The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns. That becomes a compounding machine.
Source: Berkshire Hathaway Letters · Business
Core Idea
Compounding wealth comes from owning businesses that can repeatedly reinvest large amounts of capital at consistently high rates of return, allowing value to grow exponentially over time.
Practical Application
Focus on businesses that reliably reinvest profits at high returns; by holding them long term, you harness exponential compounding instead of chasing short-term price moves.
Why It Matters
Buffett highlights that true wealth creation comes from rare businesses that can repeatedly reinvest large sums at high returns, transforming steady profitability into powerful long-term exponential compounding.