The Acquirer's Multiple: How the Billionaire Contrarians of Deep Value Beat the Market

by Tobias E. Carlisle

Let’s say the bad business reinvests all its $1 million in profit and maintains its profitability. The next year, it will earn $1.05 million on $21 million in capital. Valued the same way, the business is worth $10.5 million, just $500,000 more than the last year. The $1 million reinvested in the bad business is worth just $500,000 more in business value. It turned $1 in profit into 50 cents in value. Its growth destroyed value. This is the most surprising result of Buffett’s theory of value. Not all growth is good. Only businesses earning profits better than the rate required by the market should grow. Businesses with profits below that rate turn dollars in earnings into cents on the dollar in business value. The owner of the good business wants the business to reinvest and grow because that growth is profitable. The owner of the bad business wants all the earnings paid out because the growth destroys value.