Warren Buffett: How To Determine If Someone Is A Great Capital Allocator

Johnny HopkinsWarren BuffettLeave a Comment

During the 2011 Berkshire Hathaway Annual Meeting, Warren Buffett was asked – how can we determine how good of a job you have done at allocating capital? Here’s an excerpt from the meeting:

WARREN BUFFETT: Well, the real test will be whether the earnings progress at a rate that’s commensurate with the amount of capital that’s being retained. And over time, a market value test — but markets can be very volatile and capricious — but over time, obviously, we — unless the market value of Berkshire is significantly greater than the amount of capital that we have kept from you, retained, and used to buy businesses, you know — the verdict is against us if we ever start selling at a discount to that factor.

But you just have — and, you know, it is not a perfect measurement and certainly is not on any three-month or six months or even one-year basis, but over time, if we’re going to keep your money, we have to earn a better-than-average return on that money we keep and that has to translate into the stock selling at a premium over the money we retain from you.

And so far we’ve done OK on that, but the job gets tougher every year.


CHARLIE MUNGER: Yeah. We have continued to beat the market averages. We just aren’t beating our own past record. And I guarantee that will continue, at least the last half of it. (Laughter)

WARREN BUFFETT: Yeah. Only the last half of it, right?


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