The Most Misunderstood Phrases in Buffett-Speak: Free Cash and the Float
Everyone quotes Buffett. Few think like him.
No companies last forever. They rise, plateau, decline, and eventually disappear. Some get sold before the rot shows, but this only masks the deeper truth: businesses are mortal. Moats (competitive shields) erode. Preferences shift. Competition tightens. Regulation intervenes. Technology blows holes in once-secure positions.
If businesses are temporary, then valuation becomes brutally simple: The money a company produces during its lifetime must exceed what you paid for it (plus opportunity cost). Everything else—revenue, EPS, even headline growth—is just noise around that truth.
Warren Buffett’s genius is that he developed a language for cutting through the noise. It is not GAAP. It is not EBITDA. It is not DCF (Discounted Cash Flow) gymnastics — though Buffett has said every investment is a DCF decision; he just does it in his head, with crude numbers, massive safety margins, and no pretense of knowing year 15. It is simpler, plainer, and more honest.
You might call it Buffett-speak.
In Buffett-speak, the key economic questions are:
How much cash does the business produce that it doesn’t need back?
How long will the moat last?
Does that stream of cash comfortably exceed the price paid before the moat erodes?
There are only two kinds of money that matter in this framework: true free cash and float. Everything else is accounting details.
What’s a Moat?
A moat is whatever keeps competitors from eating your lunch.
It might be a brand so strong that customers don’t comparison shop (Coca-Cola). A network effect so deep that switching is unthinkable (Google Search). An ecosystem so sticky that leaving means abandoning everything you own (iPhone). A cost advantage so brutal that undercutting you means losing money (Costco).
Without a moat, you’re in a price war. Margins compress. Earnings become unpredictable. And if earnings are unpredictable, valuation is guesswork.
With a moat, you can actually forecast. You can ask “how long will this last?” and get a defensible answer. Duration becomes estimable. And duration is what makes the math work.
1. True Free Cash: Cash the Business Doesn’t Need Back
This is the highest form of cash flow. It’s the cash a company could distribute in dividends forever without harming its competitive strength. In Buffett-speak:
“Cash the business doesn’t need.”
The concept is simple, but the economics behind it are profound. When a business produces more money than it needs to maintain and grow itself, that surplus is what Buffett calls owner earnings — the cash that actually belongs to shareholders.
See’s Candies is the classic example. Purchased for $25 million in 1972, See’s has since generated more than $2 billion in excess cash for Berkshire—without requiring significant reinvestment. Even if See’s vanished tomorrow, the investment would remain spectacular. The cash harvested during its economic life far exceeded the purchase price.
That’s the whole game.
Some extraordinary businesses grow simply because the world grows. Coke, Amex, Visa, Moody’s—they expand not through corporate brilliance but because global consumption, commerce, and capital markets expand. They ride demographics and GDP. Others ride an expanding product market—a category still being adopted, where growth comes from the market itself, not from taking share. Either way, they produce stable, rising free cash while requiring little reinvestment.
For these businesses, valuation becomes realistic.
Duration matters more than growth. A 20-year moat is valuable. A 50-year moat is extraordinary.
The Tech Treadmill: When Profits Aren’t Profits
Then there are the businesses that look profitable but never produce a dollar of extractable cash.
Sun Microsystems was worth $200 billion at its peak. It reported billions in earnings. But every dollar of profit was already committed to the next generation of servers, chips, and software. Skip one R&D cycle and you’re dead. Sun couldn’t mail a check to shareholders and still be Sun. When the treadmill finally threw them off, Oracle bought the corpse for $7 billion. Two decades of “profits” produced nothing for investors who held through the cycle.
Nortel. $250 billion market cap. Bankruptcy. Digital Equipment Corporation dominated minicomputers, sold to Compaq for scraps, which then got absorbed by HP. Same story every time: capital-intensive tech where the moat requires constant rebuilding.
In these businesses, profits aren’t profits. They’re deposits against future survival costs. Encumbered cash.
The accounting shows earnings. The economics show a company running in place. There’s never a moment where cash can be extracted without killing the business. The “owner earnings” are zero — or negative — even when the income statement looks healthy.
This is why Buffett avoided technology for decades. It’s not that he didn’t understand tech. It’s that he understood it too well. He saw businesses where the cash never comes free. Where every good year funds the next arms race. Where the moat isn’t a moat — it’s a construction project that never ends.
See’s Candies could mail Buffett a check every year and still be See’s. Sun couldn’t skip one cycle without dying. That’s the difference between true free cash and the illusion of profitability.
(And yes, Buffett now owns Apple — because Apple throws off more true free cash than it knows what to do with. It’s a See’s, not a Sun.)
2. Float: Money You Don’t Own But Get to Use
Then there is the second category of Buffett-speak cash: float.
Insurance companies collect premiums now and pay claims later. The time gap between receiving the premium and paying the claim creates a pool of money called float. This money is not profit—it’s a liability on the balance sheet that behaves like free capital for as long as the insurance franchise remains sound.
And what do insurers do with float? They invest it—often in stocks.
This is a big engine behind Berkshire Hathaway. Buffett invests float in the stock market and keeps the investment returns, provided the insurance business remains strong and underwriting remains disciplined.
If underwriting breaks even or better, float can be better than free:
“Money that isn’t ours but that we get to invest.”
But there is a catch.
Float only behaves like permanent capital if you can survive the one catastrophic scenario that kills insurers:
A 50% market decline that stays down for years while you still have to pay claims.
This is the scenario that kills insurers. It is not the crash that kills you; it is the duration of the crash while claims must be paid.
Since the Great Depression, the broad U.S. market has never been down 50% and stayed down for five years. There have been brutal drawdowns (1973–74, 2000–02, 2008–09), but all recovered much faster than Depression-level persistence.
But Buffett never takes that for granted.
This is why Berkshire keeps hundreds of billions in cash and T-bills, why it refuses to reach for yield, why it avoids leverage, and why it underwrites conservatively. Berkshire is structured so it can keep float invested in equities even if the market drops 50% and stays there.
In Buffett-speak:
“Float is only free if you never have to sell in a crash.”
Most insurers must own mostly bonds because they cannot meet this standard. Berkshire can, which makes its float behave like a near-permanent capital source.
Conclusion: Think in Terms of Lifetime Cash, Not Illusions
No company will be around forever. But the cash they produce during their finite economic lives can be enormous—if you choose the right businesses and understand the difference between:
true free cash,
float you can use for decades if you never have to liquidate,
and illusory profits that were always owed to the next R&D cycle.
The investor who thinks in Buffett-speak isn’t looking for revenue growth or accounting profits. He’s looking for streams of cash—some permanent, some borrowed, all usable—that will outlast the competitive life of the business.
Because once you think in Buffett-speak, the only question that matters is:
“Will the cash I take out comfortably exceed the price I paid before the moat runs out?”
Everything else is commentary.