One thing here that I'm a little confused by - the 15x earnings in the next 12 months thing. We all know Warren Buffett doesn't try to predict stock prices/re-ratings, so I don't think there's any way Todd meant "which companies' multiples will expand to >15x". I think it's rather more likely he meant "which companies are currently at less than 15x the next 12 months' earnings", although phrased in a slightly awkward way. 15x seems to be a sort of cutoff point that Buffett has rarely ever exceeded.
I think what Todd is referring to here is how overvalued the wider market currently is. The S&P500 has on average hovered at around a fair value of 17x-19x iirc (could be wrong), so if its past 15x that probably indicates late-cycle conditions. That's also likely what he meant by "solving for cyclicality".
When Todd says solving for cyclicality, he doesn't mean the market cycle. He's talking about business cyclicality. That specifically pertains to the question of 90% confidence their earnings will be higher in 5 years' time - you cannot have this certainty about a cyclical business.
I don't understand your first point there. Buffett famously does not try to guess where in the 'cycle' we are.
I mean...that's semantics right? I meant pretty much the same thing. The business cycle is correlated with the market cycle, I just didn't choose the right words.
Well, an industry may be cyclical because it's overly dependent on the economic outlook, eg auto makers, or because of commodity prices, eg O&G, or because of industry specific factors, eg capacity in airlines. While they each have a relationship with the overall economic cycle, they are each in their own cycle, and one may be in the trough of its cycle while another is at its peak.
The point I'm trying to make is that when Todd says 'how many names are going to be 15x earnings in the next 12 months", he's not asking where the prices are going to go in 12 months, he's asking which businesses are CURRENTLY trading at below the next 12 months' earnings. In my opinion.
One thing here that I'm a little confused by - the 15x earnings in the next 12 months thing. We all know Warren Buffett doesn't try to predict stock prices/re-ratings, so I don't think there's any way Todd meant "which companies' multiples will expand to >15x". I think it's rather more likely he meant "which companies are currently at less than 15x the next 12 months' earnings", although phrased in a slightly awkward way. 15x seems to be a sort of cutoff point that Buffett has rarely ever exceeded.
I think what Todd is referring to here is how overvalued the wider market currently is. The S&P500 has on average hovered at around a fair value of 17x-19x iirc (could be wrong), so if its past 15x that probably indicates late-cycle conditions. That's also likely what he meant by "solving for cyclicality".
When Todd says solving for cyclicality, he doesn't mean the market cycle. He's talking about business cyclicality. That specifically pertains to the question of 90% confidence their earnings will be higher in 5 years' time - you cannot have this certainty about a cyclical business.
I don't understand your first point there. Buffett famously does not try to guess where in the 'cycle' we are.
I mean...that's semantics right? I meant pretty much the same thing. The business cycle is correlated with the market cycle, I just didn't choose the right words.
Well, an industry may be cyclical because it's overly dependent on the economic outlook, eg auto makers, or because of commodity prices, eg O&G, or because of industry specific factors, eg capacity in airlines. While they each have a relationship with the overall economic cycle, they are each in their own cycle, and one may be in the trough of its cycle while another is at its peak.
The point I'm trying to make is that when Todd says 'how many names are going to be 15x earnings in the next 12 months", he's not asking where the prices are going to go in 12 months, he's asking which businesses are CURRENTLY trading at below the next 12 months' earnings. In my opinion.