Enphasising free cash flow was the key to long term value creation. As it freed cash to be invested in the highest return investments either internallty or externally.
Net income is a blunt tool for measuring business performance as it can be distorted by differences in debt levels, capital expenditure and aquistion history.
CEOs need to run their opperations effectively and deploy the cash generated by those opperations.
The most successful CEOs decentralised opportations and centralised capital allocation.
CEOs have five basic choices for capital allocation: aquireing other businesses, issuing dividences, paying down debt, repurchasing stock. And three ways of raising capital, tapping internal cash flow, issuing debt and raising equity.
What matters in the long run is increase in per share value, not overall growth or size.
Cashflow, not reported earnings determines long term value.
Decentralised organisations keep both costs and rancor down.
Indpendant thinking is essential to success. Interactions with outside advisors can be distracting and time consuming.
With aquistions waiting for the right deal is a virtue. As is occational acts of boldness.
The top CEOs did simple one or two pay calculations themselves rather than relying on other peoples estimates. They used conservative esitmates.
The most successful CEOs were value buyers who had simple rules (eg 5 x cashflow) that were easily quantifiable, when buying. They would not break their rules even for modest differences in price.
They used their own shares to buy other businesses when they felt they were overvalued and purchases their own shares (in bulk no gradually) when undervalued.
Use of leases on cinmea purchases decreased the amount of capital employed in the new cinema locations.
The best investors looked for “no brainers” rather than just good investments. They wanted investments with a “margin of safety”. That was investments with an important competitive advantage and a price well below the intrinsivc value (the price a fully informed, sophisitcated investor would pay for the company).
Many of the purchases of companies were made directly rather than when the companies were on the open market and competition for them was higher.
Companies with low capital needs and the ability to raise prices were best placed to avoid the corosive impact of inflation.
Charlie Munger attributed his and Warren Buffets success to the ability to “raise funds at 3% and invest them at 13%”.
The most succesful CEOs “believed what mattered was clear-eyed decision making, and in their cultures enphasised seemingly old-fashioned values of frugality and patience, independance, and (occational) boldness, rationality and logic. P209
They often had very small offices and central administration. There seemed to be a inverse relationship between how expensive the company headquaters was and investor returns.
These investors were will to wait seemingly indefinately when returns were uninteresting.
Always do the maths to make sure every investment decision is the best option available. The maths is simple but most people don’t do it they just focus on their prefered project and don’t consider alternatives. Choosing from a wider range of alternative increases your likely return. Focusing on a wide range rather than just with in your current industry is a form of competitive advantage over people who fail to do this.
“Float” is money that you control but don’t own. Warren Buffet controls billions in insurance premiums that may take years before they pay out. This allows low cost investing. This can be done with the money owed to suppliers via cashflow. But avoiding low profit (pricing) options and waiting for high profit (price) options means cash is available for these “no brainer” investments when you see them.