The power of float: The secret sauce to building wealth like Warren Buffett

Warren Buffett is widely regarded as the world’s greatest investor – but what isn’t common knowledge is how he created his fortune. 

His skill isn’t just investing in great companies. That’s only one half of the equation.

The other half was his access to billions of dollars of cash at basically zero cost of capital. 

He had access to free money that didn’t cost a cent.

This kind of capital leverage was not from raising money from investors, or taking on a lot of debt from lenders. 

Rather, it was sourced from the best type of capital – ‘float’ – a lesser known financial concept that can be created in your very own business.

What is float?

Have you ever wondered why it still takes banks up to three business days to transfer and clear money between bank accounts? It’s 2022, FFS – why aren’t transactions instant?

The answer is two-fold. Part of it has to do with the banking software systems, and part of it has to do with bank greed.

When you transfer money, it vanishes from your account instantly, but takes days to turn up at the other end. 

The term for that ‘processing time’ is known as ‘float’. Businesses can profit on this float by earning interest on that money. Banks, for example, will lend your float money out to other banks and earn interest on it. In doing so, they make a profit from your transfer. 

It’s perfectly legal and is done by pretty much every financial institution known to man. The thing is, float isn’t just a tool that is seen in banks. 

It’s a financial characteristic present in many different business models – perhaps even yours.

Warren Buffett knows firsthand how powerful float can be. It’s a theme across many of the holdings found in his company Berkshire Hathaway’s portfolio, past and present.

Blue Chip Stamps

Everyone has heard of frequent flyer points offered by airlines. All of the majors have a loyalty program, designed to encourage customers to fly with them and accumulate points. These points can be redeemed in exchange for future trips, gift cards, and random gadgets. 

You book a flight, and points will magically appear in your frequent flyer account.

Before the digital era, loyalty programs were administered by trading stamps – literal paper stamps. You know, the ones you lick and use to post letters.

Paper stamps were handed out by merchants, which ranged from supermarkets to petrol stations. Merchants would buy these trading stamps from a trading stamp company, such as the Blue Chip Stamps company, and gift them to customers when they made a purchase. 

Shoppers were given a certain number of stamps for each dollar spent in a store, which they pasted into books, then redeemed for prizes such as baby toys, toasters, mixing bowls, watches, and other random doodads.

The intent was to drive repeat customers and drive up the average order value. The more you spend with a merchant, the more stamps you get, which you can exchange for more even stuff. Capitalism 101.

Trading stamp companies like Blue Chip Stamps made money by selling these stamps to merchants and used the cash to operate the business and purchase the merchandise handed out when stamps were redeemed.

Blue Chip Stamps Business model

Because it took time to accumulate enough stamps to redeem merchandise, and because some customers tossed the stamps in a back drawer and forgot about them and never redeemed them, Blue Chip Stamps found themselves holding on to a stack of cash deposits. 

This was float – interest-free cash that sat in Blue Chip Stamps’ bank account. 

Buffett recognised this was free capital that could be invested, and he acted accordingly.

Recognising the value and opportunity of this float, Buffett and his business partner Charlie Munger acquired a controlling stake in Blue Chip Stamps Company (which was later merged into Berkshire Hathaway). 

This is Blue Chip Stamps’ balance sheet in 1970 – the year Buffett and Munger acquired a controlling stake in the company.

See that ‘liability’ for redeemed trading stamps – that’s $86,189,000 of float that Buffett had at his disposal. In today’s dollars, that’s the equivalent of over $1 billion!

Buffett and Munger soon put this float to work. They made their first acquisition via the Blue Chip Stamps company in 1972 – a controlling interest in what many regard as their greatest investment, See’s Candies, for a cool $25 million.

See’s revenue for that year was $30 million with earnings before interest and taxes (EBIT) of ~$5 million, representing a multiple of ~5x profit. By 2007, See’s revenues had grown to $383 million, with EBIT of $82 million. 

In his 2007 annual letter, Buffett wrote:

We have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime, pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led to six billion humans, See’s has given birth to multiple new streams of cash for us.

Buffett used Blue’s Chip’s float to acquire See’s. The profit spun out by See’s was used to buy and invest in even more businesses. 

He discovered that float is a financial leverage tool that provides gifts that keep on giving.

Once Buffett understood the power of float, he actively sought companies that had it.

Which leads us to the next business: National Indemnity Insurance.

National Indemnity Insurance  

Back in the 1960s, the OG Berkshire Hathaway business was a struggling textile mill. It was operating in a competitive market with low margins and high capital requirements (lots of plant and equipment). As the business continued to decline, Buffett realised he needed to diversify the business into assets that had better returns and growth prospects. 

After getting his first taste of float via Blue Chip Stamps, he was out for more. The next target in his crosshairs was National Indemnity, an insurance business. 

Buffett loved this business because it possessed another kind of float – insurance premiums.

Insurance companies make money in 2 ways.

  1. Insurance companies charge a monthly or annual fee in exchange for insurance coverage.  When a customer eventually makes a claim, the insurer hopes that premiums received are higher than the payout. This is referred to as ‘underwriting’. If the premiums are higher than the payout, the business generates an ‘underwriting profit’. 

  1. As customers pay premiums to your business, you only need to payout this cash when customers make a claim. In the meantime, you can keep this float and invest it. Insurance companies try to make money on this float by reinvesting those premiums into other assets that generate a return to subsidise the cost of operating the insurance business and offset any underwriting losses.

Insurance business models are hard. It’s kind of like fortune-telling with a bit of data to help you. If you’re right (and lucky), you make a profit.  If you screw up, you lose.

For a typical insurer, the premiums it takes from customers rarely cover the losses and expenses it must pay. That leaves it running an ‘underwriting loss’. 

That’s why insurance companies need to be smart about investing the float, and ensuring that the investment returns on the float offset the underwriting losses.  

This underwriting loss is like interest on normal debt. The loss of the underwriting operations is the price you pay for access to billions of dollars of float, which you need to invest at a higher rate of return to make an overall profit.

Now, the beautiful thing about Buffett’s newly acquired National Indemnity insurance business was that it, unlike its peers, made underwriting profits. 

In other words, Buffett was paid to have access to billions of dollars of National Indemnity’s insurance float. This float was used to acquire more businesses and generate even more money. 

This is what Buffett said about insurance float in Berkshire’s 2009 annual letter:

Our float has grown from $16 million in 1967, when we entered the business, to $62 billion at the end of 2009. Moreover, we have now operated at an underwriting profit for seven consecutive years. I believe it likely that we will continue to underwrite profitably in most — though certainly not all — future years. If we do so, our float will be cost-free, much as if someone deposited $62 billion with us that we could invest for our own benefit without the payment of interest.

Insurance float is the best kind of float. It’s basically free money that you get to keep.

Buffett, of course, went on to acquire other insurance businesses, like Geico. 

On a side note, check out Berkshire Hathaway’s website – possibly the internet’s most boring website. 

Berkshire Hathingway


In January 2022, Apple became the first company to be valued at over three trillion dollars. That’s $3,000,000,000,000. That’s a lot of zeros.

Apple sells luxury and status. As a result, it has a pricing power moat, allowing it to retain strong profit margins. It’s also a highly cash-rich business due to its negative working capital float. 

If you own or operate a physical product business, like Ecommerce, you know what rapid growth can do to your cash balance. As you pay down suppliers and order more inventory, your cash can drain to zero pretty quickly.

Apple’s CEO Tim Cook knows how critical cash flow management is to scaling a company. He has masterfully manufactured negative working capital requirements, allowing Apple to scale both profit and cash flow.

He did this by creating a negative cash conversion cycle.

The cash conversion cycle (CCC) is a measure of how many days it takes for a business to turn invested cash (usually purchased inventory) back into cash in its bank account. It’s a simple metric to measure the overall liquidity of your business operations. In essence, the fewer

days it takes to convert your inventory back into cash, the better.

The cash conversion cycle has 3 components: 


Cash conversion cycle

I won’t go into the detailed math of how to calculate each of the days, but you can check out the full explanation here and here.

I took the time to calculate Apple’s CCC, sourced from its 2021 financial statements. The result is that Apple’s CCC is negative 65 days.

A negative cash conversion cycle means Apple’s suppliers are financing their operations. No extra cash needs to be deployed into the business as it scales. 

In fact, the opposite happens – as sales grow, their cash balance actually increases. These are essentially zero cost funds that can be re-invested into growth initiatives like customer acquisition or geographical expansion.

Negative cash conversion cycles (aka negative working capital) are another form of float that provides capital compounding potential.

Oh, and did I mention that Berkshire Hathaway today has ~50 percent of its entire portfolio in Apple stock? 

Apple stock

You’re starting to see the theme here… Buffett loves float. 

And as an entrepreneur and investor, so should you.

Deferred taxes

There’s one last kind of float that Buffett has written and spoken about in his annual letters. It’s deferred taxes.

When you sell an investment, like shares in a public company for example, you will pay some form of capital gains tax. Share traders and real estate flippers will proudly talk about the gains they’ve made on their investments. But what they don’t often talk about is the tax paid on each transaction.

Rather than frequently trading and selling stocks, Berkshire buys them and holds them for a long time. Ideally forever.

Berkshire owns shares with market values far in excess of their acquisition prices. 

If Buffett was to sell these shares, Berkshire would have to pay a very large tax bill. However, if he refuses to sell, and their market values continue to rise over time, these are recorded as deferred taxes – taxes that are not payable, but would be payable if they were sold today – on Berkshire’s balance sheet. As of 2020, this deferred taxes liability was $74 billion.

Berkshire Hathaway

For Berkshire, this $74 billion is also a form of float  – an interest-free loan from the U.S. Government. Buffett explained the power of deferred taxes in his 1989 letter:

Imagine that Berkshire had only $1, which we put in a security that doubled by year end and was then sold. Imagine further that we used the after-tax proceeds to repeat this process in each of the next 19 years, scoring a double each time. At the end of the 20 years, the 34% capital gains tax that we would have paid on the profits from each sale would have delivered about $13,000 to the government and we would be left with about $25,250. Not bad. If, however, we made a single fantastic investment that itself doubled 20 times during the 20 years, our dollar would grow to $1,048,576. Were we then to cash out, we would pay a 34% tax of roughly $356,500 and be left with about $692,000. The sole reason for this staggering difference in results would be the timing of tax payments.

Taxes and transaction fees are a real cost that impact returns. That’s why I’m an advocate for entrepreneurs building and holding businesses for the long-term.

Final thoughts on float

As you can see, float is an ingredient that can help you grow both a profitable and cash-rich business. 

But it’s worth mentioning that float is not a beautiful thing that appears out of nowhere. It’s a characteristic that can be manufactured in your own business. 

Consider these actions that can help to create float in your business:

  • Implement a Gift Cards/rewards points program in your retail business
  • Require upfront payments and deposits from customers to reduce your accounts receivable
  • Effectively manage your inventory and forecasting to reduce cash requirements 
  • Negotiate longer payment terms with your suppliers

This is just the start. 

Review your business objectively. Get creative. Steal from other business models.

Free float is the best form of financial leverage.

Use it to your advantage.

Love our articles? Subscribe to our monthly newsletter and get updates directly to your inbox.

You may also like

Is Your Business Ready for Financial Reinforcements?

Feeling the strain as your business grows, especially with managing…

In-House vs. Outsourced Accounting

Are you wrestling with the decision to hire an in-house…

how to scale your service business

Growth isn’t always easy. Here are the key factors that…


This article was updated on 17 May 2024.  It’s not…