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The five minute filter
Warren Buffett claims he can make a decision about a company in 5 minutes, how?
I’ve been listening to the Berkshire annual meeting sessions → https://buffett.cnbc.com/warren-buffett-archive/ where Buffett and Munger answer shareholder questions. It’s good fun - the replies are often very witty. Questions can get repetitive year on year but the answers are always very good.
One question that struck me as a good one was about how Buffett/Munger can decide in 5 minutes if a company is worth studying any further. This surely would be a great thing to have, after 5 minutes (or less) you could move on to the next company on the list. Here is a list I compiled for myself from various sources:
Can I understand it? I can understand how bricks are made and sold, I can understand how a pub or a chain of pubs operates. I’m not sure I understand how to make and market biotech product.
Is it in a stable industry or can it disrupted easily? A stable industry can also be disrupted. How much competition is there in the industry? Is it a monopoly of some sort? Is the industry one requiring a lot of capital (think cars) and a lot of players chasing diminishing returns?
Is it going to be a better business in 5 years? Given the past can you conservatively and roughly predict its profitability for 5-10 years into the future? With what level of confidence? Perhaps a high/extreme low guesstimate?
Management - how are they incentivised? Guaranteed Salary/options or shares? How much of pre-tax profit do they take home? How much of the company do they own?
What is the % return on invested capital? Is it above 15%? How is the free cash flow being deployed - is it being invested into the highest earning opportunities? Are there going to be opportunities in the future?
I think each of the above could be answered in 1 minute looking at the description of the company, general knowledge about industry, a quick read of the main shareholders record, look at the compensation report and a glance at the income statement and balance sheet.
Is there a risk that this filter would remove some genuine opportunities? I guess so. What do you think?