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Get a cup of coffee.
In this thread, I'll walk you through the basics of Capital Allocation.
The better we understand how capital moves in and out of a business, the better we can predict the business's future cash flows and its stock's long-term performance.
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Businesses generate *cash* through their operations.
For example, Apple generates cash by selling iPhones.
Starbucks generates cash by selling coffee.
Google generates cash by selling ads.
IBM generates cash by doing things I don't understand.
Etc.
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Capital Allocation is the step that comes *after* generating all this cash.
That is, once the cash is available, what does the CEO *do* with it?
What projects does he invest in? What acquisitions does he make? Does he return any cash back to shareholders? Etc.
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Capital Allocation can make a tremendous difference to a company and its shareholders.
For example, at Berkshire Hathaway, Buffett took the cash generated by textiles and allocated it towards operations that produced much higher returns. Like insurance and candy.
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This transformed Berkshire Hathaway from a lowly bunch of textile mills to the super successful giant diversified conglomerate that it is today.
Along the way, long term shareholders reaped rich rewards.
That's *good* Capital Allocation.