Issue #88 | Volume 3

If there is a single “gift” I would provide to every Porter & Co subscriber, it is the ready ability to distinguish between an average business and a great business.

Great businesses, like truly beautiful women, are rare. And for investors seeking to build real, lasting wealth, finding them is everything. With a great business, time is in your favor. With a great business, every recession is only an opportunity to gain share. With a great business, you don’t ever worry about competitors – they simply come and go.

I’ve written an entire book showing you exactly how to identify a great business. It’s called Warren’s Mistakes, and it walks readers through how Warren Buffett beat the S&P 500 by 11% per year for 30 years. He did it with a portfolio of America’s greatest businesses: Coke, American Express, The Washington Post Company, Gillette, McDonald’s, Disney, and Moody’s.

Of course, the best way to learn anything, as Berkshire Hathaway (BRK) vice chair Charlie Munger explained constantly, is to invert. That’s why my book doesn’t merely explain Buffett’s success, it focuses on his mistakes.

While I must admit it is unlikely that I will ever get you to read my book, I hope I can at least show you some of the lessons in it by looking carefully at the deal Berkshire announced today, the purchase of Taylor Morrison Home (TMHC).

Taylor Morrison is America’s sixth-largest homebuilder. Berkshire is paying $72.50 per share in cash — a 24% premium to where the stock closed Friday. That equals an enterprise value of $8.5 billion. And it values the business, on an enterprise basis, at roughly 10.7x 2025’s $791 million in net income. In the press release, Berkshire’s new CEO, Greg Abel, called Taylor Morrison “a best-in-class national homebuilder.”

Unfortunately, for Berkshire shareholders, it’s not. It isn’t even close. And I’d bet long-time readers of my work know what Berkshire should have bought instead.

In November 2007, in the depths of the housing collapse, I explained to investors why there’s only one homebuilder in America worth owning – NVR (NVR). Not because the others weren’t cheap – they were all cheap, down more than 50% from their highs. But because only one of them is a genuinely great business. I called NVR “not only the best company in the homebuilder sector” but “one of the truly exceptional businesses in the world.”

NVR went bankrupt in the early 1990s. It owned too much land and thus had too much debt to survive the 1990-91 recession. The experience turned its managers into fanatics about capital discipline.

Necessity is the mother of invention. As the company emerged from bankruptcy, it didn’t have enough capital to buy huge swaths of land. So it had to partner with developers. In the process, it invented the “land-lite” housing model. NVR doesn’t own raw land. It pays small, non-refundable deposits to option finished lots from third-party developers. It only takes title when someone is ready to buy a house. If a market sours, NVR walks away and forfeits the deposit. It never gets stuck holding billions in depreciating dirt.

The result, as I wrote in 2007, was “the highest returns on assets in the sector” and a balance sheet that was “nearly debt-free.” Those facts are still true today. NVR was trading around $400 a share when I recommended it in 2007. It trades above $6,000 today – despite a big recent drawdown as the housing market has suffered over the last two years.

It isn’t hard to compare NVR to Taylor Morrison, although doing so feels like picking on a retarded kid. In 2025, NVR earned a 44% return on invested capital (“ROIC”) and a 33% return on equity (“ROE”). Taylor Morrison earned 11% ROIC and 13% ROE. Over the full decade from 2016 through 2025, NVR’s ROIC averaged roughly 50%. Taylor Morrison’s averaged about 9%.

NVR earns 50 cents of operating profit for every dollar of capital employed. Taylor Morrison can’t crack a double-digit return on capital. So… why would anyone ever want to own that business?

Keep in mind, they build houses in the same country, at similar prices, to similar customers, at nearly identical gross margins – around 23% last year. The difference is not what they sell. It’s how much capital they have to bury in the ground to sell it.

You can see exactly where the capital goes. Taylor Morrison ended last year with $6.5 billion of inventory – land and houses – on its balance sheet. NVR, while generating more revenue, carried $1.7 billion of inventory. NVR turns its inventory more than 4x a year; Taylor Morrison turns it less than once. NVR converts a sale to cash in about 71 days. Taylor Morrison takes 376 days – its money sits trapped in dirt for more than a year before it comes back.

And the balance sheets tell the rest of the story. NVR ended 2025 with $1.9 billion in cash and negative net debt. NVR maintains a net cash position. Taylor Morrison carries net debt of more than 1x earnings before interest, taxes, depreciation, and amortization (“EBITDA”). One company is built to survive the next downturn and buy when everyone else is forced to sell. The other will spend the next bust the way the bad builders spent the last one: negotiating with its bankers.

But that’s not the real advantage.

What you’ll learn when you read Warren’s Mistakes is the enormous advantage capital efficient businesses have over time. You see, because NVR uses so little capital, it can return almost all of it. The company shovels mountains of cash into buybacks – $1.8 billion of stock repurchased in 2025 alone. Over the last decade, NVR shrank its share count 25% and drove earnings per share 4x – from about $104 to $437.

That is a compounding machine. And it is going to continue compounding, whether this housing slump lasts another year or another decade.

Taylor Morrison buys stock too: shares of other marginal builders, most recently William Lyon Homes and AV Homes. How’s that working out? It’s a bigger pile of capital that is generating meager 9% returns. That is not value creation. That is empire-building, which is exactly what Greg Abel is doing at Berkshire.

Ironically, this isn’t the first time Berkshire has made this mistake.

In 2003, Berkshire paid $1.7 billion to take Clayton Homes private. And, just like today, what Berkshire got was a capital-hungry, marginal business. Clayton is a manufactured-housing company bolted to a high-interest lender. How does it make money? It sells trailer homes to poor people. The homes depreciate faster than the loans amortize. Sure, poor people need somewhere to live, but this is a very tough business because, quite simply, its product doesn’t create any value for the people who buy it. It’s clearly a business that Berkshire shouldn’t have ever bought.

And it didn’t just buy Clayton – it has invested heavily in growing it. It built Clayton’s mortgage portfolio from $5.4 billion in 2003 to more than $13 billion today. It bought up the plants, stores, and loan books of failed competitors, too. The real capital employed by Berkshire into Clayton today isn’t $1.7 billion – it’s more like $13 billion to $15 billion.

These enormous, ongoing capital investments are what Berkshire’s conglomerate model is designed to hide. Let me explain.

Measured against the original $1.7 billion check, Clayton looks like a triumph: its roughly $1.9 billion of pre-tax earnings in 2024 is more than the entire purchase price! But once you count all the capital Berkshire has sunk into Clayton – the loan book, the factories, the competitors it bought – the return on capital employed collapses to roughly 12% to 14% pre-tax, or about 9% to 11% after tax. That is a mediocre, single-digit-to-low-double-digit business. It is, in other words, the same 9% return as Taylor Morrison.

But what if Berkshire had just bought the best business in the industry, NVR, and never invested another penny?