During the 2003 Berkshire Annual Meeting, Charles Munger discussed a good business, but not a fabulous business, tends to fall into two categories. Here’s an excerpt from the meeting:
CHARLIE MUNGER: If you take a business that is a good business, but not a fabulous business, they tend to fall into two categories.
One is the business where the whole reported profit just sits there in surplus cash at the end of the year. And you can take it out of the business and the business will do just as well without it as it would if it stayed in the business.
The second business is one that reports the 12 percent on capital but there’s never any cash. It reminds me of the used construction equipment business of my old friend, John Anderson. And he used to say, “In my business, every year you make a profit, and there it is, sitting in the yard.”
And there are an awful lot of businesses like that, where just to keep going, to stay in place, there’s never any cash.
Now, that business doesn’t enable headquarters to drag out all the cash and invest it elsewhere. We hate that kind of a business. Don’t you think that’s a fair statement?
WARREN BUFFETT: Yeah, that’s a fair statement. We like to be able to move cash around and have it find its best use. And, you know — but that’s our job. And sometimes we find good uses.
It would be terrific if every one of our great businesses, and we’ve got a lot of great businesses, had ways to deploy additional capital at great rates, but we don’t see it.
And, frankly, you know, it doesn’t happen — I mean Gillette has a great razor and blade business, I mean, fabulous.
There’s no way they can deploy the money they make in the razor and blade business to keep putting more money in that kind of business. It just doesn’t take that kind of capital. They have to deploy some money of it, but it’s peanuts compared to the profits.
And the temptation then is to go out and buy other businesses, and of course that’s what Charlie and I do when we face that, but we don’t think that, overall, the batting average of American industry in redeploying capital has been great. Nevertheless, it’s what we try and do every day.
In a sense, we sort of knock the very procedure that has gotten us to where we are. Is that a fair statement, Charlie? (Laughs)
CHARLIE MUNGER: Absolutely. And that has always worried me. I don’t like being an example of an activity where most people who try and follow it will get terrible results. And we try and avoid that by making these negative comments. (Laughter)
WARREN BUFFETT: We’d make negative comments anyway. (Laughs)
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