Numerous articles have been written and research conducted on exactly how Warren Buffett chooses how and where to invest. His methods are not mysterious or convoluted. He looks at three fundamental things:
— The Economics
— The People In Charge
— The Price
Buffet sets a standard in these areas, and if a proposed investment meets the standard, he invests; if not, he doesn’t. That’s it. We all know the outcome of his method.

Given the current economic state that many organizations are facing today, there will be gains made by just picking an approach, any approach.

According to a survey conducted by VitalSmarts, 78% of 589 professionals and managers say they're now involved in at least one project they expect will fail to produce its proposed results. To add to the suffering, 61% said they knew an unsuccessful project was going to flop before its launch, or realized it shortly after it began.

Statistics from the Corporate Portfolio Management Association (www.corporateportfoliomanagement.org) state that:
— over 85% of corporate management believes their resource allocations are “not-in-good shape”;
— 55% of corporate investments are “not-in-good shape” with respect to the accuracy of their benefits, costs and time of delivery estimates; and
— 86% of these corporation business decisions are driven by politics and relationships and not driven by data.

More than ever before, companies must make a concerted effort to optimize the benefits they get from capital expenditures (“CapEx”). Because these are often large, multi-year investments with major implications for future company growth, it makes sense to apply a sound method of scrutiny to these investments. Ironically, many corporations believe that their focus on CapEx takes attention away from operational expenditures (“OpEx”), when, in fact, many OpExitems are truly discretionary. Organizations have become so accustomed to managing the day-to-day costs of their operations that they fail to measure the value they get from their discretionary expenditures.

The challenge is to move to a system where risk can be managed, and where dependence on luck is drastically reduced. As Warren Buffett knows, risk can never be eliminated, but there are definitely ways to manage it. Organizations should take an approach based on Warren Buffett’s three fundamental considerations:
— The Economic Prospect
— The People in Charge
— The Price

By taking a portfolio view when looking at investments, organizations gain the ability to consistently evaluate discretionary projects. This helps people throughout the organization feel like every dollar of investment is on a level playing field, and is being evaluated for its merits, instead of being assessed and funded based on long-held organizational beliefs and the influence of certain groups or individuals.

Organizations tend to do what they know, and what they are comfortable with. That is typically referred to as “organizational bias.” Is your company investing and re-investing in the same types of projects year after year?
Warren Buffett prides himself on his unbiased approach. He believes that he doesn’t need to be an expert, or really know anything at all about the companies he buys. Furthermore, he completely ignores Wall Street and other “experts’” predictions of the future.

Try adopting a systematic approach to project investments, one that focuses on accountability and results, instead of serving the “project pushers” who propose the same investments over and over.

The implications of mismanaging a corporate portfolio can be significant. These problems become more acute when you have a competitor or potential new entrant into your arena that is not making the same portfolio management mistakes.

Portfolio Management is about removing the “noise” from decision-making. It is about removing the non-objective, personality-driven reasons that projects happen.

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