The Metric Everyone Uses That Buffet And Munger Hate

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Charlie Munger once said: “I think that, every time you see the word EBITDA, you should substitute the words ‘bullshit earnings.’”

Warren Buffett put it differently: “Does management think the tooth fairy pays for CapEx?”

Strong words from two of the most respected investors in history. And yet, EBITDA exists because one of the most successful operators in history invented it for a perfectly legitimate reason.

Why John Malone Invented EBITDA

In the 1970s, John Malone was running Tele-Communications Inc. (TCI), a cable television company. The cable business had a distinctive economic profile: massive upfront infrastructure costs (laying cable, buying equipment), followed by recurring subscription revenue with high margins.

The problem was that traditional earnings metrics, net income and EPS, made the business look unprofitable. All that infrastructure spending showed up as depreciation, which crushed reported earnings. But the underlying business was generating enormous cash flow that could be reinvested into growth and acquisitions.

Malone needed a metric that showed investors the real cash-generating power of the business. So he popularized EBITDA — earnings before interest, taxes, depreciation, and amortization. It stripped out the accounting entries that distorted the picture of his specific business model and showed the cash that was actually available.

It wasn’t a gimmick. TCI went on to return over 30% annually from 1973 to 1999 before Malone sold it to AT&T for $48 billion.

Why Buffett and Munger Hate It (Even Though Buffett Did the Same Thing)

So if EBITDA was created for a legitimate reason, why do Buffett and Munger treat it like a red flag?

Because of what happened next.

After Malone demonstrated that adjusted metrics could tell a more compelling story, every CEO with disappointing net income reached for the same playbook. “Standard metrics don’t capture our real performance.” “Look at this adjusted number instead.” “The traditional view is misleading.”

Sometimes that’s true. And sometimes it’s how a company dresses up bad results to look less bad.

Buffett’s core objection is that depreciation represents real economic cost. When a company strips it out, they’re pretending that wear and tear on their assets doesn’t exist. As he put it: depreciation is an expense “exactly as sure as are labor costs and overhead.” Ignoring it doesn’t make it go away.

Munger’s view is more blunt: if a company is leading with EBITDA, they’re probably trying to distract you from something.

But here’s the irony. In his 1986 Berkshire letter, Buffett introduced his own adjusted metric, “owner earnings.” He defined it as net income plus non-cash charges, minus the capital expenditures needed to maintain the business. Why? Because he felt GAAP earnings didn’t capture the true economic value of a business either. He even acknowledged the figure “does not yield the deceptively precise figures provided by GAAP.”

So Malone invented EBITDA because standard accounting didn’t work for cable. Buffett invented owner earnings because standard accounting didn’t work for his analysis. They’re both making the same fundamental argument: the right metric depends on the business. But Buffett trusts his own judgment on this more than he trusts other CEOs’.

The Credibility Problem for CEOs

This creates a genuine tension for any CEO whose business doesn’t fit neatly into standard metrics.

Here’s the dynamic: when a CEO says “don’t focus on net income, focus on this adjusted metric instead,” there are two possible explanations.

Explanation 1: The business model genuinely requires a different lens, and the CEO is helping you see the real picture, the way Malone did with cable.

Explanation 2: The business is underperforming, and the CEO is using an adjusted metric to obscure that, the way countless companies have done since.

The investor has no easy way to know which explanation is correct, especially early in the relationship. And because explanation 2 has been so common, the default assumption skews toward skepticism.

How This Shows Up at Onfolio

I navigate this tension directly. Onfolio is a holding company — we acquire and operate a portfolio of digital businesses. The portfolio companies are profitable and send cash up to the parent company. But the parent has its own fixed costs: Nasdaq listing fees, compliance, legal, insurance, audits, executive compensation.

So on a consolidated basis, net income is negative. The businesses are making money, but the holding company overhead pushes the combined number into the red.

The metric that actually tells you whether the model is working is conceptually simple: does the cash coming up from the portfolio exceed the cash expenses of the holding company? If yes, we can reinvest and compound. If not yet, the question is how fast we’re closing the gap.

That metric doesn’t have a standard name. It’s not EBITDA. Among other things, it includes preferred share dividends that flow through the cash flow statement, not the P&L. But it’s the number that shows whether the holding company engine is working.

And the moment I say “don’t look at net income, look at this,” I know exactly how it sounds. I sound like every other CEO who’s trying to put a better spin on unflattering numbers.

The Only Path Through

There’s no shortcut for this. The only way to earn credibility around adjusted metrics is:

Publish both. Show the standard metrics, the GAAP numbers, the net income, the full picture that looks unflattering. Then show the metric you believe is more informative. Don’t hide one behind the other; put them side by side.

Explain your reasoning. Don’t just assert that your metric is better. Explain why you think it’s more reflective of the actual business economics. Walk through the logic so investors can evaluate it themselves.

Be consistent. Use the same metric every quarter. Don’t switch to a different adjusted number when the one you were using stops looking good.

Let investors decide. You can make the case for your framework, but you can’t force adoption. Some investors will get it. Some won’t. Some will come around over time as the numbers prove the framework out.

We’ve laid out our version of this at onfolio.com/path-to-profit, with actual charts showing the trajectory quarter over quarter. It’s our attempt to make the framework transparent enough that investors can evaluate it on its own terms.

The Takeaway

Munger was right that some companies use EBITDA to mislead. Malone was right that some businesses genuinely need a different lens. And Buffett, who criticizes EBITDA but invented his own adjusted metric, was right that every business requires you to find the number that reflects its real economics.

They all agree on the principle. The disagreement is about trust, specifically, who can be trusted to apply it honestly. The CEO’s job is to earn enough credibility that investors give their framework a fair hearing. The investor’s job is to be open to the possibility that sometimes the adjusted metric is the honest one.

Neither side gets to skip the trust-building part.

If you want a framework for cutting through the accounting and evaluating what actually matters in a holding company, I put one together: a free guide on evaluating micro-cap holding companies.