What exactly goes through your mind when you’re actually making an investment? Warren Buffett got this question during an interview and talked for a moment about a few of the things that come to his own mind when he’s trying to evaluate a certain business and it’s future economic potential.
“Well, if I drive by a McDonald’s stand or a Kentucky Fried Chicken stand I will automatically think to myself “What is this business worth?” You know, how many customers can walk in the door? What kind of gross margins can they have? How many people do they need? How likely is it that another chicken stand opens across the street? I mean, all of those things. And that’s true of the chicken stand and it’s true of Google or you name the business. I mean, it’s all about evaluating the economic potential, the economic future of a given business. And most of them you don’t know the answer on. But every now and then you run into one where you know the answer. But that’s all business is. It’s what Aesop said a long time ago: “A bird in the hand is worth two in the bush.” You know, that was said in 600 BC and that’s now what’s called discounted cash flow and all that sort of thing. But he saw that and figured it out, you know, twenty-six hundred years ago. And all I’m trying to figure out is if I could take that dollar in my hand: When do I get the two dollars out of the bush? How sure am I of getting it out of the bush? Is there some other bush where I can get three dollars out of it instead? I mean, it’s very basic stuff. And a lot of times you look at it and you say “I don’t know how many birds there will be in the bush.” So you go in to the next one until you find the answer.”
(Source: 56:55 into Warren Buffett with B-School Students Interview from India)