Tobias Carlisle - “In Order to Find Something Genuinely Undervalued...There's Always Something that You Don't Like" | #77

Episode Summary

Executive Summary: Toby Carlisle explains his deep value framework and his “Acquirers Multiple,” a simple valuation screen based on operating earnings relative to enterprise value. The conversation contrasts Buffett-style high-quality compounders with cheap, often ugly “fair companies at wonderful prices,” emphasizes mean reversion, behavioral mistakes, and the value of systematic rules over discretion. It also covers global applicability, special situations, and practical portfolio construction.

Main Topics: Toby Carlisle’s background and evolution into value investing (Priority: 5/5): Carlisle recounts moving from Australian M&A law into investing, learning from a reluctant activist investor, and shifting from compounding/growth ideas toward deep value and catalysts. What the Acquirers Multiple is and why it works (Priority: 5/5): The Acquirers Multiple is presented as an industrial-strength valuation metric using operating earnings over enterprise value, designed to identify cheap companies that may re-rate through mean reversion and/or corporate action. Buffett, Greenblatt, and quality versus cheapness (Priority: 4/5): The discussion contrasts Buffett’s ‘wonderful companies at fair prices’ with Carlisle’s preference for ‘fair companies at wonderful prices,’ and explains why adding quality metrics can dilute returns in deep value screens. Mean reversion, unexciting stocks, and behavioral bias (Priority: 4/5): The speakers discuss how hated, low-return, or distressed companies can outperform because expectations are low and prices are depressed, while popular high-quality names often disappoint relative to lofty valuations. Portfolio construction and the role of rules (Priority: 5/5): Carlisle explains why concentrated but diversified portfolios, yearly rebalancing, and automated rules can outperform human discretion, which often leads to bad timing and unnecessary intervention. Special situations and catalysts (Priority: 4/5): Beyond quantitative value, Carlisle’s fund seeks merger arbitrage, spin-offs, buybacks, liquidations, and other event-driven opportunities where a hard catalyst can unlock value. Global investing and market structure (Priority: 3/5): The strategy is described as broadly global and agnostic across countries, though practical implementation varies because some markets are small or sector-concentrated, like Australia and Canada.

Key Arguments: The best value opportunities usually have something investors dislike attached to them; that ‘hair’ is often what creates the discount. Operating earnings over enterprise value is a better cheapness measure than P/E because it incorporates debt, cash, and capital structure. High return on invested capital is useful only if it is sustainable and protected by a moat; otherwise it is often mean-reverting. Cheap, disliked, or distressed stocks often outperform expensive, admired companies because expectations are low and valuations compress risk. Quantitative rules beat discretion because investors routinely override models based on emotional or anecdotal ‘broken leg’ exceptions. A disciplined basket approach with around 30 stocks is more robust than trying to identify a few perfect names. Special situations create uncorrelated opportunities because corporate actions can force value realization independent of the broad market.

Data Points: Podcast downloads: 2 million - The show is approaching 2 million downloads. Bookbacktest return profile: Mid-to-high teens annual returns - Carlisle references strong historical backtest performance for the Acquirers Multiple strategy. Rule-of-thumb portfolio size: 30 stocks - Carlisle says 30 stocks is about right for a quantitative value portfolio. Acquirers Multiple threshold: Below 10 - He says investors are “pretty safe south of 10” on the metric. Gilead valuation example: About 3x acquirers multiple - He cites buying Gilead when it had fallen from $120 to about $66. Gilead price move: From $120 to $66, then into the high $80s - Used as an example of a cheap company that later recovered after a catalyst. Return on invested capital buckets: 5 buckets over 10 years - Referenced Malmendier-style research on ROIC mean reversion in the S&P 500. Companies resisting mean reversion: About 4% - Only a small fraction of firms maintain very high or very low ROIC outlier behavior. Relative valuation of excellent companies: About 2.5x book - In the In Search of Excellence discussion, the excellent firms were very expensive. Relative valuation of unexcellent companies: About two-thirds of book - The reverse-screened, weak companies were very cheap and outperformed over time. Net-nets basket return: 250% in about 9 months - Carlisle describes his own basket of net-nets during 2008. Entire net-net cohort return: 750% - He says the full cohort performed even better than the subset he researched. Aetna/Humana spread: 37% below bid - Example of a merger arbitrage opportunity he analyzed. Aetna/Humana time to close: 6 to 9 months - Used to annualize the merger spread return. Short-guarantee buybacks: About 38% of shares repurchased - He cites this as a sign of smart capital allocation in a special situation.

Pivotal Quotes: "You must zig when the crowd zags." — Toby Carlisle: Used to summarize value investing and contrarian buying. "Wonderful companies at fair prices versus fair companies at wonderful prices." — Toby Carlisle: Explains the contrast between Buffett-style quality investing and deep value. "Everything looks like a broken leg." — Toby Carlisle: Behavioral explanation for why investors overuse discretion instead of following models.

Implications: The episode argues that systematic deep value remains powerful, especially when combined with patience and catalysts. For investors, the lesson is to embrace unpopular opportunities, use simple rules, and avoid overcomplicating or overriding well-tested screens.