in an interview released by the panel last week. "If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business."
Buffett, 80, accumulated the world's third-largest personal fortune through a career of stock picks and takeovers. He has bought companies such as railroads and electricity producers, whose pricing power stems from a dearth of competitive options available to clients.
Buffett also has built stakes in firms like Coca-Cola Co. and Kraft Foods Inc., which rely on the appeal of their brands to attract and keep customers.
"The extraordinary business does not require good management," Buffett said in the interview, conducted May 26 in Omaha.
The FCIC investigators focused on Buffett's investment in Moody's Corp., the bond-ratings firm blamed by lawmakers for handing out inflated credit grades during the housing boom. Buffett said he held stock in Moody's because the company's leading market share, along with that of rival Standard & Poor's, gave the two firms flexibility in setting prices.
"I knew nothing about the management of Moody's," Buffett said. "If you own the only newspaper in town, up until the last five years or so, you had pricing power and you didn't have to go to the office."
A dominant position can't prevent a bad manager from destroying a company over time, said Benjamin Hermalin, a professor of economics at the University of California, Berkeley's Haas School of Business.
"If you have a really dominant position you can survive for quite a long time with bad management, but eventually it will catch up to you," he said. "In the short run I would agree with Buffett, but in the longer-run perspective there is something to be said for having a good manager."
Buffett routinely singles out and praises managers from Berkshire's more than 70 operating companies.
"In the short run, good management can make a stock pop but I follow what Warren's saying, especially because his point of view looks at the fundamentals," said Terry Connelly, dean of the Ageno School of Business at Golden Gate University in San Francisco, and a former managing director at Salomon Bros. "Good management can't do anything with a bad case."