CAPITAL ALLOCATION

Capital allocation is the CEO’s most important job” William Thorndike

“If you buy something with a 10% free cash flow yield and hold it for 3 years, management is going to be responsible for allocating a third of the value of the company over that time. You have to really care about that” Adam Weiss

"The first law of capital allocation—whether the money is slated for acquisitions or share repurchases—is that what is smart at one price is dumb at another"  Warren Buffett

"Given the long-term nature of our investment approach, capital allocation is of paramount importance" Marathon Asset Management

"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

“I want to know in allocating the company’s capital specifically how they rank paying a dividend, making acquisitions or investing in organic growth” Carlo Cannell

“One major factor we analyse is capital allocation. If the company generates a lot of free cash flow and the management proceeds to waste it, that free cash flow has no value to investors.” Andrew Wellington

“The companies in which we have our largest investments have all engaged in significant stock repurchases at times when wide discrepancies existed between price and value” Warren Buffett

"Effective capital allocation...requires a certain temperament. To be successful you have to think like an investor, dispassionately and probabilistically, with a certain coolness" Michael Mauboussin

"The best capital allocators are practical, opportunistic, and flexible.  They are not bound by ideology or strategy." William Thorndike

Capital allocation is fundamental” Mohnish Pabrai

“Over time, the skill with which a company’s managers allocate capital has an enormous impact on the enterprise’s value” 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

“We think management’s reinvestment acumen is something Wall Street doesn’t adequately value. Most investors develop linear earnings models to arrive at pricetargets, but because the view is usually so short term, they’re more likely to missthe extent to which smart capital allocators can create real compound value over five, ten, fifteen or more years." Peter Keefe

“I learned early on how truly valuable – and rare – it is to find skilled and creative management teams and boards with a clear and rational approach to capital allocation” Jason Stankowski

“Substantial research has long shown that firms that issue new stock tend to underperform the market in subsequent years while those who buy back their own stock tend to outperform” Andy Redleaf

“While goodwill write-offs are non-cash, they can indicate just horrendous capital allocation

“I’m amazed at how many CFOs don’t truly understand the long-term sustainability and value creation of stock buybacks.” Lee Ainslee

"When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases." Warren Buffett

“Our preference is for companies to employ cash for buybacks because we believe every stock we own is under-valued” Andrew Wellington

“As long as you’re doing something that doesn’t harm the value of the company, accelerating the benefits to shareholders is exactly what creating value is about. The best example, of course, is buying back stock.   If you have a great long-term story and a value creating plan ahead of you, why would you wait and buy back stock after the market fully reflects the value? From a capital allocation standpoint, you want to buy back stock ahead of all that”   Scott Ostfeld

“The fact of the matter is that, for most declining businesses, management tends to redeploy cash flow into things outside of their core competencies in a desperate attempt to save their jobs. In the case of Kodak, they took some of their patent proceeds and cash flow and invested in a printer business, which is another declining business model.” Jim Chanos

"In allocating capital, activity does not correlate with achievement.  Indeed, in the fields of investments and acquisitions, frenetic behaviour is often counterproductive" Warren Buffett

"The most important thing management does is allocate capital" Jonathan Shapiro

"Understanding intrinsic value is as important for managers as it is for investors. When managers are making capital allocation decisions—including decisions to repurchase shares—it’s vital that they act in ways that increase per-share intrinsic value and avoid moves that decrease it. This principle may seem obvious but we constantly see it violated. And, when misallocations occur, shareholders are hurt." Warren Buffett

“Managers tend to be reluctant to look at the results of the capital projects or the acquisitions that they proposed with great detail only a year or two earlier to a board. And they don’t want to actually stick the figures up there as to how the reality worked out relative to the projections. That’s human nature.” Warren Buffett

"Because management's capital allocation decisions have such an important impact on the value created over our expected five to ten year holding period, we pay careful attention to their historical track record and want to hear that they have a rational framework for making decisions" Brian Macauley

"CEO's who recognise their lack of capital-allocation skills (which not all do) will often try to compensate by turning to their staffs, management consultants, or investment bankers.  Charlie [Munger] and I have frequently observed the consequences of such "help".  On balance, we feel it is more likely to accentuate the capital allocation problem than to solve it"  Warren Buffett

"Two companies with identical operating results and different approaches to allocating capital will derive two very different long-term outcomes for shareholders. Essentially, capital allocation is investment, and as a result all CEOs are both capital allocators and investors. In fact, this role just might be the most important responsibility any CEO has, and yet despite its importance, there are no courses on capital allocation at the top business schools." William Thorndike

"What we want is very large discounts to intrinsic value with great capital allocators" Mohnish Pabrai

"Our flexibility in respect to capital allocation has accounted for much of our progress to date." Warren Buffett

“Understanding intrinsic value is as important for managers as it is for investors.  When managers are making capital allocation decisions - including decisions to repurchase shares - it's vital that they act in ways that increase per-share intrinsic value and avoid moves that decrease it.  This principle may seem obvious but we constantly see it violated.  And, when misallocations occur, shareholders are hurt.”  Warren Buffett

"I look for businesses with capacity to reinvest. " Thomas Russo

“A big topic of conversation is always capital allocation. We’re looking for the discipline to only invest for a return on a risk-adjusted basis that is very attractive and consistent with historical levels. Not having a clear basis for making decisions, or using rules like, “We’re looking to earn 200 basis points above our cost of capital,” are obvious red flags” Peter Keefe

"A textile company that allocates capital brilliantly within its industry is a remarkable textile company - but not a remarkable business." Warren Buffett