No. of Recommendations: 2
In the 1998 Berkshire Hathaway's shareholder meeting, Warren Buffett explains that the best business is one that gives you more and more money every year without putting up anything to get it, or very little. The second best business is a business that also gives you more and more money, but takes more money and the rate at which it reinvests that money to get that growth is a very satisfactory rate.
My confusion comes with the statement the first type of business, which doesn't reinvest as much, is better than the one able to reinvest in the firm.
For instance, consider companies A and B, both similar in terms of their economics, Capex requirements, etc. and with similar Returns on Capital (ROC). Company A doesn't reinvest its FCF (sits in the Balance Sheet, distributes it as dividends or does share buybacks). Company B is able to reinvest most of that FCF at the same ROC.
Wouldn't Company B be significantly more attractive than Company A, assuming they both trade at similar valuations?
What am I misunderstanding in Buffett's statement? Or am I just completely wrong in my assessment of reinvestment in the company?
PS: English isn't my first language so apologies in advance.
No. of Recommendations: 2
"What am I misunderstanding in Buffett's statement? Or am I just completely wrong in my assessment of reinvestment in the company?"
Hi AnomolyInvestor,
I think Buffett is making a casual observation that a company growing profitably without much additional investment required is better than one that does require further investment, all other things being equal. So in your example, company A & B may have similar growth rates/ profits but A does not need to invest to achieve it (Capex requirements are different).
No. of Recommendations: 4
I second Indefensible's concise answer.
and add that the operative words in Buffett's statement,
"The second best business is a business that also gives you more and more money, but takes more money..."
are, "but takes >more< money..."
in other words, it has higher costs, even though it has a good investment return.
I think meaning, the first one that makes more and more money also needs next to nothing to make all that money.
Thanks for letting me think about this, too.
