How Does Warren Buffett Find Outstanding Businesses?

How does Buffett find outstanding businesses like Apple? This was recently revealed by one of the top managers in Warren Buffett’s company Berkshire Hathaway – Todd Combs. We can be grateful to Todd because now we have greater insights into Buffett’s formula that has given an outstanding return of 20% for over half a century. 

Me in front of Warren Buffett's house, July 2022

We’ve known about the Combs and Buffett Saturday afternoon meetings at Buffett’s house in Omaha Nebraska, but we haven’t had insights into what is being discussed in those meetings. That’s what Todd Combs recently revealed at the “Graham & Dodd Annual Breakfast”. 

According to Combs the meetings in Buffett’s house often Warren Buffett frequently asks these three questions:

  • 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), 
  • How many will compound at 7% (using a 50% confidence interval)?”

At times the same 3-5 names keep coming up when Combs answer these questions and one of the companies that kept coming up was Apple.

This litmus test, Buffett gets several areas of the business covered: for example, the cyclicality of the business, the compound rate, and the earnings (which is a number that a lot of Wall Street funds are tracking and increasing earnings typically equals an increasing stock price of the stock). How can you learn from this? You can ask yourself the same questions every quarter and if the same name keeps popping up, then you might have a winner on your hands. Remember, that Buffett always invests with a margin of safety, which means that he wants to buy the stock (the business) when it’s trading lower than the company’s intrinsic value. So, once you’ve asked yourself the three questions, remember to ask the last question: what stock price would give me a margin of safety?

Who wouldn’t want the opportunity to meet Buffet for a Saturday chat in his living room? Since most of us don't have that opportunity, I can offer the next best thing (heh). My newsletter comes out every Saturday and you can subscribe here. There’s a whopping 42% avg. opening rate so it’s safe to say that I have the best and most committed community and I’m thankful that you find the information I share useful. Thank you!

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