Great Re-Investment Opportunities

“After ten years in the job, a CEO whose company retains earnings equal to 10% of net worth, will have been responsible for the deployment of more than 60% of all capital at work in the business.” Warren Buffett

“Over a period of years, our thinking has focused more and more on the issue  of reinvestment as the single most critical ingredient in a successful investment idea, once you have already identified an outstanding business.” Chuck Akre

“Does the company have the capital-allocation skills necessary and the market potential to invest all the excess cash generated by the business in projects that can earn above-average returns? In my experience this is perhaps the single most important issue facing any CEO, and is also the area in which management can create or destroy value most quickly and permanently.” Chuck Akre

The ability to earn earnings upon earnings is essentially the definition of compounding. In the long run, we feel strongly that the rate at which the value of a business compounds will approximate its returns on reinvestment.” Chuck Akre

“With an outstanding reinvestor at the helm, even an ordinary business can become a remarkable compounding machine.  There are abundant examples, including of course Berkshire Hathaway, which began its compounding journey as a struggling textile mill.” Chuck Akre

And being a great CEO doesn’t imply someone is also a skilful capital allocator.

“Disappointingly, we often discover that managers who excel at running their businesses fall victim to “fuzzy thinking” on the issue of capital allocation. The most common example that we have encountered recently is the payment of a dividend solely to enlarge the potential shareholder base (some funds by charter will only invest in companies that pay dividends). The decision to pay a dividend, in our mind, should be based on a careful examination of alternative reinvestment options (namely, a lack thereof) and an expensive stock that makes more tax-efficient buybacks unattractive. Other commonly encountered examples of fuzzy thinking include a fixation on the near-term “accretive” or “dilutive” impact on earnings per share of acquisitions, or buying back shares irrespective of valuation.” Tom Saberhagen, Akre Capital

Source: Akre Capital


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