Expert Investor: Tobias Carlisle – On Deep Value Investing

HOSTS Alec Renehan & Bryce Leske|3 December, 2017

Meet your hosts

  • Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

Tobias Carlisle has taken an interesting path to get where he is today. Starting his career as a lawyer in Queensland, Tobias is now a world-renowned value investor based in California. He has achieved a lot of recognition in the value investing community for his books Quantitative Value (2012), Deep Value (2014) and Concentrated Investing (2016). We spoke to him about the release of his latest book The Acquirers Multiple that distills a lot of his key concepts into one easy-to-read book aimed at non-investors. In this interview you will learn: • The strategy Tobias uses that when backtested actually beats Warren Buffett and Joel Greenblatt’s strategies • How Tobias made the change from a lawyer in Queensland to a value investor in California • Why deep value investing has stood the test of time • The idea of ‘broken legs’ and how Tobias eliminates them from his thinking • How the Australian market compares to the rest of the world Stocks and Resources Discussed: • Books (click links for more information) • The Acquirers Multiple – Tobias Carlisle • Deep Value – Tobias Carlisle • The Little Book that Beats the Market – Joel Greenblatt • The Snowball: Warren Buffett and the Business of Life – Alice Schroeder • What Works on Wall Street – James P. O’Shaughnessy • Security Analysis – Benjamin Graham & David L. Dodd • The Intelligent Investor – Benjamin Graham • Stocks Mentioned: • Sina Corporation (NASDAQ: SINA) • Wibo Corporation (NASDAQ: WB) • Snap Inc. (NYSE: SNAP) • Amazon.com Inc. (NASDAQ: AMZN)


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Bryce: [00:01:29] Equity Mates Episode number 25, this is a podcast about breaking down the world of investing to make it easier for you guys. And as always, I'm joined now by Equidae Buddy Ren. How are you going? [00:01:42][12.4]

Alec: [00:01:43] I'm good. Bryce. How you going? [00:01:44][1.5]

Bryce: [00:01:45] Good, good. Very well. Excited to be back as always. I think this is going to be a good episode. We've got Toby Carlisle lined up for this week and he's a pretty well renowned value-based investor who you were lucky enough to sit down with and have a great shot. You want to tell us a bit about him? [00:02:05][19.8]

Alec: [00:02:05] Yeah. So Toby Carlyle is an Australian who has, I guess, made it big in America, you would say he started out in studying law at University of Queensland and on a journey that he takes us through has ended up as a deep value investor in California. So he's got an interesting personal story. But what I found particularly interesting, he has written a number of books on value investing and has done a lot of research on different value investing strategies. And he's written a number of sort of quasi academic textbooks. The most well known is deep value. And a lot of people in the investing community really respect his writing and the testing he's done. But he recognised that some of the stuff he was writing wasn't very accessible. And he's written a new book called The Acquirer's Multiple. And what he's essentially tried to do is to steal a lot of the lessons from some of his more technical books into a book that is quite easy to read and is sort of explains the concepts that drive his investing. To give you an idea of, I bought the book in preparation for the interview and actually read it in a day. But, you know, it was all about policy. Now that the book, it was very interesting. He doesn't just talk about the theory. He has a number of real world practical examples of different types of investors and how they've approached market and some really interesting stories. Hopefully everyone enjoys the interview as much as I enjoyed the book. [00:03:50][104.6]

Bryce: [00:03:51] Yeah, well, I think he speaks strongly to our philosophy investing of investing, so this should provide some great insight to the listeners out there who are also intrigued in the valley mindset. [00:04:04][12.8]

Alec: [00:04:05] Yeah, definitely. And before we go, we should give another plug to our competition. Yeah. How we got on it so far. [00:04:14][8.9]

Bryce: [00:04:15] Yeah, great guns. Sports are filling up fast. Not that they're [00:04:18][3.0]

Alec: [00:04:18] not unlimited, [00:04:19][0.4]

Bryce: [00:04:20] but their entrants are increasing. Yeah. So just a reminder to anyone who hasn't entered already, there is a possibility for will. There's a chance for you guys to win. Five hundred dollars to invest thanks to Belmont Securities. We've been lucky enough to team up with them and they are giving you the chance to win five hundred dollars cash to invest in any way you would like through the platform that also will be covering your brokerage fees for the first trade. And then from there on in, they'll be giving some sort of discount brokerage. So fantastic opportunity for anyone who hasn't yet started investing but would love to. Five hundred dollars. These the perfect amount to dip your toe in the water. But also if you do have an investing account with another provider or with Bellemont, that competition is still open to you guys. And this can just be in addition to what you've already got. So jump online with Equity Mates dot com forward slash win five hundred or follow our Facebook page and Twitter account and you will find the entrance details in there. So jump on board. It's a fantastic opportunity. Competition won't be running for too much longer, so don't miss the chance to win five hundred dollars. This could be the start of your investing journey. [00:05:42][82.0]

Alec: [00:05:43] And even though our entry numbers are growing faster than the price of Bitcoin, you've got to be in it to win it. You've got to give yourself a chance. [00:05:51][8.2]

Bryce: [00:05:52] Exactly. So jump in while you have the opportunity to do, too, because this won't be around forever anyway. So without further ado, this is Alex sitting down with Tobi Collomb. [00:06:04][12.1]

Alec: [00:06:05] Yeah, enjoy. That would be my Toby, thanks so much for joining us here at Equity Mates were fascinated with how the people we interviewed got started in investing. So can you tell our listeners what got you first interested in investing and how you got started? [00:06:22][17.8]

Toby: [00:06:23] Thanks very much for having me. Yeah, it's something that I'm fascinated into. That's something in the in the new book, I look at a lot of other everybody who's in the book. I look at how they got started. So I look at how Buffett got started, how I can get started, how David Einhorn got started and how a lot of good started. I came to it through a kind of funny, funny way. I was interested in value investing at uni. I studied business and law at UCU. I didn't have any kind of my family's not a stock, not on the stock market. People didn't own any shares or anything like that. But I was just interested in that. I was looking for some sensible way of investing and friend read security analysis and gave it to me and I read it. But I it's it's a very tough book to read. And the version that I read was the original one, which is a really, really tough book to read. But it was a good thing to have read it because when I started working as a lawyer, I was in M&A and it was the early 2000s. So I just sort of got there. I think I started in April 2000, which was like basically the absolute top of the dotcom bubble and a collapse from there. And I watched all of these companies that had raised a lot of money, dotcoms in Australia that had raised money that, you know, just they were just burning cash, that they didn't really have a business model. They weren't they weren't making any money at all that was selling, you know, like an online department store that was losing money with every single sale. And there was this bloke, Farrukh Farooqi, I think his name was his that is still operating in Australia is the desert writer. And he came in and he got control of a few of these little cashbox companies that were burning cash, just shut the business. And all of a sudden he had like a listed company that had cash in it. And then he used it to keep on going and buying these other companies. I'd read Buffett's letters and in those letters he talks about buying wonderful companies at fair process. But I was looking at these acquisitions that these that this guy was doing and other guys like him. And I just couldn't I couldn't figure out what he was seeing. And, you know, of course, it was the cash, but at the time, it kind of didn't just didn't have the tools to kind of analyse what was happening. But I did remember because I'd read that security analysis book that had that had that chapter in it about liquidations and shareholders getting control of companies. I went back and had a look at that, and it talks about Graham's net net sub liquidation value strategy, which basically you try and get you try and buy the stock in a company for less than the liquid assets that it has, less than the cash and the inventory and the receivables. And you try and buy it then two thirds that of that valuation relative to the to the market cap. So I sort of understood what he was doing and I just thought, next time that comes around, I'm going to be next on the stock market crashes in these kind of things that are around. I'm going to go out and I'm going to try and buy some of these stocks because I know that somebody is going to come in and take these companies out. So it worked, worked as a lawyer in Australia, worked as a lawyer in San Francisco, came back to Australia to be general counsel of a company that was listed on the stock exchange called Pipe Networks, which got taken out by TPG. And I went and sat in the office of this investor, Troy Harry, and he had a company called Trudgen Investment Management that had a listed investment company called Trudgen Equity. And that was basically what he did. He'd go and get buy a stake in these companies and then try and get them to either pay the money out of buy back some stock or do something to to improve the valuation. And just because I didn't want to I didn't want to have any conflict with what he was doing. I started looking at the states. This was kind of late 2008 when the stock market was really beaten up in the States. And it was it was falling like 15 percent a quarter. And I found a hole. There were, you know, like a thousand of these companies trading the net current asset value. And so I went and bought a basket of them, you know, doing this analysis where I look for them, look for an activist on the board or activist trying to get control at Father Thirteen, as they call it, in the States. And it was trading below net current asset value. And I bought a whole lot of these and then sort of my portfolio was flat through kind of the fourth quarter of 2008. And then it might have been up like 12 percent through the first quarter of 2009 when the market was down like 15 percent. And then from the bottom in 2009, it was up two hundred and fifty percent in the next six months. And I thought, I'm really, really good at this stuff. But I had this I went back and I looked. All of the stocks that I thought about buying. And I looked and it was like a I think it was like 120 stocks that passed the criteria of mine, but then for whatever reason, I hadn't kind of put hadn't bought them and that those 120 stocks were up 750 percent together. Well. And so I basically used all of my own genius, you know, to take to Seattle to miss two thirds of the returns. So I started on this different process. Basically, trading equity got wound up. I went and raised a little bit of money from friends and family and from people I'd worked for in the past to set up an Australian fund. And it did it. It bit the market pretty handily for the next few years. My wife is a boss, Angelino. And so we moved back to the states to get married and have kids and set up my own fund here. And I met up. I got rid deep value and is now my business partner. And we've we've basically got two strategies. We have this special situation, net special situation, deep value hedge fund that raises money from high net worth individuals and endowments and institutions and things like that. And that's running a traditional hedge fund manager. And then we have these quantitative portfolios that the objective is to turn that into some sort of listed vehicle so that any any investor can invest in that. And that'll be hopefully we'll have some announcements about that in the next 12 months. But that's basically that's my story. [00:12:39][375.6]

Alec: [00:12:40] Yeah, well, it's a it's a fascinating story. And you started with so many activist investors and you've you've made a complete pivot, I guess, to serious, deep value situations. So do you do you still do you still stay on the lookout for activists or do you purely screen for date value and then just invest in all of them? [00:13:01][21.5]

Toby: [00:13:02] So activism and deep value go hand in hand? It's just just so I can explain the difference between deep value and probably kind of more that type of value investing that Warren Buffett does. So there aren't in the stock market, something like five per cent of assets are in some sort of value portfolio in the states. Of those five percent, the very vast majority of them are in a kind of Buffett style portfolio. So when I say Buffet style, if you read his letters, he talks about investing in wonderful companies at fair prices. And what he means by that is very profitable companies that are kind of a little bit undervalued. If you're a Deep Valley guy, what you're looking for is not a wonderful company. They tend to have fairly busted businesses. They're not making money or it's a cyclical business like steel airlines or things like that. When they go well, they go really, really well. When they go badly, they get really bad. And the risk is when you're buying these things that they go to zero. So you're looking for the way that you kind of get around. That is, you want balance sheet strength, so you want cash on the balance sheet or assets that they can liquidate, things like that. I look for things that don't necessarily have great businesses, but they are still making some money and they've got great balance sheets and they can survive because when they turn around, they really rip they go very well and they sort of there's more of those types of companies on the stock market. That's about 96 percent of the companies on the stock market are that style. Four percent are the Buffett style, which is funny because that's where most of the assets are. So they tend to be more highly valued. So if you're in these deep value companies, there's kind of three ways that you get your money back. Either the business just sort of recovers, which most of the time that's what happens. It's called mean reversion. Basically, the thing is, is bustards, as it's going to get management isn't just standing there or sitting on their hands. You know, they're trying to fix it. The weak hands kind of get shaken out of the industry and then the stronger companies survive and then they go very well because they've got a period of time where there's no one, there's no real competition. So they're making pretty good money. Then the other two ways that you kind of get your money out, a leveraged buyout firm, private equity firm comes along and they buy them. That happens kind of occasionally. It's like two or three per cent of the opportunities that that happens to or they attract an activist. And so an activist is sort of they're looking for particular types of things. But I think they can do better than current management when they come in. Often there's a little bump around them coming in and then they tend to focus the mind of the management, focus the mind of the company on running it more for shareholders than it might have been previously. And so you find that they do big buybacks so the company might get sold all these sort of things that that generate pretty good returns. So activism is it is a small part of what you know of of the investment process that we use. But it's it's still a very key part because it's often how these very undervalued companies, the situations get resolved. [00:16:11][188.5]

Alec: [00:16:12] Yeah, and that's one so I guess that leads naturally into your new book where you've sort of written about your investment philosophy and and how you invest. So it's called the Acquirers Multiple. Can you explain what you mean by the acquirers multiple and and how you calculate it for these companies? [00:16:30][18.0]

Toby: [00:16:31] Sure. So the most successful book about value investing over the last decade is a book called The Little Book That Beats the Market by Joel Greenblatt. Really fantastic book. I read it when it first came out like the end of 2006 or whatever it was. I was in San Francisco, got the book, read it, loved it, because it was a great explanation of what Warren Buffett is doing, which is that the wonderful companies at fair prices, like Joel Greenblatt, who's a great investor in his own right, he went through and he analysed these things quantitatively and he said, what a wonderful company. That's a company that earns very high returns on invested capital. So what that means is that it makes a dollar more than a dollar in a lots of lots of profit per asset, per dollar of asset invested in the company. So they're very profitable companies with not much in the way of assets. And the reason that's attractive is it allows them to grow very rapidly and kind of throw off cash while they're doing it and then wonderful companies at fair prices. So the second part of the equation is this fair price idea Greenblat cause of the earnings yield. If you go through Buffett's letters, you find him talking about eBid operating earnings, the operating income, and he says that's something that he tracks very closely. I've got a couple of quotes that he says in my book. Basically, you're looking at operating income is basically the bottom line, net profit after tax and then adding back in interest and taxes. And the reason that you do that is interest payments are tax deductible. So they kind of that that if the company is paying a lot of interest, it might be paying less tax. If it's paying no interest, might be paying more tax. Basically, it makes an apples to apples comparison possible between different companies with different capital structures and then that that is examined against the enterprise value of a company. So if if you know what the market capitalisation is, that's the the number of shares that a company has on issue multiplied by the share price. That's the market cap. If you're only looking at market cap, you're missing how much debt the company has and if it has anything, anything else, that sort of debt. So other things that are debt, like a preference shares or in the states and underfunded pension or a minority interest, which is another another company or another business might hold a little part of the business. So basically, enterprise value adds all those things together. And it tells you whether you sometimes companies have more cash than debt. And so they're actually a little bit cheaper than they look. Sometimes they're carrying a lot of debt and they're much more expensive than they look. So then you look at this enterprise value against the operating earnings and that gives you how cheap they are. So Greenblat ranks them on how good they are and how cheap they are, takes a combined ranking. And that's what he calls the magic formula. When he tests that, he finds that that beats the market really well. So I partnered with a bloke in 2012 who's a he was a PhD student at the Booth School of Business in the States, which is the best sort of quantitative business school in the States, regarded as the best quantitative business school. We tested all these different fundamental measures to see which ones sort of still worked. And we tested the magic formula as part of that process just because it's a simple quantitative methodology. And we found that it beat the market. It didn't beat the market as much as Greenblat had said that it did, but it definitely beat the market. And we looked at the full data set that we had, which went back to sort of 1963 through about 2013. But I found a kind of a really fascinating idea, like why does the magic formula beat the market? And then this other kind of very unusual thing that if you take away the the wonderful company part, if you take away the return on invested capital, if you just look at Greenblat earnings yield, you find that that beats the magic formula. And it doesn't just beat it on a raw basis, it beats it on a risk adjusted basis. So the risk adjusted measures, Sharpe ratios sort of ratio, which basically look at how much the portfolio moves around relative to how much it makes. And it turns out that this is sort of just buying these things that are deeply undervalued gets you a better performance. So the book Deep Value, which came out in 2014, basically looked at the reasons why these really undervalued companies tended to beat the market and to beat a magic formula type companies. And so the most recent book, The Acquirers Multiple, is sort of a simplified version of deep value. Discuss some other things that I found in my books and things that I've found since then. It's a really simple explanation of what is sort of wrong with the magic formula and why the acquirers multiple, which is just the inverse of the earnings yield to its operating income on its enterprise value on operating income. What sort of like you could think about it like a like an industrial strength price earnings multiple. And it's why that works so well at finding deeply undervalued stocks. And so then I just discussed other guys, Gyasi Icahn, who's a who's Carl Icahn, who's a activist investor over here, David Einhorn, who's an activist, and Dan Loeb, how they've kind of used this metric or I think they've used this metric to find really undervalued stocks and make lots of money doing it. [00:21:58][327.0]

Alec: [00:21:59] Yeah, I've got to say, some of those stories were fascinating, especially Dan Loeb and his letters that he wrote when he filed his 13 day notices. I thought that was a that was a great way to sort of influence company management. [00:22:11][12.8]

Toby: [00:22:12] Very clever. Very clever. [00:22:14][1.5]

Alec: [00:22:14] Yeah, it really taking advantage of his opportunity there. So I've read the book and I got to say I really enjoyed it. I thought you wrote it in a way that really made me understand exactly how you thought about value investing. And I found it really valuable, I guess. Thank you. I guess the driver or the mechanism that you talk about that leads these deep value stocks to appreciate in value is mean reversion. So can you explain mean reversion in an investing context and how that actually drives these extremely cheap stocks to realise their value? [00:22:47][32.7]

Toby: [00:22:48] Yeah, great question, I mean, reversion is mean, revision is a is an idea that you find through lots of different disciplines, like you fight it and you find in mathematics it's the law of large numbers in mathematics. But basically, you know, it's in gambling as well. In finance. What it means is if you find you find this sort of undervalued companies and overvalued companies sort of tend to go back to about the average valuation, that kind of track back to where average valuation and that's mean reversion. It's this movement back towards the average. You find it if you find an overvalued stock market, they tend to kind of underperform an undervalued stock markets tend to outperform really fast growing economies tend to slow down and slowly growing economies tend to speed up. Slow growing companies tend to speed up and fast growing companies tend to slow down. You find it everywhere you look very profitable. Companies become less profitable. Unprofitable companies tend to become more profitable. There are some conditions around that. It's not it's not true that a company that's listed on a stock exchange, it's going to go and drill for gold somewhere in the Australian outback is going to become a profitable company. That's that's not what I'm saying. All I'm saying is that companies that do have a history of kind of making a bit of money, if they're currently not making money, then there's a reasonably good chance that given a kind of better turn of the business cycle, they'll start doing a little bit better. So that's kind of what I'm looking for, something that has done pretty well in the past, that's having a tough time now. And often when you find that if the business isn't doing well, the stock's been absolutely crushed. So you get these things when the business doesn't grow, the stock is really, really cheap. And then if they recover, if they survive. And so I'm looking for the things that will help them survive. If they do survive, you find that the business does a little bit better and then the stock does a lot better because the discount is sort of taken out of the stock and the business is doing better. You get those two things pushing together. You do pretty well in the stock. So that's that's mean reversion [00:24:54][126.2]

Alec: [00:26:48] Yeah, OK, so for companies specifically, you sort of talk about in the book, you talk about if a company is saying extremely large profits, then competitors will enter that industry and so their profits will shrink because of the increased competition and vice versa. When an industry is doing poorly, this sort of struggling companies will be shaken out of the market because they can't keep up. And then that lessening of competition will allow those struggling companies to revert to the mean. How do you ensure that the companies that you're buying aren't going to be the ones that will get shaken out by the competitive dynamics? And and you're you're not accidentally buying the ones that will go bankrupt rather than the ones that will revert to the main. [00:27:30][41.9]

Toby: [00:27:31] That's a really good question, and that really is the heart of what I do. That's that's the hardest thing to do. But there are things that there's just common sense things that you would look for. If they're carrying a lot of debt and they're not making much money, then they're going to really struggle to sort of survive. If they are kind of if they've got some cash and they've got some cash flow, then that's the kind of business that can survive a downturn in the market. So those are the ones that I'm looking for on it, if not cash on the balance sheet, at least kind of strong operating earnings, cash flow, kind of operating earnings is probably it's the accounting version of cash flow. So you're looking for you want cash still coming in. And then the other things that I look for, if if you're looking for a good management, you're looking for a company that's buying back stock. So little buybacks aren't very interesting, but material buybacks are very interesting. And there's some research about that's mature, like a big buyback typically indicates a few things. One of them is that management is thinking about the shareholders. They're taking advantage of an undervalued company to buyback and stock, too. They've got the cash there to buy the stock back because companies that don't have the cash, they just can't do a buyback. And that's that's the sort of thing you want to try and avoid. If they don't have any flexibility to buy the back the stock back when they're undervalued, then they've done the wrong thing at some stage in the business cycle. So it indicates a few things. Management know what they're doing, that they're kind of helping the shareholders and the cash is there to do the buyback and it's undervalued enough that they can they can kind of do it. So when you get those things together with an undervalued stock, that's a pretty good indication that the stock is going to do something good over the next few years. [00:29:19][107.2]

Alec: [00:29:20] Yeah, OK, that's great. I'm so then I assume the other key part of this investing philosophy as opposed to sort of Buffett and Greenblat, is that you need to time you're selling right. Because with Buffett and Greenblat a big part of their sort of magic formula or, you know, looking for Mode's is that you can buy and hold these companies for, you know, throughout business cycles and they'll keep compounding. So how do you know when to sell? Like when do you know that these companies have realised their value or are there any sort of key indicators that sort of show that it's time to get out? [00:29:55][35.2]

Toby: [00:29:56] It's one of the toughest things to sort of figure out, and it's influenced by a lot of things. If you're if you if you're taxable, you have to be careful that, you know, you get long term, short term capital gains. It can be the tax bite can be material to your returns. So you have to be you have to be a little bit careful about that. But sort of ignoring the taxes, undervalued companies. One of the nice things about value investing, one of the nice things about undervaluation, just pure undervaluation, not sort of worrying about how high quality the businesses is, that if you find something that's undervalued, typically it takes about three to five years for the undervaluation to work its way up. So what that means is that five years later, the company sort of only finally getting to its its value. The very vast bulk of the return comes in the first few years because that's that's where the rubber band is stretched the furthest away from. Intrinsic value and thought springs back pretty quickly if you get it right, but then five years later, you still find that they outperform. What I do in my deep value portfolio is that I got an idea about intrinsic value and I'm watching what that intrinsic value is doing quarter to quarter in the States, because that's how often that report half to half in Australia, because Australian companies report on the half and you just sort of looking at what's intrinsic value doing. Is intrinsic value going up as going down as it's stable, where is the price relative to that intrinsic value when the price matching up to intrinsic value? I'm probably becoming less interested in that company because they know the stock gets bigger in your portfolio and it gets riskier as it gets bigger because it's getting closer to value. So I often trim companies back and I'll add to them if they fall again. And I find that there's quite a lot of return in sort of trading around that. And that's something we do regularly. If something's falling, we'll buy some more. If it's growing, we might take some off the table. And finally, if it gets to a point where we think it's fully valued and we've got better ideas around, so we've got some stuff that's really cheap that we really want. I mean, we really want to buy a big chunk of will probably finally exit and then move towards that thing that we think is really cheap. So that's the process. It's it's it's not really quantitative. It's it's a little bit more there's a little bit more art to it than there is science. And I've got no idea how successful we are with it because it's a tough thing to do. But that's that's basically what we're trying to do. [00:32:37][161.0]

Alec: [00:32:38] Fair enough. So on top of the board, the acquirers multiple, you also have the website, the acquirers, multiple dot com. Can you can you talk about a little bit about what you're doing there? Because I found it really just a great resource to sort of understand in practise what what you're talking about in the book and to see some of the companies that I mean, I was surprised to see some of the companies that were sort of springing up in that stock screener. [00:33:05][27.5]

Toby: [00:33:06] Yes, one of the when I when I found I kind of had done this research and I went back to Greenblatt's magic formula because he's got some free stock picks on his magic formula. So what I really wanted to do was just look at the ones that were cheap on an operating earnings on acquirers multiple basis. And I couldn't find a way to kind of do that successfully on the side. So I thought, I'll just build my own. That was it's a difficult process to kind of track down the data and to track down the data and get it get it up on the site like that. But what it does is it screens. There's a free screener on the site that screens all US stocks and looks for the ones that are cheapest on an acquirers multiple basis. We do some of the statistical things in the background. So we we look, we make sure they're not. We use these statistical measures to find financial distress and earnings manipulation and fraud. And we kicked those stocks that we also kickett at stocks that are too heavily shorted because the research shows that sometimes the short sellers, the smart money, you know, they've got a pretty good idea about what isn't going to perform very well in the future. It's often hard to short on the basis of short interest because there's a lot of guys trying to borrow the stock. It makes them very expensive to short, but they don't want you don't want to own them along because they don't perform very well. So we kicked those out. And then we have a few other measures that I don't really tell anybody about because it's some of our secret sauce. We just kick out things that are too expensive, basically. And so the things that are left are cheap, generating pretty and plenty of accounting cash flow relative to what you're actually paying and statistically as a portfolio that have tended to work very well, kind of over a long period of time. So the thought is that I've got a I've got a partner on the site, Johnnie Hopkins, who runs it from Australia. He's he he's a great investor in his own right. And he kind of have all these great stories that sort of talk about illustrate the ideas of what we're trying to do. So if anybody's interested, you can go to the acquirers multiple, just the acquirers multiple. Com sign up to the sign up to the screen. And you can see in the top thousand companies in the states, the cheapest thirty. And it's interesting, the stuff that goes in that last year, Apple came into the screen and I was kind of shocked because it's it's a stock that just just coincidentally, it was when I first published Quantitative Value in 2012. In order to promote it, we had to write up a stock pick because, you know, we've spent the whole book saying, don't pick individual stocks, pick based pick, pick portfolio. And then, of course, the first thing that somebody wants is a stock write up. So we read at this, we read a battle because we thought that was I think it was one of the cheapest stocks around in the large cap. You. Most of the time, so he wrote that up. Of course, it goes on to perform really well, and part of that was because there were activists involved. Icahn and Einhorn both got involved. And I write about that, how that all happened in acquirers multiple. And then last year, I think it was about April last year, it came back into the screen. I kind of couldn't believe it, that it's such a big, well-known, you know, great brand, really well respected company, so much cash on its balance sheet. And it came back in. It was like the 20th cheapest stock in the US in that large cap universe. So I tweeted it out again, whatever it was at the time, I think it was about 80 bucks or something. And it's basically it's in it's up sort of 80 percent since then. So it's a good screen and it picks up some great stocks along the way. [00:36:41][214.3]

Alec: [00:36:42] Yeah, that's great. And so on the website, you've got all U.S. stocks and Canadian stocks, other plans to do Australian stocks at some at some point in the future. [00:36:54][11.6]

Toby: [00:36:55] I'd love to do it because I love the Aussie stock market and I'd love to be invested there a little bit more. The problem is tracking down the Aussie data, tracking down the Aussie data to to sort of put into the screen because it's very expensive, right? Yeah, it's something that I will do in the future. It's it's sort of a it's not an immediate project. [00:37:16][21.4]

Alec: [00:37:17] Yeah. Yeah, fair enough. So I guess from from your experience, because you started your fund in Australia and then moved it over to America. What are the big differences that you've noticed between the two markets and specifically for value investing? Are there any major differences yet [00:37:32][15.2]

Toby: [00:37:33] that the Australian market is very so the index in Australia is 50 percent financials, and that's banks and insurance, which is which is massively overweight. And if you look around. So the MSCI World is the global stock market index. Banks don't come anywhere near 50 per cent. I think they sit around sort of 13 or 15, something like that. And in basic materials, which is that sort of miners, they make up another 13 percent in Australia. And that that's so that means that the Australian index is sort of two thirds financials and basic materials, which is a very unusual mix. And the things that, you know, the tend to be better businesses. So those are tough business. Those are very cyclical businesses. Typically, Australia hasn't had a recession in a long time, so the banks haven't looked like cyclicals. But if Australia has a genuine recession, then they might find that there are some holes in some of that balance sheets of the banks in Australia might look a little bit a fair, bit weaker. And that's a big chunk of the index. The funny thing about the Australian index, I think it's still below where it was in 2007. And so it's been a tough period to be an investor in a purely Australian. You know, if you're only investing domestically in the US market is a different kind of market. It's very, very big. It's like half of the global market capitalisation and it has a lot more consumer discretionary consumer staples, consumer product companies, you know, Googles and Apples and things like that. They're kind of interesting from a business perspective. So Australia's infotech sector is zero point five percent of the index. MSCI world is 13 percent. So Australia's sort of underweight infotech and things like that. So it's a different market. The other thing is that the Australian stock market tends to be a little bit more shareholder friendly. You can get proposals put to the company. You can circulate documents and do things like that. And none of those things exist in the states to have this dual class, dual share class structures in the states where, you know, the founders own these shares that vote a million times to the other shares or the bishops don't vote at all. That's pretty common over here. And it's hard to kind of get management to listen to if you hold a lot of bishops that don't vote, whereas in Australia on the ASX, you're not allowed to do that. You only have the ASX on you as ordinary shares and ordinary shares basically have the same voting rights. So that means that the activists in the states are like they're a totally different breed. The activists in Australia, they're kind of weaponized, you know, like Armadillo, you know, just evolved in a different way. And which is why you see the Dan Loeb style with they you know, they write the really rude letters. And Carl Icahn, he'll just get on a call and rip their faces off, stuff like that. They have to be a bit tougher over here. But it's something that you have to bear in mind as an investor. You have to be careful when you're in these things. And I've been caught recently in a stock where we can misread what management was doing a little bit that the company is seen as Sina's is the ticker over here. They own a big chunk of another company called Weibo, which is the China Chinese kind of a chat thing in China. So it's a situation I like because you can buy a whole lot of Sina and you can hedge at the web by selling it short. And then if the stock market crashes, you've got this natural kind of arbitrage short in there. And the idea is that. You're getting this chunk of sener free, and if the if the two stocks kind of trended together, which is what we were hoping would happen, then you make some money and eventually you just take the position off and you've had a little arbitrage. What they had been doing is CNN had been sort of spinning off bits of Weibo, which naturally closes that short. In this instance, though, the stock had continued to get wider. And the the the spread was something like 70 percent, which is very, very wide. And something like this. Then this American, it was firm, Agastya showed up and said, we want to get to directors on the board. We're going to close the gap. We're going to play out these things. Papis we were holding the management, fought them really hard. And Aristo was defeated about two weeks ago at at the shareholder meeting. And immediately the senior directors issued these preferred shares that basically cement them into this company. So they're doing that. They're doing that. You know, they lend themselves money to buy Sina shares when they're cheap rather than just going and buying back for all the for all the other shareholders. So now you could never get away with that kind of stuff in Australia. [00:42:07][273.9]

Alec: [00:42:08] Yeah. How do they. Is that just allowed in America that you can give yourself preference shares? [00:42:14][5.6]

Toby: [00:42:15] It's a well, they're not showing it to themselves, but they're just issuing them and they're convertible and we've basically sold out this position because it hasn't really worked out. But it's it's a it's just a different kind of regime in the States. You have to be prepared to look after yourself a little bit more, whereas in Australia, ASIC and the ASX are much more kind of they pay more attention to this sort of thing so that the regime in Australia is just more shareholder friendly. So that's sort of that's the main difference. You just got to be a little more careful when you're investing in the states, sort of who the management is and who you're invested alongside because you want to be alongside somebody who's a big engaged shareholder who's prepared to kick up a stink if something happens that they don't like. But you also just want to be beside in with management who who are shareholder friendly. [00:43:08][53.2]

Alec: [00:43:09] Yeah, yeah. So another another thing that I found really interesting of late, and it seems to be that as we approach any market talk, there are people who talk about the death of value investing. We we our most recent interview, we interviewed an Australian investor, Michael Day, who said he was a value investor, but he doesn't think that model works anymore. Recently, David Einhorn has said something similar or he's questioned the utility of value investing. Do you think this is just almost a natural part of the market cycle and, you know, they'll come to their senses at some point or has something structurally changed after the GFC? [00:43:47][38.3]

Toby: [00:43:49] Yeah, I think I think it's naturally part of the cycle that when the market gets, you know, when the market gets I don't know how close we are to to the crash. If you'd asked me five years ago, is the market overvalued and will it crash soon, I would have said yes. So I've been wrong for at least five years, maybe longer than that. So I'm not a great picture of what the stock market's going to do. But, yeah, it's something that I have seen, you know, in the late 1990s when dot coms were all the rage the magazine covers, it said, has Warren Buffett lost his touch in 2007? It'll be good for value up to 2007. But but again, it was just easier to be in kind of it that a more glamorous stocks and what happens when the market gets like this, the bigger a company is, the sort of more momentum it has. So if you're if you're a value guy, you're naturally buying things that are smaller because, you know, if two companies have got 100 million dollars in earnings and one's trading on a PE of 50 and one's trading on a P five, the one's trading on a P of 50 is ten times bigger. And it's those ones that everybody wants to be in and the one that's trading on a P five. No one wants to touch with bargepole. And that's the sort of thing that I'm trying to say. And it just doesn't get any love in a market like this. [00:45:09][80.4]

Alec: [00:45:10] I guess that would be exacerbated by indexes and passive investing. Those days work as well, because they would naturally skew towards the companies with higher market caps. [00:45:19][8.8]

Toby: [00:45:21] That's that's true. And that's that's been the argument that ETFs have had a big influence on this market going the way it is. And is that a structural change to the market? That means value investing will never work again. One of the things that I've seen over to previous market pops, and I don't know if this is a market top, but we're probably closer to the top, don't get out of the bottom is that whenever value investing starts looking like the dumbest thing around and values look pretty dumb through this cycle, I think it's if I if I look at my Baptiste's basically since June 2009, value just hasn't looked, values underperformed. And that's a really long period of time. It's seven years and another quarter and probably a little bit more. It's the longest period of time since the late 1990s and the underperformance in the late 1990s was much greater, but it was over a much shorter period of time. This is sort of been a really drawn out SUKIE period for value, which is great because I started being a value investor about about the same time. So, yeah, it's underperformed the entire period. My wife is very forgiving, but she must think I'm a complete idiot. You know, we just put it on the stock market and gone to the beach. [00:46:28][67.0]

Alec: [00:46:28] Yeah, but [00:46:29][0.9]

Toby: [00:46:30] so, yeah, I think it's cyclical. And I do think that at some stage there's a reckoning for the stock market and then value starts looking like a much better strategy. But yeah, I've got there's nothing there's nothing that I can point to the proves that other than sort of that's my intuition and I've seen it a few times before. [00:46:46][16.0]

Alec: [00:46:46] Yeah. I guess you're you're back testing in the acquirers multiple. It was pretty hard to argue with though because you sort of went back to the mid 60s and back tested. I think it was five different strategies, including one just following the market, one chasing growth, and then Joel Greenblatt and then the acquirers multiple. And, you know, you're back testing with you exponentially beat the market. So that's got a point to his value, having some value. [00:47:18][31.8]

Toby: [00:47:18] I guess it's one of the funny things, like the reason that value works over the long term is because it doesn't work regularly in the short term. And there are lots of people who just can't stand the underperformance. And look, I'm one of them. I hate underperforming, especially because you look like an idiot and you're doing all this stuff and the dumb index, which, you know, they're just buying the biggest that's doing so much better. You know, it's hard it's hard on the old ego to sit there thinking that you're doing anything at all. But I do think that it's it's the time of the market. And I think that the long term returns to value is so strong that just because the last sort of seven years haven't worked so well, it's not long enough for me to write it off. And I've seen longer periods of underperformance in those back tests. You can know it happened in the in the 60s. It's happened in the 70s. And often out of that really long period of underperformance, you get a really good period of outperformance. So that's what I'm holding out for. Yeah. [00:48:18][59.7]

Alec: [00:48:19] How do you how do you get your investors to keep the faith? Because, you know, they they would get quarterly updates and they would have their you know, they could say how the market's going. And, you know, value investing has to be a long term philosophy. But as sort of Seth Climbin writes, like a lot of Wall Street is this institutional performance, derb, where everyone's compared on the last quarter. So it's a how do you how do you get that message that you've got to you've got to stick with me for the long term? The. Earlier investors. [00:48:48][28.8]

Toby: [00:48:50] We report on a monthly basis, so that makes it that does make it tough and there's there's a lot of noise on a monthly basis, particularly the last month has been very tough for for whatever reason, value has just sort of collapsed a little bit over the last month. And the market's still being quite strong. Part of it is educating them. That's why I write the books, because I want people to understand what it is that I'm doing, why we're buying these really ugly companies. And you know, that underperformance isn't unusual, that it regularly occurs. And also to say, look, this is a long term approach over the long term, over 20 or 30 years. This is a better place to be, even though in the short term it's pretty painful. That still doesn't help. You know, there's still there's still some churn. People come in and people go out. But that's that's the argument that we make. [00:49:37][47.1]

Alec: [00:49:38] Yeah. Yeah. Well, hopefully they all pick up the acquirers multiple and and give it a ride. [00:49:42][4.1]

Toby: [00:49:43] Hopefully everybody [00:49:43][0.3]

Alec: [00:49:44] does. Yeah. Yeah. Well, one other thing that I found really interesting in your book, and you refer to them as broken legs and essentially they're, you know, the facts about a certain business that make you say wait. But, you know, I'm not going to invest in it for this reason or that reason. And you sort of talk about how you have to eliminate that thinking from your investing. And because, you know, you always be able to find a reason not to invest. But this value system works best if you just ignore those broken legs. How? [00:50:15][31.3]

Toby: [00:50:17] Yes. So that there's this there's this idea basically there's some research going back to the early 80s, maybe even early 70s, where they've been comparing the performance of simple algorithms. So an algorithm is just it's not like a computer programme. It's just a decision. You know, you might have six decision gates in a row, yes or no, go, don't go. And then you get to the end. And if you're if you've done some analysis on this thing. So, yeah, you go to the racetrack and you look at, you know, you don't bet in the first race that might be your first decision. Get your second decision. You might be bet in the last bet in the last race. Is it the last race? Yes. I guess underbite is the favourite top white. Yes. Maybe time to bet on the favourite, you know, did something like that. It's just a series of decisions that you make that you that you have no influence on. And I found that basically if you apply these rules, you tend to do better than even experts in these different areas and everything from picking the right wine bottle to working out whether somebody's got depression. So it's in medicine, in the stock market. It's it's across all of these different disciplines. And so they've come up with this thing. It's called the Golden Rule. Basically, these simple algorithms be the expert decisions. And one of the ideas that comes out of is, you know, why is that the case? And the reason is that experts tend to exercise their discretion to override models too often and lead the way that they kind of the example that they give is so you have some algorithm that tells you whether Johnny is going to go to the cinema on a Friday night and in your algorithm, you might have something like what kind of movie is showing? Is that is it an action movie? Is it a romance movie? You might look at the weather is it's is the night writing. So you might say if it's if it's raining and it's a romantic movie, he's not going to go. If it's a dry night and it's an action movie, he's going to go. But you get this extra bit of information. He's got a broken leg. Surely you should be able to factor that into your model to say he's not going to go to the theatre, even though all these other things are lining up, telling you that he is going to go. And the answer is that you shouldn't do it. And the reason is that we find too many broken legs. We find too many ways that we want to override the model. We try to exercise our discretion too often. That's particularly apt if you're a deep value investor, because every single one of these companies looks like it's got a broken leg. You know, they've all got something wrong with them. There's a reason not to invest, but you just got to keep on saying to yourself, the reason not to invest is why the opportunity exists in the first place. That's why it's cheap. And if it's cheap enough and you think it can survive, it just needs a little bit of good luck to sort of do very well. And that's what I found over a long period of doing this. You find something that's really busted on a business on a business basis, but the balance sheet looks okay and it looks like it's going to survive. You know, good things do tend to happen to these stocks. Something good, you know, they get a little bit of luck and all of a sudden you sort of off to the races. [00:53:26][189.5]

Alec: [00:53:27] Yeah, it's it's really interesting because it is quite a counterintuitive idea that experts shouldn't trust their sort of expertise to put like a layer on top of these, you know, stock screening algorithms or how however they assess what what good value. But I mean, you know, as you said, the back testing sort of proves that that. You just got to stick to the system, right? Yeah, so one other thing that I wanted to ask you, sir, in your book, you were talking about mean reversion. You talk about how Buffett talked about how corporate profits would revert back to the main. He said that they wouldn't stay above six percent for any sustained period of time. But look at what we've seen is that they have had an unbelievable staying power. So is this an exception of to mean reversion or is this just an extremely long cycle that that we're in the middle of? [00:54:23][55.7]

Toby: [00:54:24] Well, that's that's the million dollar question. My intuition is that it's cyclical, but there's no evidence for that at the moment. It's looking pretty secular. But I think that you can you don't have to think very long to kind of figure out why why it has happened. If you if you flood the economy with cheap money and if you make you make it really easy for companies to raise money on the stock market or to borrow money, then things that are marginal projects that just wouldn't get a get a look in in any kind of normal market tend to be they're doing quite well, you know, and it's hard to kind of see the relationships between, you know, sometimes it's it's. So, for example, you know, Snapchat has gone public, right? Snapchat doesn't make much money at all. It loses a lot of money. But Snapchat pays Amazon Web Services 400 million dollars a year to be the kind of back end of Snapchat. So Amazon Web Services is making 400 million dollars that it wouldn't otherwise make because Snapchat has raised money from venture capitalists and the public now. And so that's a sort of an example of you just you can't see how the money flows through these companies to make other companies look better than they would otherwise look, you know. So the venture capitalists have been able to raise a lot of money. They've been able to invest a lot of these companies that are pretty marginal, all of that kind of. And those companies then spend money with other companies, all of that kind of working together, all that cheap money that they can raise and borrow that is then invested in these other companies, makes them look more profitable than they might otherwise look. So I think that cheap money flows through to that profit line and competition will eventually come in to eat that, eat that away. And they just it's just it's too easy to make that much money and not expect that you're going to get somebody else who wants to come in and make that amount of money. So I think it's cyclical. But, you know, I do acknowledge that it doesn't look that way. [00:56:22][118.2]

Alec: [00:56:23] Yeah. We'll say, let's say mean reversion. [00:56:25][2.4]

Toby: [00:56:25] Oh, so there aren't a lot of guys left who are cheering for me professionally. So I'll either look like I'm either going to cast doubt on an island or it's going to it's going to it's going to start working. [00:56:38][12.9]

Alec: [00:56:39] Yeah. Yeah. So tell look, we've reached our final three questions that we ask all of that we finished all of our interviews with. But just before we get there, can you tell our listeners if they're interested in reading some more stuff that you've written or following you on social media? Where can they find you? [00:56:56][17.3]

Toby: [00:56:57] The new book is called The Acquirers Multiple. It's it's in Australia. I think it's only available on Kindle at the moment, but it's in the it's in Amazon.com that you or you can buy the the a paperback through Amazon in the States. I'm on Twitter at green backed dot com. It's a funny spelling. It's G in B a CKD or we can just search my name, Tobias Carlyle. It comes up or requires multiple. So that's the website where acquirers multiple dot com, that's the website that has the stock picks and Johnny writes, put some good articles up there every single day. So those are the easiest ways to get. Or you can shoot me an email. Tobias at acquirers multiple dot com. [00:57:41][43.3]

Alec: [00:57:42] Perfect. All right. Well, let's get into our final three questions. So first of all, what book or books do you consider must reads? [00:57:49][7.5]

Toby: [00:57:51] Well, ignoring my own. Yeah. To the you know, the analysis and the intelligent investor. Really tough books to read. But I think they they are worthwhile if you sort of get the most recent version of security analysis, because I've got interest by well-known investors and the intelligent investor just sort of describes the idea of value investing. I love the snowball, which is about Warren Buffett. Just looking at my bookshelf now, what else what else is great or what works on Wall Street is another epic that's written by Jim O'Shaughnessy. He's a quant he sort of went through when he looked at all these different strategies for investing in the stock market. And then he shows the actual returns to those the strategies. I've had the pleasure of meeting Jim a few times. He's a really good bloke. [00:58:40][49.4]

Alec: [00:58:41] Perfect. All right. Well, we'll we'll link all those books in in our show notes that some good ones and I haven't heard of that Jim O'Shaughnessy one. So that's definitely one. It's very good. Yeah, great. So second question. What is your go to source for investing information? [00:58:55][14.0]

Toby: [00:58:56] Twitter, I love Twitter. I spend a lot of time kind of hunting around. They're really smart guys and they're asking questions about stocks, asking questions about strategies. They follow lots of interesting investors. They're not now famous at all. They're just sort of guys on there. Who are there any major sort of plugging away? [00:59:15][18.4]

Alec: [00:59:15] Are there any must followers that you would sort of recommend to jump on Twitter and follow? [00:59:19][3.8]

Toby: [00:59:20] Yeah, there's shadow stock at Journal of Value. He's he's great. He's an old school kind of quant. Did value go? I saw I love a lot of the work he does. He'll have he'll just run some interesting screen and he'll dig up. Now, here are here are 10 stocks that are really cheap, online acquirers, multiple bases that are buying back stock, and then he'll just give them to you. So he's always really good. So that's one of my favourite ones. I think [00:59:46][25.9]

Alec: [00:59:47] that's great. Yeah, I've found Twitter is just people are so willing to share information and stock ideas and thoughts on markets. It is really just an unbelievably good resource. It's good value. Yes. Free. Yeah, very much now. All right. One final question. What advice? And this can be investing or otherwise would you give your younger self when you were just starting out in markets and as an investor, [01:00:13][26.7]

Toby: [01:00:15] it's going to take a lot longer to get going. And you think it is and you probably need more money than you think you do. I really wanted to. You know, I have been more than happy to kind of go and work for somebody else in the States. It's just hard with, you know, an Australian an Australian degree and not a lot of excuse me, not a lot of us experience. But as it happens, that didn't happen. So I sort of started my own thing earlier than I should have. So it just takes a lot of time and patience. It's you know, you can run into these periods like we've just seen seven years of kind of underperformance, which makes it tough to be a value investor. So you need a lot of patience and you need some capital behind you to kind of make it work. That's that's kind of the best advice I can give. [01:01:02][47.4]

Alec: [01:01:02] Yeah, I think that's good advice. Just I think I think for probably all areas of life, it's going to take longer. Got to be patient. Yeah. Yeah. You'll come good in the end. All right. All right. Well, Toby, thanks so much for joining us. I can't recommend the acquirers multiple highly enough, so I reckon everyone should go out and get it. And then if they're feeling game value is another one that I've heard great things about. But thank you for coming on and joining us today. [01:01:30][27.9]

Toby: [01:01:32] Thanks so much for having me. I really love the questions and it's great chatting [01:01:34][3.0]

Speaker 7: [01:01:36] Equity Mates and the people appearing in this programme may have positions in the companies. This is general advice for me. Please speak to a financial professional to understand how they pertain to your individual situation. [01:01:36][0.0]

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