Kennon-Green & Co. Global Asset Management, Wealth Management, Investment Advisory, and Value Investing

Do Not Throw Away the Melon for the Seeds

There is a traditional Chinese proverb that goes something along the lines of, “Do not take the seeds and throw away the melon”.  Though there are many ways you can approach this, and multiple lessons that can be extracted from reflecting on it, it can be particularly sage when it comes to running a business and allocating the cash flow from that business.  One of my favorite examples comes from The Coca-Cola Company.

A few decades ago, Coca-Cola, one of the most profitable enterprises in the history of the world from a return on tangible equity standpoint, decided that instead of repurchasing its own shares or increasing the dividend, it would diversify into other operations that it knew nothing about and in which it had no strategic or competitive advantage. This resulted in the soft drink company buying a movie studio, farming shrimp, and a lot of other low-return schemes that cost shareholders real money.

Start-ups are exciting and new projects are the lifeblood of an enterprise.  However, it is often a mistake to throw away the valuable core business or profession that provides the funds to pay for everything. If you are a lawyer earning good money that allows you to build a portfolio of real estate, don’t suddenly start buying race horses unless you know exactly what you are doing.  Just as Coke would have been far better off returning money to shareholders and continuing to do nothing but manufacture syrup concentrates for bottlers around the globe, you may be by figuring out how to improve your already good or great cash generators.

That doesn’t mean you shouldn’t chase new opportunities.  Diet Coke made Coca-Cola owners billions of dollars in profit and it was an entirely new ventures but it drew upon management’s knowledge, experience, and strategic assets.  Don’t try to make a fortune in the music industry if you have no talent.  If you have trouble reading, don’t try to become a lawyer.  You could do these things, of course, but you are facing an uphill climb that puts you at a disadvantage.  Play off your strengths rather than minimizing your weaknesses.