Buffett Reallocation Method
Capital allocation methodology where every dollar is reallocatable regardless of which unit generated it.
Capital allocation methodology where every dollar is reallocatable regardless of which unit generated it. All cash flows to central pool, opportunities are ranked by expected return (IRR, payback period, risk-adjusted), capital allocates to top opportunities until exhausted, and projects below hurdle rate are killed. Based on Berkshire Hathaway's approach where business units like GEICO generate $12B but receive only $2B back.
When to Use Buffett Reallocation Method
Use when allocating capital across multiple projects, business units, or initiatives. Essential for conglomerates, multi-product companies, or any organization with competing investment opportunities. Apply when breaking free of historical allocation patterns or 'fair share' thinking.
How to Apply
Pool All Capital
Treat all generated cash as centrally allocatable. No business unit 'owns' its cash flow.
Questions to Ask
- What's total available capital?
- Which units are generating vs. consuming?
Rank Opportunities by Return
Calculate expected return (IRR), payback period, and risk level for every investment option including expansion, efficiency, new products, acquisitions, buybacks
Outputs
- Ranked opportunity list with returns
Allocate Top-Down
Fund opportunities in priority order (highest return first) until capital is exhausted. Fully fund top priorities rather than spreading thin across all.
Outputs
- Funded projects list
- Unfunded projects list
Kill Below Hurdle Rate
Defund any project with expected return below cost of capital or below next-best alternative, regardless of historical allocation or emotional attachment
Questions to Ask
- Does this beat our hurdle rate?
- Does this beat our next-best alternative?
- Are we funding this for strategic or sentimental reasons?