Rich Guy is a billionaire and he is looking for a new business to invest in. Fortunately for Rich Guy he has a chance encounter with Warren Buffett.

Rich Guy: Hey Warren!

Buffett: Hey Rich!

RG: Say Warren, everybody tells me you are the guru of investing. Maybe you can help me with my little problem.

Buffett: Uh, oh! This sounds like trouble…

RG: No, no. I promise I won’t take much of your time.

Buffett: Ok. What’s your problem?

RG: I have inherited a fortune that I want to invest. I hired a few Investment Bankers and they came up with all kinds of proposals, but I was not convinced. And I am confused about where to invest or what to do?

Buffett: Look- there are all kinds of ways that you can invest in and be successful. You can invest in startups, you can buy out businesses and turn them around and sell them, you can invest your time and energy finding the next Google or Amazon or you can try my way- that is find companies with predictable cash flows.

RG: Tell me a bit more about each one of them, Warren.

Buffett: So in startup investing like the way Peter Thiel does, you identify companies that are likely to make the world better. For example- Facebook, Stripe, Tesla, and AirBnB. Now for every Facebook, there would be 20 other startups that didn’t make it. Therefore it’s hard to know which company will make it through.  But Peter is a genius! He can see things that normal people can’t. But the same kind of investing is very hard for most people.

Another kind is the private equity kind of guys. They buyout existing companies, sell some parts of the company, fix up the other parts and sell it after a few years. Kind of like the fixer-uppers in real estate that buy run down properties in decent neighborhoods, refurbish them and sell them for a profit. These guys have to be cold and ruthless in getting rid of loss making units, trimming the workforce etc and then selling the lean, profitable unit to another company.

And then you have my kinds. Very early on my partner Charlie and I decided that there was no point being money rich but time poor. So we built this company the way we wanted it – easy for us. What do the Chairman and Vice Chairman for multi billion dollar company do everyday? We read.

We also realized that we aren’t gifted like Peter or ruthless like the PE guys. And so we avoid investing in companies like say Uber where we can’t predict future cash flows. People give us a lot of flak for ducking opportunities like Uber. And we say- Uber is great for the society. But we aren’t so smart that we can figure out if and how Uber is going to make money for it’s investors say 5 years or even 10 years from now on. Therefore we stay away from such promising opportunities. It’s our limitation and not Uber’s.

RG: You have limitations?

WB: Yes we do. We have big limitations. But as Charlie would say – “All I want to know…” -we tend to stay away from games where we have no real advantages.

RG: Thanks Warren. I want to apply your kind of thinking to a specific opportunity. My Investment bankers pointed me to a non-operational airline in India. They said I could buy it at a discount. How should I think about it?

WB: I would say frame it very differently using undefiable ideas. For example – Newton’s first law of motion says that “An object at rest remains at rest, or if in motion, remains in motion at a constant velocity unless acted on by a net external force.”  And second law says – greater the mass, greater the force required.

Local authorities, lessors, creditors, employee unions, availability of pilots, permits, airport slots, brand equity with customers, all add to the mass. Therefore if you want to resurrect this airline that is now at (temporary) rest, you really need a lot of force to move this. And by force I mean a function of money, time, connections and patience. And even after turning it around, airlines usually tend to suck more capital from their owners. The base rate just sucks!

Is that a bet you wish to take? And if you make this bet, what other bet are you foregoing?

RG: Wow! Such clarity. Who would’ve even thought high school physics could help arrive at a decision.

WB: Exactly! Charlie and I are not experts at problem solving. But we are good at problem avoidance. And what you described to me, seemed like a problem we would rather avoid. So we look for easy bets and avoid difficult ones.

RG: So, what are those easy bets that you keep talking about?

WB: The easy bets, I would go after usually have the following characteristics. Think of these also as filters:

• Predictable cash flows
• Competitive advantages that will keep the cash flows predictable
• Companies that need very little capital to grow
• Preferably one that you can buy it at a discount

The particular airline that you mentioned would flunk the 2nd and 3rd tests even though it would pass the 4th with flying colors.

RG: I was hoping for names…

WB: Berkshire Hathaway is one that I recommend.

RG: Ha ha…thanks Warren! I think learnt more about how not to invest rather than how to.

WB: What not to do is more important than what to do. Best wishes!