In one sentence: Phil builds a "story" for Chipotle in order: Radar (is any smart value investor buying? almost none), then understand (moat and management scored through ROE, ROIC, debt and four growth rates), with a reminder that a falling price isn't a falling value.
Key ideas
- Perspective on risk. After a long Little House on the Prairie detour, the point is that stock-market risk is not frontier survival, it is smaller if you know what you're doing, and losses can be made up. [00:04–07:00, 44:30–46:00]
- Mark-to-market pain. Watching a position fall daily hurts. If the business value is falling, worry. If only the price is falling, it's Mr. Market, the neighbor shouting prices at your farm. Danielle adds that sometimes information has changed too, so work out which. [06:00–11:00]
- Radar. Phil starts a story with how he heard of it. Buffett and Munger began by copying good investors, and 13F filings (thousands of investors over $100M must file quarterly) are the public record. [11:00–15:00]
- Dataroma. A free site that tracks about 100 hand-picked value managers. Searching CMG showed one holder: Maverick Capital owning 390 shares, a toe in the water, out of 116 positions in a $5.8B fund. [12:00–21:00]
- Reading a 13F. Look at how concentrated the fund is: Phil says 100+ holdings means roughly 1% each and is far from his approach. (Buffett holds 100+ stocks but about 65% sits in four or five.) Filings lag, so December's buyers weren't visible. [16:00–22:00]
- Few buyers is a flag, not a verdict. Either it isn't wonderful or it's overpriced (value investors want sales). Small caps can be ignored by a $5B fund but Chipotle isn't one of those. Radar isn't why Phil looks at it, he eats there. [21:00–24:30]
- Value needs a wonderful business. Only a business you can understand can be valued. Too-hard goes in the pile, not a waste, since knowledge accumulates and the next similar case costs less time. [25:00–28:30]
- Look for your moats in daily spending. Gas stations that compete on price only have no moat; Coke over Pepsi, McDonald's over Burger King, Crest over Colgate do. Back in the 1950s, service-station brands competed on service until low-cost pumps ended it. [28:30–33:30]
- Seven numbers. Management: ROE, ROIC and debt. Moat: growth rates of book value, EPS, operating cash flow and sales. [34:00–39:00]
- Chipotle's scores. No debt, so ROIC equals ROE. ROE is 17% over ten years and 22% over three, i.e. rising. Above 10% passes, above 15% is great. Growth rates all above 20% with the lowest the three-year operating cash flow at 18.7%. [34:30–42:00]
- Looking out the back window. Past numbers set the road, not the turns ahead. Using a 20% growth rate gives roughly $700 a share. Analysts' 21% for five years would imply about $1,100. Neither should be taken at face value. [39:00–45:00]
How it maps to RuleOne
- Radar corresponds to the event watch plus a 13F tracker. Stock pages could show how many tracked value investors hold a name, as a flag and never a signal.
- The screen's Big Five columns (ROIC, sales, EPS, equity and cash growth) plus debt are these seven numbers. The scoring of 10-year, 7-, 5-, 3- and 1-year averages is what the stock page should lay out.
- The too-hard pile maps to a "pass" status on the watchlist so reasons aren't lost.
Buffett, Munger and Graham links
- Munger's "too hard" pile is a Berkshire meeting staple (Buffett also uses the phrase in letters).
- "If looking at the past was enough, librarians would be rich" is a Buffett line Phil cites. I haven't verified its source.
- Buffett's holdings concentration and the "Todd" managers (Ted Weschler and Todd Combs) appear in the Berkshire letters from 2011 onward.
Words to know
- 13F: quarterly holdings disclosure by managers over $100M.
- ROE: earnings ÷ equity. ROIC: earnings ÷ (equity + debt).
- Mark to market: valuing holdings at the latest price.
- Too-hard pile: companies set aside as outside your competence.
Try this
On /stock/CMG/ or a company you use weekly, write ROE, ROIC and debt. Then look up its holders on Dataroma and note the fund sizes and how concentrated they are. Record in one line why few or many value investors own it.
Check yourself
- What does Phil conclude from only one small holder on Dataroma?
Answer
A flag to explain: it may not be wonderful or may be overpriced. It isn't a verdict, and it didn't drive his interest. - Why does ROIC equal ROE for Chipotle?
Answer
It has no debt, so equity is its only invested capital. - Why is the past growth rate not enough to value the company?
Answer
The road ahead can differ (limits to store counts, the crisis), so you must judge the future rate.
Short quotes
"If I'm not capable of understanding it, it is by definition for me not wonderful." (Phil, ~26:30, auto-transcribed)