berkshire hathaway, page-20

here is the secret to Warren Buffetts success

taken from the 1981 letter to share holders

be careful if you read this you may be in danger of making money.... a lot of money...you may even become a millionaire

"What makes sense for the bondholder makes sense for the
shareholder. Logically, a company with historic and prospective
high returns on equity should retain much or all of its earnings
so that shareholders can earn premium returns on enhanced
capital. Conversely, low returns on corporate equity would
suggest a very high dividend payout so that owners could direct
capital toward more attractive areas. (The Scriptures concur. In
the parable of the talents, the two high-earning servants are
rewarded with 100% retention of earnings and encouraged to expand
their operations. However, the non-earning third servant is not
only chastised - “wicked and slothful” - but also is required to
redirect all of his capital to the top performer. Matthew 25:
14-30)

But inflation takes us through the looking glass into the
upside-down world of Alice in Wonderland. When prices
continuously rise, the “bad” business must retain every nickel
that it can. Not because it is attractive as a repository for
equity capital, but precisely because it is so unattractive, the
low-return business must follow a high retention policy. If it
wishes to continue operating in the future as it has in the past
- and most entities, including businesses, do - it simply has no
choice.

For inflation acts as a gigantic corporate tapeworm. That
tapeworm preemptively consumes its requisite daily diet of
investment dollars regardless of the health of the host organism.
Whatever the level of reported profits (even if nil), more
dollars for receivables, inventory and fixed assets are
continuously required by the business in order to merely match
the unit volume of the previous year. The less prosperous the
enterprise, the greater the proportion of available sustenance
claimed by the tapeworm.

Under present conditions, a business earning 8% or 10% on
equity often has no leftovers for expansion, debt reduction or
“real” dividends. The tapeworm of inflation simply cleans the
plate. (The low-return company’s inability to pay dividends,
understandably, is often disguised. Corporate America
increasingly is turning to dividend reinvestment plans, sometimes
even embodying a discount arrangement that all but forces
shareholders to reinvest. Other companies sell newly issued
shares to Peter in order to pay dividends to Paul. Beware of
“dividends” that can be paid out only if someone promises to
replace the capital distributed.)"