In his latest Q4 2021 Letter, Ron Baron discusses goodwill as the gift that keeps on giving. Here’s an excerpt from the letter:
“During inflation, Goodwill is the gift that keeps on giving.” Warren Buffett. 2022.
Buffett is such an easy person to quote. His sentences are simple. His ideas elegant. We presume what he refers to when he says “Goodwill is the gift that keeps giving” is the positive effect inflation has on increasing the intangible value of businesses. We define “Goodwill” as the value of a business in excess of its stated “book value.”
Included in business “Goodwill” are its management talent…its culture…its competitive advantages…its reputation…its clients…its operations…its brands…its growth prospects…its contracts both real and implied…and the discounted value of its cumulative “nominal” long-term earnings. (“Nominal” means present day dollars.) When inflation increases the value of business “Goodwill,” it increases the value of that business and the defensive “moats” surrounding it.
Unlike fixed assets that really do depreciate and must be replaced or refurbished in present day dollars, “Goodwill” in general does not decline in value and does not need to be replaced…beyond normal annual operating and growth expenses.
Intangible assets and ideas are what most investors and analysts find difficult to assess and value. The focus of Baron is to invest in our asset management business by hiring, training, and retaining extraordinary individuals to study businesses and to value their long-term intangible assets…not only their fixed assets.
You can read the entire letter here:
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