TIP165: Tobias Carlisle and The Acquirer's Multiple (Investing Podcast)

Episode Summary

Executive Summary: Toby Carlisle discusses his new book, The Acquirers Multiple, explaining how it simplifies deep value investing by focusing on enterprise value and cheap operating earnings rather than Buffett-style quality screens. He contrasts his approach with Greenblatt’s Magic Formula, argues value’s underperformance creates tracking-error pain but long-term opportunity, and outlines practical screening, diversification, options use, and rebalancing rules.

Main Topics: Difference Between Deep Value and The Acquirers Multiple (Priority: 5/5): Carlisle explains that Deep Value was denser and more academic, while The Acquirers Multiple is written for a broader audience with clearer definitions and less jargon, though not watered down. Origin of Carlisle’s Investing Approach (Priority: 5/5): He traces his journey from reading Graham, working in M&A/capital markets, and seeing post-1990s cash-rich companies trade cheaply, leading him to net-nets, activism, and eventually the acquirers multiple framework. Buffett’s Three Buckets: Generals, Workouts, and Control Situations (Priority: 4/5): The conversation revisits Buffett’s early strategy of separating investments into undervalued ‘generals,’ event-driven ‘workouts,’ and ‘control situations’ where an investor can directly influence outcomes. Enterprise Value and Why It Matters (Priority: 5/5): Carlisle defines enterprise value as the full takeover cost of a business, incorporating debt and cash, and explains why it is often more useful than market cap alone when screening for undervalued stocks. Backtesting vs. Greenblatt’s Magic Formula (Priority: 5/5): He argues that removing Greenblatt’s high return-on-invested-capital requirement and focusing on cheapness plus operating earnings can improve returns by several percentage points in backtests. Risk, Tracking Error, and Diversification (Priority: 4/5): Carlisle emphasizes that value strategies require tolerating periods of underperformance and that diversification in deep value is usually around 20-30 stocks, with uncorrelated asset-class diversification being a separate question. Practical Implementation: Filters, Options, Rebalancing, and Market Cap (Priority: 4/5): He discusses using short-interest screens, cautious options usage, yearly or quarterly rebalancing, and his preference for the all-investable universe while acknowledging small caps often offer the best returns.

Key Arguments: The Acquirers Multiple is designed to be accessible without simplifying the underlying investing logic; it explains the core concepts needed to understand deep value. Enterprise value is superior to market cap for valuation because it captures debt, cash, and takeover realities that a simple share-price-based metric misses. Carlisle’s strategy recognizes that investors rarely have special insight into businesses, so the edge comes from buying extremely cheaply and relying on mean reversion. Greenblatt’s Magic Formula can be improved by dropping the requirement for high current return on invested capital, since that can just mean the business is near a cyclical peak. Value strategies survive because they are hard to hold through due to tracking error and underperformance; investors tend to abandon them right before they recover. Diversification in single-stock value investing is usually achieved with roughly 20-30 names, enough to reduce single-name blowups without diluting returns too much. Short interest is used as a negative filter because heavily shorted stocks tend to underperform, though no hard cutoff is used. Options can be useful in special situations but should be sized very carefully because they are highly leveraged and can go to zero. A reasonable expected market return over the next decade may be around 2%, making 6-8% a strong outcome for an active investor if achieved with controlled risk. Small-cap value stocks have tended to generate the best returns, but the all-investable universe is easier and more liquid to implement.

Data Points: Deep Value publication year: 2014 - Carlisle notes that his earlier book Deep Value came out in 2014. Target book price: Paperback $9.99; Kindle $15.99 - He mentions the retail pricing for The Acquirers Multiple. Net-nets cycle frequency: About every 7 or 8 years - He compares rare net-net opportunities to a cicada that appears only periodically. Expected market return: About 2% annually - Carlisle says current valuations imply very low expected market returns over the next decade. Good return threshold: 6% to 8% annually - He agrees this would be a good return for an investor over the next decade. Early 1980s expected market return: Close to 20% annually - He contrasts current valuations with much cheaper historical periods. Portfolio concentration guidance: 20 to 30 stocks - He cites academic and value-investing consensus on how many names are enough for diversification. Short-interest filter: Top 5% most heavily shorted stocks excluded - He says the screener removes the most heavily shorted names without a fixed hard cutoff rule beyond that percentile approach. Typical rebalance frequency: Once per year or quarterly - He suggests annual rebalancing, or quarterly check-ins, as practical implementation options. All-investable universe floor: Around $250 million market cap - He says the screening universe includes liquid names and the smallest are roughly this size or larger. Magic Formula backtest period: Roughly 1993 to 2005 - He references the period Greenblatt used in The Little Book That Beats the Market. Performance uplift from Acquirers Multiple: A few percent per year - He says backtests suggest his method outperforms Greenblatt’s by several percentage points annually. Stock sizing example: 1% of portfolio for a call on a 10% position - He illustrates using options to limit downside while retaining upside exposure.

Pivotal Quotes: "When value investors look their dumbest, that's the time that value, I think, is generally about to start working." — Toby Carlisle: He explains why value strategies suffer from painful but potentially rewarding tracking error. "It's just make sure that the company is cheap and has pretty good operating earnings." — Toby Carlisle: He summarizes the Acquirers Multiple as a simpler valuation approach than Greenblatt’s formula. "I think 2% is probably what the market's going to do." — Toby Carlisle: He discusses expected long-term market returns based on current valuations.

Implications: Listeners should expect lower market returns and consider disciplined value approaches, but only if they can tolerate underperformance and use rigorous screening. The episode reinforces that deep value is about cheapness, patience, and risk control—not prediction.