Warren Buffett, the CEO of Berkshire Hathaway, is consistently ranked as one of the world’s wealthiest, successful and most influential persons.

One of Buffett’s famous quotes is “Risk comes from not knowing what you’re doing”.

Buffett should know it better than anyone else. He has seen his wealth skyrocket from practically nothing back in the 1950’s to billions today. Buffet’s investment philosophy has always been in Value Investing. But how does Buffett do it?

Buffet gave the following answer when he was asked about his sources of information during the Annual Meeting of Berkshire Hathaway in 2003:

“We read a lot — we read daily publications, we read weekly or monthly publications, we read annual reports, we read 10-Ks and we read 10-Qs. Fortunately, the investment business is a business where knowledge accumulates. Everything you learn when you’re 20 or 30, you may tweak some as you go along, but it all kind of builds into a knowledge base that’s useful forever.”

Without a doubt, Buffett spends an enormous amount of time reading and researching the executives, the company and the business he is interested in before making any investments in it. It has been reported that he spends days and even weeks pouring over trade reports, annual reports, the target company’s business strategies, its management philosophies, its competitors and the long term growth potential of the business. He does all of that before he even considers investing in the company and the business.

Buffett ensures that he does his homework thoroughly before making any investment moves. He first invests time, energy and effort upfront to understand the target company and its business inside out before putting any money down for the target company.

“Never invest in a business you cannot understand” is Buffet’s famous philosophy. It clearly underscores his investment philosophy and explains why most of his investments have brought him huge returns over the years.

Jim Rogers, another famed investor who made his profits in Commodities also had this to say:

“The best advice I ever got was on an airplane. It was in my early days on Wall Street. I was flying to Chicago, and I sat next to an older guy.

Anyway, I remember him as being an old guy, which means he may have been 40. He told me to read everything. If you get interested in a company and you read the annual report, he said, you will have done more than 98% of the people on Wall Street.

And if you read the footnotes in the annual report you will have done more than 100% of the people on Wall Street.

I realized right away that if I just literally read a company’s annual report and the notes — or better yet, two or three years of reports — that I would know much more than others.

Professional investors used to sort of be dazzled. Everyone seemed to think I was smart. I later realized that I had to do more than just that. I learned that I had to read the annual reports of those I am investing in and their competitors’ annual reports, the trade journals, and everything that I could get my hands on.

But I realized that most people don’t bother even doing the basic homework. And if I did even more, I’d be so far ahead that I’d probably be able to find successful investments.”

Do you perform your due diligence before hiring the candidate?

In our context of interviewing and selection, you need to prepare yourself if you are the interviewer and your preparation must be done prior to meeting any of your candidates for a job interview – just like what Buffett and Rogers do before putting their money down for any investments.

So if you still believe that your people are your greatest assets, then you need to ensure that preparation is done upfront prior to any human capital investments.

“Risk Comes from Not Knowing What You’re Doing???. Nothing is more applicable to our context of interviewing and selection than this.

If you don’t know what you’re doing, and you don’t know who you are hiring, then your risks of ending up with a bad hire increases exponentially.