“That year, 15,000 people came to Omaha’s Woodstock for Capitalists. Buffett’s $36 billion fortune was once again exceeded only by Bill Gates’s. He had bounced back, almost to the top of the heap.
“What is the ideal business?” a shareholder asked when the questions began. “The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns. That becomes a compounding machine,” Buffett said. “So if you had your choice, if you could put a hundred million dollars into a business that earns twenty percent on that capital—twenty million—ideally, it would be able to earn twenty percent on a hundred twenty million the following year and on a hundred forty-four million the following year and so on. You could keep redeploying capital at [those] same returns over time. But there are very, very, very few businesses like that…we can move that money around from those businesses to buy more businesses.” This was about as clear a lesson on business and investing as he would ever give.
It explained why Berkshire was structured as it was, although what it said about the stock market’s long history of disappointed investors was sobering. It explained why he was always looking for new businesses to buy, and what he was planning to do with Clayton Homes. He expected to invest part of Berkshire’s extra capital in Clayton so that it could survive to take market share away from its bankrupt competitors and to buy and service their portfolios of loans.”
Excerpt From: Alice Schroeder. “The Snowball.”