47: Buffett On Calculating Required Capex; Coke in East Germany; "Just Make The Investment"
"Just make the investment"
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“Just make the investment”
In my last post, I talked a little about my experience in commercial lending. I couldn’t help but think of my time in banking while listening to Buffett talk about “just making the investment”.
Business schools would have you think each project is neat and tidy and easily fit into a spreadsheet. Enter the numbers and *poof* out pops the IRR and NPV with a go/no-go decision. Life isn’t that simple.
In reality businesses often simply “feel” the need to make an investment. I know, that goes counter to even good business sense, but it’s true. A lot of times long-term strategy dictates capital investment decisions, like Coke establishing a presence in new markets.
To be sure, I’ve seen business owners make terrible capital allocation decisions on the basis of a gut feeling. But I’ve also experienced (read: endured torturous hours of lecturing) business school classes that would have you think you need a ten-tab spreadsheet in order to lay out any cash.
Buffett keeps it simple. Depreciation, in most cases, is a good proxy for capital expenditures. It’s not worth your time to try and determine if depreciation is 95% correct or 5% overstated or whatever. Get the rough numbers and spend your time figuring out what the business/competitive landscape will look like in ten years.
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Stay rational! —Adam
why do I see some companies have much lower capex than depreciation? What would cause this?