Here's why Warren Buffett says to 'run a lousy business'

Warren Buffett, chairman and CEO of Berkshire Hathaway
David A. Grogan | CNBC

Warren Buffett's holding company, Berkshire Hathaway, is anything but lousy: In 2017, it generated net income of $44.94 billion. But there are advantages to being exposed to struggling businesses, the Berkshire chairman and CEO said at the 2017 Berkshire Hathaway Annual Meeting, adding that it may even make you a better investor: "I really think, if you want to be a good evaluator of businesses — an investor — you really ought to figure out a way, without too much personal damage, to run a lousy business for a while.

"I think you'd learn a whole lot more about business by actually struggling with a terrible business for a couple of years than you learn by getting into a very good one where the business itself is so good that you can't mess it up."

Buffett's longtime business partner Charlie Munger, who has been around for many mistakes and failures, agreed. "It was very useful to us," Munger said of their early days, when they were involved with some bad businesses. "There's nothing like personal, painful experience, if you want to learn. And we certainly had our share of it."

Still, while running a lousy company can be a "useful experience," Buffett said, "I wouldn't advise too much of it."

There's nothing like personal, painful experience, if you want to learn.
Charlie Munger

There are other ways to become a smart investor. For starters, consider the three things the Oracle of Omaha looks for when deciding to invest in a company: a unique product, strong leadership and a good price.

If he doesn't come across a company that meets all three of his criteria, he doesn't invest. Buffett is always "looking for the exception," he says. "But the nice thing is, if there are thousands of companies out there, I really only have to be right on a couple."

He's in no rush to find them, either, and once he does, he buys and holds. "If you aren't willing to own a stock for 10 years," Buffett has famously said, "don't even think about owning it for 10 minutes."

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