Tren Griffin+ Your Authors @trengriffin I work for Microsoft. Previously I was a partner at Eagle River, a private equity firm established by Craig McCaw. I am on the board of directors of Kymeta. Oct. 19, 2019 3 min read + Your Authors

1/ "A textile company that allocates capital brilliantly within its industry is a remarkable textile company — but not a remarkable business.” Warren Buffett (1985).

You can't understand why he is such a great capital allocator if you don't understand the previous sentence.

2/ "Successful capital allocation means converting inputs, including money, things, ideas, and people, into something more valuable than they would be otherwise.” “The goal of capital allocation is to build long-term value per share.” Michael Mauboussin 

3/ Warren Buffett: "It’s the ability to distribute cash that gives Berkshire its value." 

"The economic value of any asset is the present value… of all the future streams of cash going in or out of the business." 

4/ “The numbers in any accounting report mean nothing, per se, as to economic value. They are guidelines to tell you something about how to get at economic value. To figure out that answer, you have to understand something about business.”

Warren Buffett 1994 Annual Meeting

5/ “Some of our best businesses we own outright don’t grow. But they throw off lots of money, which we can use to buy something else." "There’s a huge difference in a business that grows and requires lots of capital to do so and a business that grows and doesn’t require capital.”

6/ "Our capital is growing, without physical growth being in the business. And we are much better off being in that kind of situation [than] a business that, itself, is growing, but that takes up all the money in order to grow, and doesn’t produce at high returns as we go along."

7/ “If our managers spend on machinery, equipment, plants, new leases, we have no review process on that. They know how to allocate the money that relates to actual operations of their business.

In terms of the capital that is generated above that, that that’s our job." Buffett

8/ "It doesn’t matter to Warren where the opportunity is. He has no preconceived ideas about whether Berkshire’s money ought to be in this or that. He’s scanning the world trying to get his opportunity cost as high as he can so his individual decisions are better." Charlie Munger

9/ "If opportunity A is better than B, and you have only one opportunity, you do A. If you’re really fortunate, you get to be like Berkshire. We have high opportunity costs. We always have something we like and can buy more of, so that’s what we compare everything to." Munger

10/ "When managers are making capital allocation decisions, including decisions to repurchase shares, it’s vital that they act in ways that increase per-share intrinsic value and avoid moves that decrease it. This principle may seem obvious but we constantly see it violated." WEB

11/ "All inputs have an opportunity cost, or the value of the next best alternative. Unless an input is going to its best and highest use, it is underperforming relative to its opportunity cost." Michael Mauboussin 

12/ "Proper allocation of capital is an investor’s number one job.” Charlie Munger

"If we’re keeping $1 bills that would be worth more in your hands than in ours, then we’ve failed to exceed our cost of capital.” Warren Buffett

13/ "The first law of capital allocation is that what is smart at one price is dumb at another.”

"After ten years in the job a CEO whose company retains earnings equal to 10% of net worth, will have been responsible for the deployment of more than 60% of all capital."

14/ "Capital allocation is investment and all CEOs are both capital allocators and investors. This role just might be the most important responsibility any CEO has." William Thorndike

Managing a business ≠ allocating capital.

The skills required for each role ≠ the same.

15/ "All capital has an opportunity cost, whether the source is internal or external. As a consequence, managers should explicitly account for the cost of capital in all capital allocation decisions." Michael Mauboussin

Common common allocation error. 

16/ When allocating capital "there are only five things you can do: pay dividend, buy back stock, pay down debt, do an acquisition, and invest in your existing assets. Buffett added a sixth one to that, which is to invest in the stock market." Thorndike 

You can follow @trengriffin.


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