Dive deep in value investing with Tobias Carlisle

Tobias Carlisle is a well-known value investor focusing on the quantitative aspects of investing. He is the author of books such as 'Quantitative Value', 'Deep Value', 'Concentrated Investing', and 'The Acquirer's Multiple'. Carlisle is also the founder and principal manager of Acquirers Funds.

In a podcast with 'Millenial Investing', he discusses Warren Buffett's value investing style from a unique perspective and compares it with the Acquirer's Multiple strategy.

Flaw in the Warren Buffett way

Carlisle starts with an overview of Buffett's investment strategy - picking companies with high returns on invested capital (ROIC) trading below their intrinsic value. He says, "What Buffett is looking for is a company that grows over time. You're getting the improvement in intrinsic value; at the same time, you're hoping for the discount between the price you pay and intrinsic value to close".

Carlisle points out a flaw with the method. Markets efficiently identify such companies; hence, investors often pay a premium price for them. However, this will be fine if the companies can maintain their ROIC. At the same time, Carlisle says these high returns often revert to the industry average in the long run. Investors pay for the premium return on capital, which disappears in the long run, and consequently, investors often earn lower returns when following this strategy.

A possible solution

The solution Carlisle prescribes for this dilemma? Focus more on what we pay than how good the business is. In his words, "If we have no ability to predict what the future is going to look like... the way that I say that you can protect yourself is by paying as little as possible and not trying to work out which really are the better businesses". He does not mean investors should buy stocks of poor companies, but give a fair chance to businesses that are available at excellent prices.

Carlisle states, "Often the best investment opportunities are not the ones that have supernormal returns on equity. It's just the ones that are doing a little bit better than average". This way, you get something better than the average while paying a relatively lower price.

The Acquirer's Multiple

Carlisle expresses he is biased towards value since a pure value portfolio has consistently outperformed a pure quality portfolio in his experience. It made him develop the Acquirer's Multiple, computed as the enterprise value (EV) divided by operating profit (EV/EBIT).

Benefits of the Acquirer's multiple

The Acquirer's multiple can be viewed as a modified version of the P/E ratio, which is calculated by dividing a company's market capitalisation by its net profit. Note that market capitalisation does not account for a company's debt obligations. Similarly, net profit is not purely dependent on how much earnings the company generates from its core operations as it considers income generated from investments, etc. Replacing the market capitalisation with the enterprise value helps the investor account for the company's liabilities. Similarly, operating profit (EBIT; earnings before interest and taxes) is a better estimate of how much money the company makes from its core operations.

Carlisle uses Acquirer's multiple as the primary screener to arrive at his investment universe, where he adds quality factors.

On diversification and more

He advised against too much diversification and stated that 20-30 stocks should be more than enough for an investor.

The podcast is a treasure trove of investing lessons. We highly recommend that you listen to the entire podcast. While it is beyond the scope of this article to include every interesting tidbit, Carlisle's investing philosophy can be best summarised using the following line.

"The more cash flows that you get for the lower the price that you pay, the better the returns that you get."

Also read: Seven investing mistakes to avoid