Operational Float 

Sometimes, valuable concepts present themselves in new ways. For example, I believe "float" exists in multiple forms. Float is valuable to investors because it amplifies a company’s returns without the added risks of leverage. For simplicity, let’s refer to the version of float popularized by Warren Buffett as “time-based float.” 

Time-based float exists when a company collects a resource before it must pay it back–a time lag. A classic example of time-based float is an insurance company that collects premiums well before paying out claims. The insurance company can invest customer premiums until claims are paid out, increasing operating efficiency. 

The value of good ideas is limited by the degree other investors understand them. “Time-based” float is now widely recognized, which is problematic for today's investors. When Warren Buffett exploited time-based float, he retained significant value because most others could not see what he saw. As consensus internalizes a "mental model,” its value to investors diminishes as it becomes reflected in the price. Mental models also follow maturity curves. 

Let's discuss a different form of float, which we will refer to as “operational float.” With operational float, instead of a time lag, a company benefits from having customers and partners who directly or indirectly reduce its operating expenses. Although “time-based” and “operational” float operate differently, they achieve similar results: increased capital efficiency without the added risks of leverage. 

To better understand operational float, imagine a high-performance sports car that excels in speed and handling. The vehicle might lack a luxurious interior or advanced technology features, but its buyers overlook these shortcomings if the car excels in the attribute they value most: driving performance. The sports car company saves significantly by avoiding investment in these tangential areas. 

Costco operates like a sports car. Since it is a leader in selling high-quality products at low prices, Costco customers overlook many of the company’s shortcomings, significantly improving its capital efficiency. For example, Costco customers overlook its limited product selection, barebones interiors, membership costs, or potentially inconvenient locations. "Operational float” allows Costco to spend significantly less in areas its competitors must invest heavily. 

“Operational float” is valuable because it does not look like "time-based float" yet offers similar benefits. Because this concept is not yet widely recognized, investors retain more value when they identify it. We intend to exploit this idea as long as it remains outside consensus thinking.