Why Investors Ask The Wrong Questions About Holding Companies

During our IPO roadshow, someone asked what inventory accounting method we use. FIFO or LIFO.

We have one tiny ecommerce business. Inventory accounting is essentially irrelevant to our model. We run a portfolio of digital businesses with 90%+ gross margins. But that’s what this person zeroed in on.

It wasn’t a dumb question. FIFO vs. LIFO matters a lot for companies with meaningful physical inventory. The problem is, it had almost nothing to do with understanding Onfolio. And it revealed something I’ve seen play out over and over in the years since: investors tend to apply the mental models they already have, not the ones that actually fit the business in front of them.

When you run a holding company, this problem gets magnified.

“If You’re Buying Profitable Businesses, Why Aren’t You Profitable?”

This is the question I’ve been asked more than any other. It’s a fair question on the surface, and the answer is straightforward. But it requires a mental model that most people don’t have coming in.

Our portfolio companies are profitable. They generate cash and distribute it up to the parent company. But the parent company, the holding company level, has its own fixed costs that exist regardless of how the portfolio performs: Nasdaq listing fees, compliance and legal costs, insurance, auditing, executive compensation.

So on a consolidated basis, net income can be negative even though the underlying businesses are making money. The portfolio is profitable. The parent has overhead. The net number combines both.

I’ve explained this dozens of times. People nod. Then they ask the same question again three months later. Or we acquire a company, , and they ask why SG&A increased, while ignoring the revenue and operating profit increases. It’s not that they’re not smart — it’s that the mental model of “one company, one P&L, one bottom line” is deeply ingrained. Holding companies break that model, and most people snap back to the simpler version.

The best example I have: someone once looked at a chart we published showing portfolio-level profitability alongside consolidated net income and told me, “This graph is wrong. It shows you’re more profitable than your net income.”

That wasn’t a mistake. That was the entire point of the chart. (This is the article with the chart incase you are interested)

The “Right Metric” Problem

This leads to an uncomfortable tension about metrics.

John Malone effectively made EBITDA mainstream because it told the real story for his cable businesses. They were spending heavily on infrastructure, and traditional earnings didn’t capture the cash-generating power of the model. Charlie Munger, on the other hand, called EBITDA “bullshit earnings.” Warren Buffett’s take: find the metric that actually makes sense for the business and use it.

The truth is all three are right, depending on context. And that’s exactly what makes it confusing for investors. When a CEO says “don’t look at net income, look at this adjusted metric instead,” the natural reaction is skepticism. And honestly, that skepticism is earned. Plenty of companies use adjusted metrics to dress up bad results.

So the challenge isn’t just finding the right metric. It’s earning enough trust that people give your framework a fair hearing.

What Actually Matters for Onfolio

For us, the metric that matters most is conceptually simple: does the cash coming up from the portfolio exceed the cash expenses of the holding company?

Parent company cash expenses include salaries, compliance costs, interest on debt, and preferred share dividends. If portfolio distributions exceed those costs, we can compound — reinvest, acquire, grow. If not yet, the question is how quickly we’re closing the gap.

This isn’t a standard metric with a standard name. It’s not quite EBITDA, because preferred dividends flow through the cash flow statement, not the P&L. But it’s the number that tells you whether the holding company model is working.

We’ve laid this out in detail, with actual charts showing the trajectory quarter by quarter, at onfolio.com/path-to-profit. The key visual: when the green bar (cash distributed from portfolio) crosses the gray line (parent company cash burn), we’ve crossed over. We haven’t hit it yet, but we’re closing the gap.

The Bigger Point

If you’re investing in a holding company, or any business with an unusual structure, the most valuable thing you can do is figure out what mental model actually fits.

The standard toolkit of revenue, net income, and EPS works well for single-business companies. Holding companies require you to think in layers: what’s happening at the portfolio level, what’s happening at the parent level, and how cash moves between them.

The financial statements are accurate. They’re just not self-explanatory if you’re bringing the wrong framework. And most investors are.

That’s not a criticism; it’s a design challenge. The CEO’s job is to make the right model accessible. The investor’s job is to be open to using it.

If you want the full framework for what to actually look at, I put together a free guide on how to evaluate a micro-cap holding company.