"Warren Buffett" Questions (test sense of business, economics, and investing)

Question 1

Tips for Answering Warren Buffett Questions

Answer 1

1. Ask what the investor/business goals are

2. Ask about any constraints, limitations, time horizons, or other limiting factors

Question 2

Let’s say you had $10 million to invest? What would you do with it?

Answer 2

Ask for investor goals first. Are they looking for capital gains, tax-free retirement income? What types of assets interest them?

If investing for over 30-40 years and want high capital gains, a well-diversified portfolio is best. If they want tax-free income, they might be more interested in municipal bonds.

Question 3

If you owned a small business and were approached by a larger company about an acquisition, how would you think about the offer and how would you make a decision?

Answer 3

Key Terms to Consider:

1. Price
2. Form of payment (cash/stock/debt)
3. Future plans for the company in relation to your own plans

Though there is much more, these are most important terms. Weigh each term, and see if anything is of particular importance to you (such as retaining role in the company).

Question 4

We do most of our work with technology companies? Can you talk about a trend or company in the technology industry that has piqued your interest lately.

Answer 4

For any industry group, do research and be able to speak about market trends.

Common Mistakes:

1. Describing something not recent or relevant
2. Don’t explain why trends are occurring
3. Don’t explain impact on market as a whole

Make sure to describe relevant/recent news, try to talk about why you might think a trend is occurring, and explain that trend’s impact on the gross market

Question 5

Let’s say you could start any type of business you wanted, and had $1 million in initial funds. What would you do?

Answer 5

Ask more follow up questions to see if the interviewer is looking for something specific.

If no further direction is given, say you’d want to start a niche business with high margins that requires little startup capital and ongoing maintenance.

Niche market focus is key as most broad, horizontal markets are dominated by major companies

Can explain why this type of business would be attractive and how it could grow with minimal future investment

Question 6

Can you talk about a company you admire and what makes them attractive to you?

Answer 6

Do not list a commonly known company like Apple/Google.

Pick an obscure company no one knows so they know you’ve done research and gives them little room to ask probing questions

Emphasize qualities that investors would find appealing in the company (well-diversified/large customer base, unique competitive advantage, high-margins)

Question 7

Let’s assume you’ll start a laundry machine business? How would you analyze its viability?

Answer 7

Need to determine whether the business is profitable.

• Start by looking at location (important for any retail), estimate customers, laundry frequency per customer, and payment per load. These give an idea of monthly/annual revenue.
• Expenses would include upfront construction/purchase of building/machines. This likely needs a loan.
• Additional expenses would come from maintenance/service of machines, building maintenance, and hiring staff.
• Location plays biggest role in business success
• Since laundry machines are profitable (not labor intense and no need for huge investments after initial), can use for “What business would you start with $1 million question”

Question 8

Tell me about an M&A deal that interested you recently

Answer 8

• Indicate who the buyer and seller were
• Include background info, price, multiples (purchase price/revenue, purchase price/EBIDTA) if available
• Read relevant news article, and discuss deal dynamics (how it developed, other interested parties, and industry implications)
• If they ask info you don’t know, say you don’t know it

Question 9

Pitch me a stock

Answer 9

Similar to “company you admire” question (but must mention financials)

Structure you answer as follows:

1. Give name and summarize what the company does
2. Give a brief overview of financials to indicate its size and profitability
3. State how its undervalued or more attractive than rivals due to any competitive advantages
4. Say there is a long-term trend in its favor
5. Talk about how the next 5-10 years will be great for the company

Don’t make the mistakes of:

1. Failing to list specific financials
2. Not saying how company stacks up relative to competitors, and why its prospects are more favorable

Question 10

Can you explain to me in simple terms, the subprime crisis?

Answer 10

• Banks made mortgage loans to people who were very unlikely to pay them off (or meet monthly payments)
• Borrowing was easy, since interest rates were at historical lows
• Mortgages no longer became loans just to individuals, they were packaged into securities that banks traded with investors (mortgage-backed securities MBS)
• Riskier packages of mortgages were labeled subprime
• Banks made an argument that even if parts of an asset were risky, the rest still had value
• Unqualified homeowners began defaulting, buyers disappeared, and asset value plummeted to $0.
• Since banks had so many subprime MBSes, their values also approached $0 and few failed or went bankrupt. The securities were so complex that nobody/few understood them or the risks involved.

Question 11

Do you agree with the $700 billion bank bailout?

Answer 11

Specific answer doesn’t matter as much as reasoning.

• Probably better to say yes; as we witnessed with the bankruptcy of Lehman Brothers, a large enough financial institution crashing can bring down the rest of the economy and financial markets with it