Graham & Dodd Annual Breakfast 2022
Graham & Dodd Annual Breakfast 2022

Graham & Dodd Annual Breakfast 2022

Combs opened his discussion on investing by equating it to Einstein’s theory of intelligence, which he said ranges from smart, intelligent, brilliant, genius to simple. Combs states that while investing is simple, it is not easy. (View Highlight)

During one of Todd Combs and Warren Buffett’s famed Saturday afternoon living room chats, the two posed the following question as a means of valuation: if you take a business, what is your level of confidence in predicting what it looks like in five years? (View Highlight)

Combs recalled the first question Charlie Munger ever asked him was what percentage of S&P 500 businesses would be a “better business” in five years. Combs believed that it was less than 5% of S&P businesses, whereas Munger stated that it was less than 2%. (View Highlight)

Combs explained how one question is constantly asked, usually daily, and that is if the moat is wider or narrower on any of their businesses. (View Highlight)

98% of what Buffett and Combs discuss is qualitative. If something is 30x earnings you can calculate what it will have to do to get to run rate earnings. The worst business grows and needs infinite capital with declining returns. The best business grows exponentially with no capital. (View Highlight)

It’s a good sign when the owner’s earnings are close to the reported earnings. Owner’s earnings can be calculated in the following way: (a) reported earnings plus (b) depreciation, depletion, amortization and certain other noncash charges less (c) the average annual amount of capitalized expenditures for plant and equipment, etc., that the business requires to fully maintain its long-term competitive position and its unit volume. (View Highlight)

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. Combs said that this rubric was used to find Apple, since at the time the same 3-5 names kept coming up. (View Highlight)

Businesses are run by people, and Buffett says he likes taking the cash flow and removing it from managers and investing it himself. There’s a known adage, when looking to buy a business: look to buy a business a dummy can run, because eventually a dummy will run it. (View Highlight)

Combs mentioned that business destruction has accelerated and that every business has become a data and technology company and to stay aware of what parts of the business are dying. (View Highlight)

If a management is incentivized to appeal to Wall Street, it might behave in a value destructive way. Combs said that it’s a red flag if a company is too focused on external relations. (View Highlight)

A big signaling effect for Combs is when management changes the key performance indicators for which it will get compensated by, presumably because management won’t get compensated if the KPIs are left as is. (View Highlight)

Every time Combs meets with a company, there are two questions he always asks management: (1) How long do you spend talking to investors, and (2) what would you be doing if you were not publicly traded? The median response is 25% of the time is spent talking to investors. In response to the second question management usually lists a number of things that make a lot of sense, and Combs then proceeds to ask why they don't do that, and they say because they feel handcuffed. (View Highlight)

Feynman had this saying “it’s so easy to fool yourself and you’re the easiest person to fool.” CEO’s have a very low grasp of their maintenance capex. Combs further says how most management teams aren't even able to have that discussion because of their confidence in investing for growth (View Highlight)

A recent Ph.D at Columbia wrote a paper on maintenance capex. The paper found that depreciation understates maintenance capex, he explains it industry by industry. (View Highlight)

The goal of investing is to have intellectual purity. There’s facts and numbers, and then there is a narrative. Combs tries to wall himself off from the narrative until he has a view. As mentioned before, Combs would start with delta reports. (View Highlight)

To some degree, when valuing a business, you disregard the financial statements and accounting, and you focus your attention on the unit economics. (View Highlight)

After figuring out unit economics, the first thing Combs does is evaluate P/E, and then understand the owner's earnings. “Look at where you’re at in the lifecycle of the company, and where it is. Then let’s look at where it is going and apply some confidence intervals.” (View Highlight)

As a manager if you are good at communicating you can mobilize people to change the operations, whereas as an investor, you see businesses fail left and right, you have the experience, so theoretically, you should be able to come in and tell people to change. But it doesn’t work like that, and management usually is too charismatic to listen.” (View Highlight)

Combs answered when Warren bought Burlington, he said he should have bought it long before he actually did. His great attribute is knowing when and how to adapt. Like the Keynes quote “the facts have changed, what did you do?” Most of us get more set in our ways. It’s part of being a learning machine to avoid that. (View Highlight)

“Generally speaking, we (Berkshire) don’t pay a lot of attention to taxes. Some of it is bespoke. Some are compounders, vs return to par, which is cigar butts which we don’t usually do. Coke is more in the compounder category. “ (View Highlight)

However, Charlie got this question on Wells, and Charlie said something like “we have to invest in the world we live in, and not the world we want.,” “It’s a tough question. We used to have these questions on payday lending. But if you completely cut these things off, then people don’t have access to markets at all.” (View Highlight)

He reiterated that they don’t do macro, and they don’t predict the future at all. What they do instead is take the world they’ve been given in the present, without having to understand the future (View Highlight)

Many markets have few opportunities, Berkshire will look at them and they’ll have to assess those vs the opportunities it has here (View Highlight)