Talking All Things Value Investing with Tobias Carlisle

Episode Summary

Executive Summary: Toby Carlisle argues that value’s long underperformance reflects extreme valuation divergence rather than broken fundamentals, and that mean reversion still favors value over time. He explains the Acquirers Multiple, discusses combining value with quality, sector concentration, intangible assets, and why patience and Bayesian updating are essential for investors running long-term value strategies.

Main Topics: State of value vs. growth (Priority: 5/5): Carlisle reviews the historic and recent underperformance of value stocks, arguing the current valuation spread remains unusually wide and still consistent with eventual mean reversion. How the Acquirers Multiple works (Priority: 5/5): He explains his preferred valuation metric: EBIT/EBITDA relative to enterprise value, emphasizing simplicity, comparability, and focus on cash-generating businesses. Value, quality, and composites (Priority: 4/5): The discussion compares pure value versus blended value-quality approaches, with Carlisle noting that quality can smooth returns but may reduce long-run upside. Quantitative vs. discretionary investing (Priority: 4/5): Carlisle describes using both systematic screens and discretionary due diligence, mainly to identify hidden liabilities and avoid accounting distortions. Sector concentration and intangibles (Priority: 4/5): They debate whether value is just a sector bet and whether accounting fails to capture intangible assets like software, brands, and intellectual property. Rates, inflation, and value performance (Priority: 4/5): Carlisle and the hosts discuss whether higher rates and inflation should help value by compressing long-duration growth valuations and favoring front-end cash flows. Patience, strategy evolution, and fund management lessons (Priority: 3/5): Carlisle stresses patience, staying with robust historical signals, and updating carefully rather than abandoning a strategy after a painful drawdown.

Key Arguments: Value’s underperformance has been extreme, but the spread between cheap and expensive stocks remains historically wide, which supports a mean-reversion case for value. The recent underperformance is driven more by valuation divergence than by weak operating performance in value companies, which suggests the signal still has economic relevance. Today’s large-cap market leaders are higher quality and more profitable than the dot-com era leaders, making the current environment similar in valuation extremes but different in business quality. The Acquirers Multiple is powerful because it compares enterprise value to operating earnings, capturing debt and cash while avoiding some distortions of equity-only metrics. Pure value has historically outperformed blended value-quality portfolios over the full dataset, but quality can reduce drawdowns and make the strategy easier to hold. Quality is hard to define consistently; different investors use different proxies, so adding a quality screen can improve or worsen results depending on the definition. Discretionary analysis is best used as a risk-control overlay to catch liabilities or accounting issues that quantitative screens miss, not necessarily to predict returns. Sector concentration can boost performance but also create painful cyclicality; diversification helps survival through long periods when a sector is out of favor. Accounting metrics may understate intangible-heavy businesses because software development and stock-based compensation are treated imperfectly in financial statements. Running a long-term factor strategy requires patience and Bayesian updating: stick with evidence, but remain open to genuine structural change. If value remains weak for years, possible explanations include software capturing more economic value or the market increasingly favoring long-duration growth assets. Carlisle believes value should still work if one buys sufficiently good businesses at a sufficient discount, earning returns above the business’s own return on equity.

Data Points: Value underperformance period: Begins around 2007 or 2010 and lasts through early 2020, with a brief reversal from late 2020 to mid-2021 - Carlisle describes the long underperformance of value relative to growth Value spread: Wider than at the 2000 peak and 2009 trough as of July 31; only June 30 was wider - Referenced from Wes Gray / Alpha Architect data on valuation spreads Acquirers Multiple data history: 1963 to present - Carlisle says the strategy was tested over this long dataset Profitless tech decline: Down 90% before the rest of the market’s swoon, then an additional 80% in the subsequent crash - He cites Kochu’s framework on 1999–2000-style manias Bear market timing: 18 months to 2 years - Carlisle compares possible timing for a larger selloff from the start of the year Price-to-book test horizon: 80 years of additional underperformance would be needed to rule it out statistically - Referenced from Corey Hofstein’s paper on factor persistence Share-based compensation: Could run as much as 15% a year - Carlisle notes tech companies may use substantial stock-based pay Return stream trade-off: Lumpy 15% vs smooth 12% - Buffett/Munger quote used to illustrate quality vs return smoothing Top stocks concentration: Top 10 stocks occupy an unusually large weight in the index - Used to describe the current S&P 500 structure Software economics: Virtually zero incremental cost of product - Discussed as a reason software businesses can scale differently from traditional firms

Pivotal Quotes: "In the short term, the market is a voting machine, but in the longterm it's a weighing machine." — Toby Carlisle: Used to explain why undervalued companies can outperform over long horizons "I'd rather a lumpy 15% to a smooth 12%." — Warren Buffett / Charlie Munger (as cited by Toby Carlisle): Illustrates the trade-off between higher raw returns and smoother, more investable returns "The simplest way to think about it is just to take a step back and do what all of the great value investors have said that you should do..." — Toby Carlisle: He argues value investing is about buying strong returns on equity at a sufficient discount

Implications: For listeners, the message is to stay disciplined with long-term value signals, accept that patience is required, and use quality/discretion as a risk control tool rather than a reason to abandon value. The broader implication is that market structure may be shifting, but valuation extremes still matter.