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This episode covers how management’s decision on capital allocation policy can greatly affect the value of your investment in the long term. Earnings/capital can be allocated in various ways. Warren Buffet mentioned in his shareholder letters as to when it makes sense to use one option vs. the other. Later, I discuss how you can get a hint of whether the management team acts in the best interest of long-term shareholders.
The following capital allocation options are discussed in this episode.
- Reinvested back into the business to maintain the current operation
- Reinvested back into the business to grow the business
- Used to acquire other businesses via M&A deals
- Parked and invested in marketable securities such as Treasury Bills
- Distributed to shareholders in the form of dividends
- Distributed to shareholders through share-repurchase program
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