Warren Buffett likes to talk about “float,” which is basically all the money lying around a company that he’s free to invest but which doesn’t show up as cash on his balance sheet. My dictionary defines float as “an amount of money represented by checks outstanding and in process of collection,” but I think Buffett’s definition would be different. Basically, it’s the money that a company is holding that eventually will go to others but of which the company has temporary possession. (This is not to be confused with the “float” that is defined as the volume of a company’s shares available for active trading.) Here’s a link to the part of his 2010 annual letter that talks about float: http://www.npr.org/sections/money/2010/03/warren_buffett_explains_the_ge.html. And here’s an excellent powerpoint presentation on Buffett’s exploitation of this idea throughout his career: https://fundooprofessor.wordpress.com/2012/12/06/httpsdl-dropbox-comu28494399blog%20linksfloats_and_moats-pdf/
In terms of quantifying this on P123, I think the closest we can get is LiabTotQ - DbtTotQ. Does anyone else have any ideas about this? Should I be focusing on LiabCurQ - DbtCurQ instead?
Very related to this, I’ve found that using a ratio of net operating assets to total assets as a ranking factor (with lower numbers better) improves my results significantly. Now net operating assets is the operating assets (total assets minus cash) minus the operating liabilities (total liabilities minus debt). So if you subtract net operating assets from total assets, what you get is cash plus non-debt liabilities. So another way to configure my ranking factor would be the ratio of cash plus non-debt liabilities to total assets, with higher numbers better. (These two ratios will always add up to 1.)
There’s another way to think about this too: net operating assets can also be thought of as the total of all debt, equity, and non-controlling interest, minus cash. The less debt and equity a company has and the more cash it has, the better off it is, right?
I’m not an expert in reading financial statements, and understanding the balance sheet is a high priority for me; the entire concept of equity is still a bit hard for me to wrap my head around, and I really don’t know what goes into the “other liabilities” (current and non-current) categories. So if anyone who’s better versed in accounting than I am would care to weigh in on this, I’d be grateful.
I’ll close with this quote from Buffett: “Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.”
Float in this sense is one of those tricky questions. Buffett and your dictionary are both correct; they are each talking about the same thing although in slightly different contexts. But in a big-picture sense, they are both on point.
Both are addressing the financial services business in which a company take in cash at Time A, pays back cash under certain circumstances at Time B, and gets to invest (and make investment income) on the cash between Time A and Time B.
For banks, Time A is when the money comes in as a deposit and Time B is when t goes out as a withdrawal, a check payment, etc.
For insurance companies, Time A is when to money comes in as premium payments and Time B is when it goes out as payment on claims.
It’s important that we always remember what Buffett is. He’s acting as the manager of float at an insurance company. We’re incorrect when we speak of Buffett investing in anything. The famous legendary investment portfolio is actually the float at Berkshire Hathaway’s investment portfolio. In structure, it’s just like the float at Aetna, State Farm, Met Line, CIGNA, etc., etc, etc. So when Buffett talks about float, he’s really talking about the same sort of plain-vanilla operating assets any other insurance exec would be speaking about.
Probably becasue it wasn’t a master plan from day one. He started by acquiring Berkshire Hathaway, a textile mill. And he gradually evolved. His characterization of himself as an asset allocator above all is something that probably became apparent to him later in life.
As Buffett wrote in the latest B-H annual report; “The investment portfolios of almost all P/C (Property/Casualty) companies - though not those of Berkshire - are heavily concentrated in bonds. As these high-yielding investments mature and are replaced by bonds yielding a pittance, earnings from float will steadily fall.”
Finding companies with float isn’t the issue. It’s find companies that use their float well.