Interview: Value Investing with Tobias Carlisle

Episode Summary

Executive Summary: Tobias Carlisle discusses his path into value investing, why he believes the current setup resembles prior deep-value troughs, and why absolute cheapness now matters more than market narrative. He argues that value often bottoms before the market, that quality alone can be misleading, and that crisis periods create the best opportunities for deep-value investors willing to focus on balance sheets, survival, and mispricing.

Main Topics: Tobias Carlisle’s path into value investing (Priority: 5/5): He moved from law into investing after finding M&A, takeovers, and corporate dynamics intellectually interesting. Reading Buffett’s letters and classic value texts helped him understand valuation and the logic behind deals. How today compares with 1999-2000 and prior busts (Priority: 5/5): Carlisle compares the dot-com era with the current cycle, arguing late-1990s companies were mostly bad businesses, whereas today’s leaders are often excellent businesses that became too expensive. He sees the current selloff as more of a typical value-cycle setup. Why value can work before the market turns (Priority: 5/5): He emphasizes that value often bottoms earlier than the overall market and can rally long before a market bottom. He cites historical patterns from 2000-2002 and 2008-2010 to show deep value’s strong rebound tendency. Absolute cheapness vs. relative cheapness (Priority: 5/5): The discussion distinguishes between value being cheap relative to growth and being cheap on an absolute basis. Carlisle argues the current market has now reached both, making the opportunity more compelling than in the prior year’s rally. Quality, balance sheets, and defining ‘good’ value (Priority: 4/5): Carlisle rejects ROIC as his main quality measure and instead focuses on cash conversion, balance-sheet strength, and liquidity. He says investors should not avoid lower-quality businesses if they are mispriced enough. COVID-era uncertainty and cyclically adjusted valuation (Priority: 4/5): The hosts and Carlisle discuss how COVID breaks near-term earnings and makes trailing metrics unreliable. Carlisle supports using cyclically adjusted earnings/CAPE for context, while still relying on balance-sheet and survival analysis in actual portfolio construction. Future cycle possibilities: private equity and takeovers (Priority: 4/5): He expects a possible shift toward private equity, takeovers, and financial engineering if public-market valuations remain distorted. He believes cheap, low-quality firms may attract capital as buyers seek mispricings and ownership control.

Key Arguments: Value investing is fundamentally about buying mispricings, not necessarily the highest-quality businesses. Deep value tends to perform best at the tail end of a bust and often starts working before the broad market turns. The late-1990s bubble involved mostly poor businesses, whereas today’s expensive leaders are often high-quality but overvalued businesses. Absolute cheapness now matters because many value stocks have become cheap both relative to growth and on their own historical valuation bases. ROIC is not Carlisle’s preferred definition of quality; cash-flow conversion, liquidity, and balance-sheet health matter more in his process. Crisis periods create uncertainty that value investors can exploit because they are already accustomed to buying before fundamentals fully normalize. CAPE/cyclically adjusted measures are useful for context because single-year earnings can be distorted by unusually good or bad years. If public markets do not re-rate value, cheap companies may instead be taken private or bought outright, which would still validate the strategy.

Data Points: Quantitative Value publication date: December 2012 / published in 2013 - Carlisle mentions writing the book quickly after developing the ideas. Time to write Quantitative Value: About 3 months - He says he wrote the book in roughly three months, working intensely each day. Legal career length: 10 years total - Carlisle practiced law in Australia and the U.S. before moving into investing. Typical junior-lawyer hours: 60-80 hours/week, often 100-hour weeks - He describes the workload in M&A diligence during his legal career. Value bottom in 2008-2009 cycle: November 2008 - He says the cheap value decile bottomed about four months before the market bottom. Market bottom in 2008-2009 cycle: March 2009 - Referenced as the broad market low following the value low. Value rally window after 2008 low: November 2008 to June 2010 - He says much of the cycle’s value gains occurred in this period. Microsoft free cash flow yield: 2.8% - Used as an example of a high-quality company that still looked too expensive. Dot-com bust severity: Value sold off first, then energy was hit harder in the second half - He compares sector behavior across bust phases. Small cap value vs large cap growth: Potentially over 16% annual excess return over the next decade - He references Patrick O’Shaughnessy’s work on valuation spreads. Yield-curve inversion lead time: About 10 months on average - Carlisle cites Campbell Harvey’s historical finding on recessions/busts. Japan Q4 annualized print: -6.3% - Mentioned as evidence of global weakness before the COVID selloff. Past selloff timing: 12/17 peak in performance - He says value outperformed from 8/27 to 12/17 and then gave it all back. Portfolio concentration examples: 1 energy stock and 1 airline - He notes his holdings included ConocoPhillips and Southwest Airlines.

Pivotal Quotes: "I just cannot see how value doesn't work on the other side of this." — Tobias Carlisle: He explains why he believes the current extreme cheapness should ultimately normalize. "What this business is about is it's about finding mispricings. And these things are wildly mispriced." — Tobias Carlisle: He defends deep value investing despite criticism that the companies are low quality. "That's the best time to be deep value is at the tail end of a bust and coming out the other side." — Tobias Carlisle: He describes when deep value historically offers the strongest opportunities.

Implications: Listeners should expect value investing to remain cyclical but durable, with the best opportunities emerging after major drawdowns. The current setup may favor deep value, takeovers, and private-market activity as capital seeks extreme mispricings.