Excerpt taken from Graham & Dodd Annual Breakfast 2022

Guest Speaker: Todd Combs, Moderator: Michael Mauboussin

Summary:
The event’s guest speaker was Todd Combs and was moderated by Michael Mauboussin. Combs provided his insight on defining a “good business,” the longevity of these businesses, the accuracy of financial statements, and a unit cost centered valuation approach.

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.

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?

Buying a whole business requires varied degrees of scrutiny into factors which cannot be evaluated using financial modeling formulas, such as: level of capital required, management style and efficacy.

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%. You can have a great business, but it doesn’t mean it will be better in five years. The rate of change in the world is significant, which makes this exercise difficult, but this is something that Charlie, Warren and Todd think about. When Combs started at Berkshire, they had a 7/10 confidence on the businesses outlook for the next five years. The nature of the world is that things are constantly changing, and Todd says they are right on maybe 1/10 predictions.

Michael asked if there are traditional measures that Combs/Berkshire look at to indicate good business performance? And how does Combs/Berkshire assess that quantitatively? 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.

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