And can reasonably expect to earn the same 12% on reinvested earnings.

from Warren Buffett – Letter To Shareholders 2012 on Rap Genius

Meaning

Buffet’s essentially arguing that the rate of return does not decline with the amount of capital deployed, which 1) seems pretty false empirically; and 2) contradicts statements he makes elsewhere in the letter.

If you assume a non-negative rate of return, dividends end up looking pretty poorly — if any investment returns more than the cash itself, why would you ever give the cash away?

Which all sounds pretty good, until you realize: there are negative returns to deploying more capital.

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