Tobias Carlisle - The Acquirers Multiple: How the Billionaire Contrarians of Deep Value Beat the Market

The Acquirers Multiple:

How the Billionaire Contrarians of Deep Value Beat the Market

TOBIAS E. CARLISLE

Copyright 2017 Tobias E. Carlisle

All rights reserved.

ISBN: 0692928855

ISBN-13: 978-0692928851

DEDICATION

For Nick, Stell, and Tom.

CONTENTS

Preface

It is better to be lucky. But I would rather be exact.

Then when luck comes, you are ready.

Ernest Hemingway, The Old Man and The Sea (1952)

This book is a short, simple explanation of one of the most powerful ideas in investing: zig.

Zig?

Zig when the crowd zags. Zig with the value investors. Zig with the contrarians.

Heres why: the only way to get a good price is to buy what the crowd wants to sell and sell what the crowd wants to buy. It means a low price. And it might mean the stock is undervalued. Thats a good thing. It means the downside is smaller than the upside. If were wrong, we wont lose much. If were right, we could make a lot.

When we find undervalued stocks, we often find they are cheap for a reason: the business looks bad. Why buy an undervalued stock with a seemingly bad business? Because the markets are ruled by a powerful force known as mean reversion : the idea that things go back toward normal.

Mean reversion pushes up undervalued stocks. And it pulls down expensive stocks. It pulls down fast-growing, profitable businesses, and it pushes up shrinking loss-makers. It works on stock markets, industries, and whole economies. It is the business cycle: the boom after the bust and the bust after the boom.

The best investors know this. They expect the turn in a stocks fortunes. While the crowd imagines the trend continues forever, deep-value investors and contrarians zig before it turns.

Mean reversion has two important consequences for investors:

1. Undervalued, out-of-favor stocks tend to beat the market. Glamorous, expensive stocks dont.

1. Fast-growing businesses tend to slow down. Highly profitable businesses tend to become less profitable. The reverse is also true. Flatlining or declining businesses tend to turn around and start growing again. Unprofitable businesses tend to become more profitable.

This might be a surprise if youre familiar with the way billionaire Warren Buffett invests. He is a value investor who buys undervalued stocks. But he only buys a special group with sustainable high profits. He calls them wonderful companies at fair prices. And he prefers them to fair companies at wonderful prices: those that are undervalued but with mixed profitability.

Billion-dollar fund manager Joel Greenblatt tested Buffetts wonderful companies at fair prices idea. He found it beat the market, and he wrote about it in a great 2006 book called The Little Book That Beats the Market . It is one of the most successful books on investing ever written.

We ran our own test on Greenblatts book and found that he was right. Buffetts wonderful companies at fair prices do beat the market. But heres the twist: fair companies at wonderful prices do even better.

In this book, I show how to find those fair companies at wonderful prices. And I explain in plain and simple terms why they beat Buffetts wonderful companies at fair prices.

We wrote about the test in 2012 and again in my 2014 book, Deep Value . It did well for an expensive, quasi-academic textbook on valuation and corporate governance. But I wanted one that could be read by non-professional investors.

This book is intended to be a pocket field-guide to fair companies at wonderful prices. Its mission is to help spread the contrarian message. Its a collection of the best ideas from my books Deep Value , Quantitative Value , and Concentrated Investing . In this book, the ideas in those are simplified, summarized, and expanded.

The book is based on talks I have given at Harvard , Cal Tech , Google , the New York Society of Security Analysts ( NYSSA ), the Chartered Financial Analysts Association of Los Angeles ( CFA LA ), and others.

My work has been featured in Forbes , The Harvard Business Review , The Journal of Applied Corporate Finance , two editions of the Booth Cleary Introduction to Corporate Finance , and the Manual of Ideas . Ive talked about the ideas in it on Bloomberg TV and radio , Yahoo Finance , Sky Business , and NPR , among others.

The overwhelming response is disbelief. The reason? Many find the ideas counterintuitivein conflict with our intuition about the way the world works. A few, however, find the ideas wholly intuitive.

You dont need to be a lawyer, a chartered financial analyst, a tech genius, or a Harvard graduate to get this book. Buffett wrote in 1984, It is extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately to people or it doesnt take at all:

A fellowwho had no formal education in business, understands immediately the value approach to investing and hes applying it five minutes later.

In the book, I set out the data and my reasoning. Well look at the details of actual stock picks by billionaire deep-value investors:

• Warren Buffett
• Carl Icahn
• Daniel Loeb
• David Einhorn

Well see the strategies of Buffett and his teacher, Benjamin Graham, and other contrarians, including:

• billionaire trader Paul Tudor-Jones
• venture capitalist billionaire Peter Thiele
• global macroinvestor billionaire Michael Steinhardt
• billionaire tail-risk hedger Mark Spitznagel

I wrote this book so you can read it in a couple of hours. Its written for my kids, family, and friends, for people who are smart but not stock-market people . That means its written in plain English. Where I need to define a stock-market term, Ive tried to do it as simply as possible. And this book is packed with charts and drawings explaining why its important to zig when the crowd zags. Youll learn why fair stocks at wonderful prices beat the market and wonderful stocks at fair prices. Lets get started.

ACKNOWLEDGMENTS

I am grateful to the early reviewers of this book, notably Johnny Hopkins, Colin Macintosh, Jacob Taylor and Lonnie Rush at Farnam Street Investments, Michael Seckler and John Alberg at Euclidean Technologies, and my wife, Nick.

ABOUT THE AUTHOR

Tobias Carlisle is the founder and managing director of Carbon Beach Asset Management, LLC. He serves as co-portfolio manager of Carbon Beachs managed accounts and funds.

He is the author of the bestselling book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance). He is a coauthor of Concentrated Investing: Strategies of the Worlds Greatest Concentrated Value Investors (2016, Wiley Finance) and Quantitative Value: A Practitioners Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). His books have been translated into five languages. Tobias also runs the websites AcquirersMultiple.comhome of The Acquirers Multiple stock screenersand Greenbackd.com. His Twitter handle is @greenbackd.