Best Idea Show - Tobias Carlisle, Acquirers Fund - There Are Basically Three Big Periods Of Value Underperformance And They Seem To Congregate Around These Periods Of Technological Advancement | #272

Episode Summary

Executive Summary: Toby Carlisle argues that long micro-cap value stocks are at an unusually attractive setup after a decade-plus of underperformance. He ties today’s value bust to historical episodes driven by technological shifts, says valuation spreads are extreme, and favors cash-rich, profitable, shareholder-friendly businesses with buybacks and dividends. He also discusses using shorts for downside protection and highlights several specific holdings.

Main Topics: Why micro-cap value is attractive now: Carlisle’s core best idea is long micro-cap value, especially in the smallest U.S. companies with strong balance sheets, cash flow, and buybacks. He believes these names are deeply mispriced after prolonged neglect. Historical evidence for value cycles: He cites 200 years of research showing that major value underperformance periods clustered around technological or market regime shifts, and argues today’s episode is the worst on record relative to growth. Fund construction and quality overlay: The strategy is not pure cheapness; it seeks inexpensive companies with durable balance sheets, cash generation, and capital returns to survive volatility and realize intrinsic value. Specific holdings and examples: He walks through examples such as Biglari Holdings, Diamond Hill, Intel, Cisco, and eBay to show how complexity, cyclicality, or investor neglect can create opportunity. Shorting as portfolio protection: Carlisle explains that the short book is intended mainly to protect longs in a market drawdown, focusing on distressed, manipulated, or structurally weak companies rather than just expensive names. Value versus momentum and style dispersion: He notes that momentum has massively outperformed value and that some value investors may unknowingly drift into growth; he sees today’s dispersion as extreme enough to favor contrarian reallocations.

Key Arguments: Historical data suggests value tends to outperform over long horizons, with underperformance clustered around major technological or structural booms. The current value/growth spread is historically wide, which should improve forward returns for value-oriented strategies. Small and micro-cap stocks are particularly sensitive to value cycles and have become more attractive after prolonged selling. The best value ideas are not just cheap on price metrics; they are cheap, cash-generative, and capable of buybacks/dividends. Mean reversion cannot be relied on in the near term, but dividends and underlying business growth still provide real return components. Using shorts for valuation alone is less effective than shorting names with fraud risk, earnings manipulation, or financial distress. Complex corporate structures and neglected capital allocation can hide substantial intrinsic value. Some companies can stay expensive for years; investors must distinguish a good business from a good stock purchase price.

Data Points: Value underperformance vs. growth: ~60% - Carlisle says the current value bust is the worst in the historical data, with value lagging growth by about 60%. Historical value outperformance: ~15% per year - He cites Ben Graham’s reference to the Cowles data set showing value stocks generated about 15% annual outperformance. Value lag in 1904 episode: 59% - He says a prior major underperformance episode ended in 1904, when value had trailed growth by 59%. Micro-cap cutoff: Below about $300 million; fund floor around $75 million market cap - He describes the Deep strategy as focused on micro/small caps, with a lower bound driven by NYSE listing standards. Average market cap in Zig: About $8 billion - He says the long-short Zig strategy tends to cluster around this average market capitalization. Portfolio construction: About 100 names, ~1% equal weight at initiation - Describes the Deep portfolio as diversified and equally weighted to manage volatility. September 9 value reversal: Largest day for value since 2000 - He references a sharp value rally day last year as evidence that value can still rebound sharply. Special dividend at Diamond Hill: Huge special dividend - He notes Diamond Hill recently declared a large special dividend, reinforcing capital-return behavior. Biglari Holdings ownership structure: Two share classes: A and B - Used as an example of a complex, discounted holding with founder control. QSBS tax benefit: Potentially tax-free gains up to $10 million or 10x investment - Mentioned briefly in discussion of private-company investing and tax advantages.

Pivotal Quotes: "The best opportunities in the market right now are small and micro value and the spread between the very overvalued and the very undervalued." — Toby Carlisle: Summarizing his bullish case for value in the current environment. "You do get the dividend. Your dividends are real once they're paid into the account. And the underlying growth should be real as well." — Toby Carlisle: Explaining why return can still come from cash yield and business growth even if mean reversion is delayed. "The function of the short is to provide some protection for the longs in the event that the market falls over." — Toby Carlisle: Describing the primary role of the short book in the long-short strategy.

Implications: For investors, the episode argues that deep value—especially in small/micro caps—may offer unusually favorable long-run upside after a historic drawdown. But execution matters: favor quality, cash flow, and balance-sheet strength, and use shorts selectively for protection rather than pure valuation bets.