Tao of Charlie Munger: A Compilation of Quotes from Berkshire Hathaway's Vice Chairman on Life, Business, and the Pursuit of Wealth With Commentary by David Clark

by David Clark

“There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested—there’s never any cash. It reminds me of the guy who looks at all of his equipment and says, ‘There’s all of my profit.’ We hate that kind of business.” – Early in Charlie’s career as an investor he got involved in a high-tech business that was manufacturing sophisticated measuring devices for science. The company had good sales, but every dollar it earned had to go right back into the business. Luckily for Charlie, he sold the company right before the technology changed and rendered the company’s product obsolete. He had the same experience with Berkshire’s textile business: in good times it made money, even created a small surplus, but as time went on the textile business became so competitive that every dollar the company made had to be spent trying to keep the business afloat. Charlie had the exact opposite experience with See’s Candies—the pots that hold the chocolate were fifty years old and still didn’t need replacing, and the product was the same year after year. The business required very little in capital expenditures, so it was possible to take money out of it every year to invest in other businesses.

Interesting…different from the ownership mentality. Difference is in what you’re using those profits for—capital depreciation costs or re-investment in future opportunities. Minimize the former (lower costs) and use profits to improve business or reward shareholders.