Tobias Carlisle - The Way To Get The Best Performance Is To Concentrate Into Industries When They Get Cheap | #158

Episode Summary

Executive Summary: Toby Carlisle discusses launching the Acquirers Fund (ZIG), a U.S. long/short 130/30 deep-value ETF built from his Acquirers Multiple framework. The conversation covers how he screens for cheap, cash-generative longs and weak, story-driven shorts, why value has underperformed for years, and why widening valuation spreads may finally favor disciplined value investors.

Main Topics: Launch of the Acquirers Fund (ZIG) (Priority: 5/5): Carlisle explains the new public fund, its ticker, structure, and why he chose a long/short ETF format to express deep-value ideas more directly. Deep-value long selection process (Priority: 5/5): He outlines the long book: U.S.-only stocks screened with enterprise value/EBIT, then refined with balance-sheet, cash flow, shareholder yield, and diligence-based checks. Short-book construction and risk control (Priority: 5/5): He details the short side: financially fragile, cash-burning companies with weak fundamentals and poor price behavior, sized small and rebalanced quarterly. Why value has struggled (Priority: 4/5): The discussion focuses on the prolonged underperformance of value metrics, the extreme spread between expensive and cheap stocks, and possible causes such as passive flows. Market structure and valuation distortions (Priority: 4/5): Faber and Carlisle debate market-cap weighting, passive indexing, float adjustment, and why expensive mega-caps can dominate even when fundamentals lag. Process, judgment, and model overrides (Priority: 4/5): Carlisle emphasizes continuous research but minimal discretionary override, arguing that statistical models usually beat expert intuition except in rare balance-sheet distortions.

Key Arguments: Enterprise value/EBIT is a strong screening metric because it captures operating value while accounting for cash and capital structure better than simplistic ratios. Deep value works by buying distressed businesses at dark moments, expecting mean reversion and improvement in both business fundamentals and valuation multiples. Shorts need extra caution because losses can compound quickly, so he uses small positions, quarterly rebalancing, and avoids the most crowded shorts. Many recent market darlings are structurally weak businesses whose valuations are disconnected from fundamentals, making them attractive short candidates. Value’s long underperformance may be partly driven by expensive stocks becoming extremely stretched, not just cheap stocks getting cheaper. Passive, cap-weighted indexing may channel flows toward the largest and most overvalued companies, widening valuation dispersion. Carlisle prefers a disciplined quantitative framework augmented by due diligence, but he resists broad discretionary overrides because humans over-identify false exceptions. Shareholder yield and stock buybacks are strong signals of undervaluation and management alignment, while heavy share issuance is a negative signal. The current environment may be unusually favorable for long/short value because the spread between expensive and cheap stocks is historically wide. Even if value remains out of favor in the short run, a long-term reversion toward historical valuation norms could make the strategy compelling from a risk-adjusted perspective.

Data Points: Fund structure: 130/30 - Carlisle describes the Acquirers Fund as a long-biased long/short strategy. Long positions: 30 names - The long book is concentrated, equal-weighted, and U.S.-only. Short positions: 30 names - The short book is also 30 names, each sized at 1% at inception. Inception short weight: 1% each - Every short position begins at 1% of fund assets. Rebalance frequency: Quarterly - Both long and short books are rebalanced on a quarterly basis. Turnover: About 50% - He estimates roughly half the portfolio changes at each rebalance date. Value underperformance vs glamour: -59% since June 2014 - He cites a price-to-cash-flow decile spread showing deep value lagging glamour stocks. Latest underperformance after partial recovery: -57% - The same price-to-cash-flow spread improved slightly but remained deeply negative by February data. Price-to-book 10-year result: Negative over 10 years - He notes Fama-French data showing the worst 10-year period ever for price-to-book. Relative valuation of value stocks: ~50% overvalued vs long-run average - He argues value stocks are still rich on an absolute basis even though expensive stocks are much more stretched. Share buyback tailwind: +2.5% per year - He cites positive drift for companies buying back stock. Share issuance drag: More than 4% per year - He cites negative performance drag from companies issuing stock. Public fund ticker: ZIG - The fund is named Acquirers Fund with ticker ZIG, as in 'zig when the market sags'. Number of podcast episodes recorded: 13 - Carlisle says he has just recorded his 13th episode of The Acquirers Podcast.

Pivotal Quotes: "I think that now is a particularly good time because I do think that we can look at any of the most of the listings that have come to market over the last year or two have traded well down." — Toby Carlisle: He explains why he believes the short opportunity set is currently attractive. "I think the financial statements tell the truth." — Toby Carlisle: He argues that fundamental data ultimately constrain prices and support value investing. "I think that the gold standard of valuation is cash return on invested capital." — Toby Carlisle: He contrasts his preferred valuation approach with discounted cash flow analysis.

Implications: The interview suggests value investing may be nearing a favorable regime shift as valuation spreads widen. For listeners, the takeaway is that disciplined fundamentals, concentrated portfolios, and careful shorting may offer opportunity—but with high volatility and long patience required.