Sunday, 22 March 2015

The Capital Allocator vs Owner Operator

There is a distinct difference between the businessmen who concentrates on capital allocation versus the businessman who is an owner operator of a business. The capital allocator on one hand looks very much like Dr. Henry Singleton who understood the principles around capital allocation very well. William Thorndike in his book "The Outsiders" looked at some of Dr. Singleton's investment approach in chapter two. Dr. Singleton invested the cash generated by his companies where he thought the prospect of getting the highest return on capital existed.

On the other hand, an owner operator looks more like Sam Walton, founder of Walmart who was the consummate owner operator. His investment approach was completely different. He concentrated his capital distribution on building out the Walmart franchise enterprise  in small towns where he completely dominated the retail space.

Warren Buffett mirrors both principles very well with a greater emphasis on capital allocation. Berkshire Hathaway is owner, but not the operator of most of its operating business. Mr. Buffett made it clear that he doesn't do the heavy lifting and much rather the cash be remitted to Farnam headquarter. This is worth copying.

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