Marcus Lemonis, the host of CNBC’s popular show “The Profit”, recently lambasted a struggling business owner by saying, “You can’t spend the revenues, dummy.” Hey, we have to take our truths wherever we can find them. And almost eighty years ago, Benjamin Graham added some elegance to that notion when he stated that intelligent men often mistake a company’s rapid overall growth for the amount of profits that would actually be someday attributable to the shareholder.
Charlie Munger called high revenue/low profit businesses “good until reached for” because the money you saw reported on paper looked nice until you actually tried to convert it into cash that shows up in your bank account. Buffett, too, addressed this concept tangentially when he stated that his favorite businesses are the ones that permits the owners to extract ever-growing sums of cash each year without threatening the company’s competitive position or ability to self-fund growth. The Berkshire Hathaway investment in See’s Candies has emerged as the Exhibit A for this type of business over the past half-century.