A Walk Through on Charlie Munger’s Greatest Insights

And it’s always a fact of life that trees don’t grow to the sky. S-curves eventually turn concave. Laws of diminishing returns kick in. So, size eventually becomes an anchor on returns.

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But I think it’s possible to get an imprecise idea based on the fundamental economics of the business.

For example, if the business raised prices and that boosted ROC, that’s probably attributable to legacy.

But if the business has a new high-margin line of products that it is actively researching and developing, and that’s why returns are going up, that’s likely all incremental.

So, I guess the answer is “it depends”!

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Regarding holding M for 10 years, I believe this is a core component of our job as investors — to constantly monitor our portfolio companies for material changes in their economic characteristics.

Based on this, if we conclude that forward returns aren’t likely to be very good relative to other opportunities we know of, then it may be time to exit the position and re-deploy our capital elsewhere.

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Such businesses tend to be worth less than businesses that *are* able to re-invest all their earnings at high returns for a long time.

But at the right purchase price, such businesses can also deliver attractive returns to long-term investors.

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