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

from Warren Buffett – Letter To Shareholders 2012 on Rap Genius


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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