[This post is made in response to Matters Arising from some...

[This post is made in response to Matters Arising from some discussion on the PRR thread, so apologies if its seems misplaced and out of context]

Piou (x2)


Sorry, you are absolutely right.

It was tardy of me to bandy about such a tight definition.

I think that instead of:

“And the only tactile, meaningful, sustainable measure of Intrinsic Value is GROWTH IN THE GENERATION OF SURPLUS CAPITAL.”

what I should have written is:

“...And the only tactile, meaningful, sustainable way Intrinsic Value can increase is by GROWTH IN THE GENERATION OF SURPLUS CAPITAL”


For you are right, it is indeed possible to determine the Intrinsic Value of an enterprise that generates STATIC SURPLUS CAPITAL (your See’s Candy example).
(In fact, I do it all the time and indeed buy shares in businesses on this very basis.)

[But if a company is unable to generate surplus capital over time, then I believe its value is indeterminate (although there are many who would disagree with me on this, arguing, for example, that if Company A has an EV per ounce of gold in the ground, then this can be applied to derive a value for company B. My argument is that I can go to my local supermarket and I know I can buy my groceries with cash, but although I haven’t tried I am certain that if I attempted to pay on the basis that I owned a mystical piece of paper that represented the ratio of Market Capitalisation per unit of some or other technical denominator, or on the basis that I own something whose market value is far less than the amount of capital that has been invested in it, i.e,, the old replacement cost theory)]

So, your hypothetical company that “throws off cash, which it cannot usefully re-invest in the business, and hence it holds to a high pay-out ratio, or it buys back and cancels shares”, will I believe indeed fail the growth-in-the-generation-of-surplus-capital test, but that does not preclude it from being valued intrinsically (which is what my earlier post wrongly stated).

I think what I was trying to do was to draw attention to the quest for the quintessential Shareholder Wealth Creation enterprise, namely one that is able to organically grow surplus capital on a sustainable basis, without any recourse for capital to the owners of enterprise.

Trouble is, these sorts of businesses are very rare. I know of only a handful: ASX, COH, CRZ, CSL, RHC, RMD, SEK, WES, WOW, ARP, BRG, IVC, REA, REH, TME, VRT (curiously enough, most appear to be healthcare stocks or first-mover IT companies)

I’d far sooner own shares in a FCF generating company that was able to reinvest in its business to grow FCF (and hence dividends, to your point) than one that also generated FCF but was unable to deploy that surplus cash towards growing FCF in subsequent years, and that simply returned it to shareholders.

I own a few of the former as well as a few of the latter.

But what I don’t own are companies who are unable to fund themselves.

My first rule of investing is: ”An Investment is something that puts money into my bank account, not take it out”


In terms of your EPS focus, I’m afraid I’m a bit wary of EPS, in isolation, as a measure of financial performance, because of it being a direct derivative of Net Profit, and Net Profit contains too many accounting assumptions for my liking.

I far prefer Free Cash Flow, which is something that cannot be obfuscated by audit committees and financial managers prone to embellishment.


Hope my garbled, convoluted diatribe helps.

Cam