Roger's Letter #06
Tesla, ChatGPT, Stream, Todd Combs
資訊-Timeless
Tesla Buciness Model
資訊-Trending
Roger’s Note on Graham & Dodd Annual Breakfast 2022 - Todd Combs
98% of what Buffett and Combs discuss is qualitative.
The worst business grows and needs infinite capital with declining returns. The best business grows exponentially with no capital.
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.
Owner’s earnings= reported earnings + depreciation -the average annual amount of capitalized expenditures
when looking to buy a business: look to buy a business a dummy can run, because eventually a dummy will run it.
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.
Valuation
Combs began by describing a three-legged stool and explaining how you can't ignore any one leg (in this case valuation). You have to have a framework where you are getting a financial return. Sometimes earnings are misleading. For example, at Berkshire things are marked to market but not considering real earnings. You can have SAAS businesses incurring 100 cents on the dollar in expenses on day one and going forward earn whatever the LTV of the customer is. For example, “in the early days of Walmart and Amazon, I wouldn’t focus on the fact that the reserves seemed wrong and quite large. Look at where it took them. I build out unit economics (in the case of Walmart look at the individual store), and that is your north star. You backtrack, and you get to CAC, LTV, and so on.”
CAPEX
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. Very few companies talk about maintenance capex. You can have a SAAS company where the maintenance capex is your people and your salesforce, so you can’t ignore it just because you’re not capitalizing those expenses.
sticky customers and how that affects valuation
Combs focuses on fundamental unit economics. “First figure out CAC and LTV for GEICO. You know the data of where they live, the kind of car, and then there is the LTV of the customer. Combs thinks where people go wrong is where they think they know their CAC and LTV but it’s from too high a level. When you slice the data, there are really big pockets where the LTV is negative, and that is where the potential is to improve margins.”
Valuing a Business
when valuing a business, you disregard the financial statements and accounting, and you focus your attention on the unit economics. Combs even said, “throw the accounting out”! 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.”
Here are some places where managing and investing overlap:
Process vs outcome is similar. Carry around a list of things to get done.
Intellectual honesty
Facts and numbers vs narratives
Everything is a meritocracy as an investor. You need to reinforce that as a CEO.
Due diligence, Combs loves “skip level meetings”. That’s where all the information is, speak to the people 3-7 levels down!
Get the big stuff right
Finding owners who are fiduciaries, (Charlie asked Combs what percent of management are fiduciaries)
Transparency and accountability, the people in power are held accountable and are aware of the implications their actions have
Avoiding past dependencies, tendency to fall prey to trusting past research and former experience
Find areas where you can push a little and change a lot. You want nuclear fusion. Put in 100 units and get out 1,000 or a 1,000,000
when Combs joined Berkshire, what were some of the things he looked to accomplish, how that’s going, professionally and personally.
He responded that when he came to Berkshire, he took over Lou Simpson’s portfolio. Over time, after positive performance, he got a couple more billion. In the summer of 2011, the European market imploded. People were worried about Europe disbanding. He was strictly focused on the portfolio. He got a look at every deal that Warren did. In the 200 plus deals that came through to Berkshire every year.
With regard to what Combs wanted to accomplish, Combs said that he was wondering how to add value. He was hired to pick stocks, but Buffett was already pretty good at that. Buffett and Combs had many conversations about the paint industry that led into some things with operating companies. “I was not outcome oriented; I was just process oriented and trying to add value. With GEICO we want to be the #1 insurer, it’s compounded at 15% since Buffett bought it, I want to take it up a level.”
Someone said being in a room of a lot of people who started their careers at Goldman, Morgan Stanley, and JP Morgan what are some of the key takeaways Combs got from the state of Florida securities regulation division.
Combs graduated undergrad from Florida State. He said he didn’t have that option for investment banking, and further said the experience that he got was very robust and probably better than his friends at Arthur Anderson. Combs always wanted to be an investor but started his career working for the Florida State securities regulator. When he worked for the regulator, he worked on a case of insurance fraud. That introduced him to the parallels between insurance and investing. Additionally, at the time his friend was working for Progressive, and he loved it. Combs decided to try working directly in insurance and landed a job at Progressive. Later, Combs interned at a fund when he was at Columbia Business School, and he “was fortunate not to destroy value for people.” After graduating with an MBA, he got a job at a hedge fund and went on to start his own before coming to Berkshire.