ratiman

Will BRK after Buffett try to run the conglomerate like a business? For instance BRK has a number of furniture subs, including NFM, Jordan's, Star, CORT, and maybe some others. Why not merge those and try to get scale? I know that is against the BRK religion but it is what any other conglomerate would do. Same goes double for jewelry.

What I meant was that he doesn't consider a poor track record of acquisitions or lack of reinvestment opportunities to be a disqualifier. The Berkshire portfolio is full of brands that have withered while in the BRK portfolio without any reinvestment or acquisitions, like Dairy Queen and Jordan's Furniture. And why would past capital allocation decisions be included in a measure of capital efficiency? It's completely extraneous so it's curious that ROIC is so much more popular than RONTA. What you want to understand is the efficiency of the current business, not the blended measure that includes the effectiveness of past management decisions.

Buffett doesn't really care about the company's past investment decisions because he doesn't plan on growing by acquisition. Typically if the business doesn't have reinvestment opportunities Buffett isn't going to do any acquisitions.

Munger & Buffett have mentioned that they did not initially realize how important RONTA was. Does Graham's Security Analysis even mention RONTA? DNA was discovered before investors discovered the important of tangible capital.

Some businesses even have negative tangible assets. These are the truly great businesses, like Chewy.

I haven't seen a company ever use it in an investor presentation. Banks do use ROTA and Buffett is talking about banks in the clip above, whereas in a normal business I think Buffett would focus on *net* tangible assets. But I don't remember a CEO ever talking about RONTA. I could be completely wrong though.

Buffett has consistently said that the best way to measure a business is return on tangible assets (see video). Likewise Greenblatt's magic formula uses ROTA. Tangible assets (PP&E, inventory, receivables, accrued expenses and some other stuff) minus payables is the amount of capital needed to run the business. And despite Buffett touting this measure for the last fifty years it rarely gets mentioned. For instance the last mention of "return on tangible assets" on X was over a month ago whereas the last mention of "return on invested capital" was an hour ago. The difference between ROTA and ROIC is that ROTA ignores capital structure and intangibles. So why has Buffett's preferred measure been largely ignored? This is especially puzzling when it is much easier to understand than the alternatives.

This seems like the difference between chess and poker extended to politics. Is he saying that conservatives are Villagers?

It's a good point that a capital lite business can grow to the sky but a capital heavy business is constrained by real resources. If a cap heavy business compounded indefinitely it would eventually consume all of the real resources but that constraint does not apply to software. If the high capex business did succeed in producing real resources at near zero it would put itself out of business, like nat gas producers.

Here is a list of highest return stocks over the last 100 years roughly. As you can see there are plenty of capital heavy stocks. The low capital stocks on this list are Altria, S&P, Coke, Pepsi, Hershey, J&J, UST, Tootsie Roll. I didn't include tech or pharma companies because R&D really should be considered capex. So historically capital lite has mainly meant popular brands. There is a reason why CPG companies still trade at 20x multiples. I think what connects all of these companies is that there is no substitute for a tootsie roll when you want a tootsie roll.

I agree with your analysis but that's why it's FCF and not earnings. The capital heavy business will have higher cash flow and more capex requirements.

Everyone knows that capital light lite outperform but why? Let's say there are two business. Same exact growth rate and same FCF. One is capital lite and the other is not. Why does the capital lite typically outperform? The capital lite will have much higher return on capital but it doesn't matter because growth in FCF is the same. My guess is that high capex businesses develop hidden liabilities over time that aren't immediately apparent ie real depreciation is understated.

I thought banks lend money? In none of these cases do the companies lend money. Instead they are lent money by customers. Borrowing money is very different from lending it. Negative working capital is great but it has nothing to do with being a bank.

It's not the case that the recession crowd has stopped predicting a recession. The consensus has not shifted to "inflation is here to stay". A few people predicting higher inflation does not change the consensus. The consensus is vastly and overwhelmingly on the side of disinflation, a slowing economy (variable lags), and lower rates and lower inflation over the long term. If that is your position, you are with the crowd. The crowd is usually right but you are not bravely fighting the consensus. For instance consider the consensus (from Nick Timiraios of WSJ):

So Powell comes out and says what everybody is realizing, that current rates aren't very restrictive, and now Fedwatch has Fed staying flat through December at . . . ZERO. Not .1% but actually 0%. I'm clearly missing something. Isn't the first rate cut the hardest, because it commits the Fed in one direction? If the Fed stays flat it leaves open the option of hikes without flip flopping. There must be something else going on because cutting with everything at highs and oil perking up and so on strikes me as insane.