Sep 15, 2020
Deep Value Investing using the Acquirers Multiple w/ Tobias Carlisle
- BRT S01 EP32 9-13-2020
Things We Learned This Week
Guest: Tobias Carlisle – Founder of Acquirers Fund and author of Acquirers Multiple book & blog
Investing is broken down with Toby's philosophy on 'Deep Value', the Acquirers Multiple (purchasing the whole company), and value investing from Graham to Buffett.
Tobias Carlisle is the founder of The Acquirer’s Multiple®. He is also the founder of Acquirers Funds®. He is best known as the author of the #1 new release in Amazon’s Business and Finance The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market, the Amazon best-sellers Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014), and other books. He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law.
He runs the Acquirers Fund, a Long / Short Fund (ticker symbol – ZIG). Prior to founding the forerunner to Acquirers Funds in 2010, Tobias was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions he has advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam. He is a graduate of the University of Queensland in Australia with degrees in Law (2001) and Business (Management) (1999).
Deep Value – what drives returns in investing, picking stocks is half the battle
Concentrated Investing – interviews with fund managers
Acquirers Multiple – summary of previous books, giving the best lessons
Built Models to back test investing styles and value investing techniques
Warren Buffet is looking for Wonderful Companies at Fair Prices vs a Good Company at a Wonderful price (Deep Value)
Not a great business, but still a good business, that is being priced like it is going out of business. The market will realize this later, as it rebounds and grows slowly over time.
Contrarian’s contrarian like Carl Icahn
Value Trap – buy a cheap company (stock) that just keeps going down, but still looks cheap
Corporate Raider or LBO (Leverage Buyout)
Activist Investor or Shareholder Activism – forces management to make changes and unlock that value
Solutions - Buy back stock, sell assets, spin off a division
Value Investor has to be patient, can take years for the market is too realize the value
Lots of cash $ on the balance sheet, low debt, and business is generating free cash flow
Cash Flow is the life blood of a business, without it the business runs out of options
Buffet was a Liquidator in his early days, buy the company and liquidate the assets to make a profit, but decided to change his strategy because of pushback from company employees
Acquirers Multiple: think like an Acquirer (like Private Equity), buying the whole business or the Enterprise Value - what is the equity value of the business, how much debt, how much cash – forensic analysis of the balance sheet, and determine all assets and all liabilities
Enterprise Value = market cap plus debt plus preferred stock plus minority interest minus cash.
Enterprise Value compared to the operating income
EBITDA – operating income / cash flow of the business
Magic Formula - Joel Greenblatt investing has 2 formulas to calculate:
Return on invested capital (ROIC) = EBIT / (net working capital + net fixed assets)
Earnings yield = EBIT / Enterprise value.
Average Small Business gets valuation that is 1 – 2x cash flow multiple, because it is owner centric
Big Business gets better Valuation (could be 6 – 12x cash flow) because it is robust and not dependent on 1 or few people
Tech Company with great secular growth, and a Moat could have a multiple of 20x free cash flow
Ie - Google, Microsoft, Apple, Amazon, Facebook, Visa , Mastercard
Mean Reversion – companies or stocks go down over time, because completion comes after the main players in a an industry and chip away
13F – follow 13 F of Super Investors for stock ideas, Toby does not use this method, even though he pays attention. Toby likes: Carl Ichan (Catalyst), Warren Buffet, David Einhorn, Dan Loeb (Third Point), Seth Klarman
Baupost Group – Seth Klarman is a deep value investor, buying into distressed companies
I Press – David Einhorn of Greenlight Capital made an activist push at Apple in 2013 to unlock value by creating share levels
Buffet’s buy of Apple stock in 2016, put in $36 Billion
Buy the stock cheap, even when the value is going down to cash in on the opportunity, when the stock is rising again, it’s too late
Howard Marks – no bad stocks, just bad prices, it’s all about what price you pay
Acquires Multiple Checklist –
MB on Ben Graham's teaching and seminal investing book, The Intelligent Investor (c 1949), & review of the 2 main chapters - Ch. 8 on Mr. Market, and Ch. 20 on Margin of Safety
Ben Graham was an economist, professor, and investor. He is also known as the Father of Value Investing, and the author of Security Analysis, and The Intelligent Investor. He stressed fundamental analysis of securities (stocks), investor mindset, focused investing, and ‘buy and hold’. He was Warren Buffet’s professor, one time boss, friend and mentor. More: Here
Buffet – Rule #1 Never Lose Money, Rule #2 Remember Rule #1
Ch. 8 - The Investor and Market Fluctuations / aka – Mr. Market Parable
Ch. 20 - Margin of Safety as the Central Concept of Investment
Stocks are a piece of ownership of a company, not just some piece of paper. You have to be able to value the company to determine if the market is selling you the stock at a discount, or if it is over-valued. A good investment is based on the price you pay for it. A good stock can be over-priced, and a bad stock can be a good buy if the price is depressed enough. You make money when you buy (what you pay).
Mr. Market is very emotional, and changes his mind daily. Sometimes he makes you an offer on a stock that is silly, and other times he offers a stock at a deep value, at a low price. This is when you should buy. It is all about psychology, discipline and patience.
Margin of Safety is the idea to buy stocks with a defensive mindset. Buy it cheaper than the value, so if your valuation was off, you give yourself room for error. You have to do detailed fundamental analysis to determine if a stock is over or under valued. Then you hold until the stock, ride out the fluctuations until it rises to its true value.
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