In November 2022, the 32nd Annual Graham and Dodd Breakfast featured Todd Combs, one of the two portfolio managers allocating capital for Warren Buffett.
Source: Instagram @heilbrunncenter
In it, Combs explained how one question is constantly asked, usually daily, and that is:
“Is the moat wider or narrower on any of their businesses?”
Furthermore, he highlighted that he goes to Buffett’s house on many Saturdays to talk, and here’s a litmus test they frequently use.
Warren asks :
- “How many names in the S&P are going to be 15x earnings in the next 12 months?
- How many are going to earn more in five years (using a 90% confidence interval), and
- How many will compound at 7% (using a 50% confidence interval)?”
In this exercise, you are solving for cyclicality, compounding, and initial price. This rubric was used to find Apple, since at the time the same 3-5 names kept coming up.
Todd Combs, Berkshire Hathaway portfolio manager, November 2022
In order to better understand why Buffett might be asking these questions, we might ask:
- What percentage of companies in the S&P 500 have historically traded at or above a 15-times earnings multiple?
- How many companies in the S&P 500 earn more in 5 years than they are currently? And how much does this number vary by year?
The Equity Analyst 