Warren BuffettAnalytical perspectiveWB-P03PRODUCT ADVISORY COUNCIL
Compare acquisition assumptions with outcomes
Warren BuffettAnalytical perspectiveWB-P03The method
Compare acquisition assumptions with outcomes
Before committing resources, record the competitive advantage and what is surrendered in exchange; later check whether the original assumptions held.
When to use it
- Acquisitions, major partnerships or resource commitments that are difficult to reverse.
Ask yourself
- Which options are we giving up, and what changes could remove the advantage?
Put it into action
- Preserve the original forecasts and triggers, and schedule a comparison with actual outcomes.
- Examine the transaction structure, the opportunity cost of the assets used to pay and the business prospects separately.
Keep these limits in mind
- Historical reviews contain hindsight bias; cases do not prove that the future can be predicted accurately.
- The cost of equity cannot be measured only by its accounting amount on the transaction date, nor judged solely by a later share price.