Thread by @ideahive

Thread on ‘capital allocation’.

1/ The Buffett shareholder letter has got me thinking about what a great capital allocator he has been at #BRK. One of the best ever. Henry Singleton, Tom Murphy & a few others are right along side him.

2/ A great capital allocator in my opinion can be correlated with long-term market outperformance. @chriswmayer makes this case in his book #100baggers. William Thorndike hammers the point in #theoutsiders

3/ So what are the capital allocation decisions that made #Buffett and others so great? And how can we identify a CEO that can allocate effectively?

4/ Firstly, we have acquisitions. The ability to acquire a business at the right price is critical for any allocator. In the shareholder letter, Buffett shares many of the successful acquisitions #BRK has made, but also some of the mistakes.

5/ @brettkellySYD is CEO of a micro-cap in Australia $KPG. He has continually acquired accounting firms at around 4x EBITDA and less than 1x sales. A fragmented industry of ‘mom and pop’ business can be beneficial.

You can read more about Brett here: contactinvestingwi.wixsite.com/investingwithf…

6/ Henry Singleton is another great serial acquirer and arguably the best capital allocator ever. Buffett & Munger have both suggested Singleton is second to none.

7/ Singleton took advantage of Teledyne’s public valuation. When trading above high multiples, he would raise capital to acquire private businesses at low multiples. Taking advantage of the arbitrage situation between public and private markets.

8/ Second capital allocation decision to discuss is share buybacks. Again, Singleton is the best example. During his time as CEO he bought back 90% of all outstanding shares.

9/ He would raise capital during the early days when trading at high multiples. But when they became cheap, he bought back more shares than any other CEO in history. During his time at Teledyne he turned $1 of shareholder value into $180.

10/ Thirdly, is not paying a dividend. Buffett has been very public about never paying a dividend due to tax inefficiencies. He and many others suggest reinvesting that capital for growth or even buying back shares will increase shareholder value more than paying out dividends.

11/ Of course there are times dividends are a good option of capital allocation. For example, if a company is trading above intrinsic value and have no opportunities to reinvest the capital for growth, then a dividend would usually be a better decision than a buyback.

12/ there are other ways management can intelligently allocate capital, although I just wanted to highlight a few that have made Buffett so great. His 2020 shareholder letter highlighted some of these brilliant decisions.

13/ Here are a few of Buffett’s best capital allocations;

Sees Candy & GEICO acquisitions, consistent buybacks below intrinsic value and reinvesting rather than paying a dividend.

The shareholder letter this year has highlighted the importance of capital allocation.

14/ Overall, I think it’s important for investors to put an emphasis on finding a skilful capital allocator. If you are looking for above market returns, you need to find above average capital allocators. Ideally, we are searching for the next Buffett, Singleton or Murphy.