Just an interesting
couple of comments mentioning the 13% hurdle number which I hadn’t noticed
together until recently. In Poor Charlie's Almanack, I think there was also a comment from Munger along the lines that Berkshire's one big, 'hedgehog' type of idea was to continually borrow at 3% and earn 13%.
Charlie Munger on Berkshire (via Whitney
Tilson’s notes from the 2001 Wesco Annual Meeting):
“The businesses that Berkshire has acquired will return 13% pre-tax on what we paid for them, maybe more. With a cost of capital of 3% -- generated via other peoples’ money in the form of float -- that’s a hell of a business. That’s the reason Berkshire shareholders needn’t totally despair. Berkshire is not as good as it was in terms of percentage compounding [going forward], but it’s still a hell of a business.”
…..
Bruce Greenwald on the return Buffett expects (via a GuruFocus
interview):
“His idea of a fair price, by the way, is a price that gets him a return going forward on that investment without any improvement in the multiple of somewhere between 13 and 15%. By normal standards, when the average market return is 7-8%, that’s a really good price, he’s looking for a very good price. They call it a fair price because the multiple may be fairly rich, it may be 13, 14 times earnings. But the value of the growth may bring his return up to 13-15%. So when he says a fair price he’s talking in terms of normal value metrics, and there the reason that you prefer that to a poor company at a really good price is that because the good company can grow through reinvestment and things like same-store sales growth, your return will come in the form of capital [gain], not distributive income, and that, after tax, is much more valuable.”