1986

Buffett proposed that analysts and owners think in terms of 'owner earnings' rather than reported earnings. Owner earnings, he wrote, equal reported net income plus depreciation, amortization, and other non-cash charges, minus the average annual amount of capitalized expenditure a business needs to maintain its unit volume and competitive position. The gap between accounting earnings and owner earnings is where many businesses quietly consume their owners' capital.

The definition Buffett offered as a better proxy for distributable cash than EPS or even operating cash flow.

Buffett argued that a business that must continuously reinvest to stay competitive — a textile mill, an airline — reports earnings that are economically fictional for the owner, because the cash never reaches the owner; it is consumed by the business itself. The test is whether a dollar of retained earnings eventually produces more than a dollar of market value. If not, the business is destroying capital regardless of what its income statement says.

Connecting owner earnings to the retained-earnings test.

Decision — Initiated Nestlé position. Context: Tenure data per Latticework 2022. Outcome (known): Held ~40 years; capacity-to-suffer exemplar.