Todd Combs: 99% Of My Analysis With Warren Buffett Is Qualitative
The Acquirer's Multiple2023-05-23T10:08:25-04:00
During his recent interview on the I Am Home Podcast, Todd Combs explained why 99% of the analysis he does with Warren Buffett is qualitative. Here’s an excerpt from the interview:
Q1 2023 hedge fund letters, conferences and more
Combs: And so when Warren and I would talk about stocks, acquisitions, whatever, we talked… it’s 95, 99%, qualitative. And that comes down to all the stuff that you talked about in terms of moats, barriers to entry, all the stuff.
You’re not getting that necessarily in a filing or an annual report. You get a sense for it. It’s a starting point, but you want to work essentially inside out.
And I think which is what I mean by that is starting with the details, and then those details form the foundation from which you can build upon that.
You then gain a qualitative understanding. And I personally feel like too many people start outside in, and what I mean by that is they’re starting with a narrative.
They’re starting because they heard something from someone, or they saw it on CNBC, or they read a research report or what have you.
And if you start with any narrative, one of the real cognitive dissonances that we can all have our blind spots is that then you start forming all of your opinions based on a loose narrative, that you formed, that was completely erroneous to begin with.
So it’s no different than the scientific process. You don’t start with a narrative and try and prove it. You start with the facts and build it from there.
You can listen to the entire discussion here:
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The Acquirer's Multiple
The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates.
It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization.
The Acquirer’s Multiple® is calculated as follows:
Enterprise Value / Operating Earnings*
It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com.
The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT.
Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up.
Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC.
He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law.
Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener.
All metrics use trailing twelve month or most recent quarter data.
* The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”