Why Warren is big on intangibles and low on tangible assets!

See's was bought for 25 million with an earings of 2 million. At that time, it had roughly 8 million of tangible assets and hence the payment for see's created a 17 million goodwil intangible account.

If a hypothetical business did have an intangible asset base of 18 million and had 2 million in earnings, it would have earned 11% on tangible assets. We also assume that this business has no economic goodwill.

Now imagine if a doubling of price level or inflation did take place, both businesses would have to double their earnings to 4 million to keep pace with inflation. Hence, both businesses would have to sell the same number of units at double the earlier prices and assuming that profit margins were unchanged, profits must also double.

To bring about a doubling of profits and to be even with inflation, both companies would have to double their investment in net tangible assets. For See's candies, an investment of 8 million would have to be made while the other would have to make an investment of 18 million.

While both companies are attaining the same amount of profits , See's only had to spend an additional 8 million while the other business had to spend an additional 18 million. This just goes to show that companies with more intangibles (moat) and less tangible assets are better than asset heavy companies when it comes to fighting inflation.