19 May 2019

On today’s show, we talk to Tobias Carlisle about a new ETF that is starting.

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  • What the value spread is and how to identify it?
  • What the difference is between a mutual fund and an ETF
  • What will happen to the cheapest value stocks if the market crashed
  • What you might want to be long Fiat Chrysler and short Tesla
  • Ask The Investors: What is the best value investing curriculum?


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Preston Pysh  0:02  

How’s everyone doing out there? On today’s show, we bring back our close friend Toby Carlisle to talk about all sorts of investing topics. For example, we talk about value spreads. We talk about what it’s like to set up your own exchange traded fund or ETF, and the underperformance in value picks, just to name a few of the topics. 

Toby is the best selling author of multiple books. He’s got an expertise in back testing, and mixing value in momentum strategies. He’s the founder of The Acquirer’s Multiple. He’s always a crowd favorite on our show. So without further delay, we bring you the always thoughtful Tobias Carlisle.

Intro  0:40  

You are listening to The Investor’s Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

Preston Pysh  1:01  

Hey everyone, welcome to The Investor’s Podcast. I’m your host, Preston Pysh. As always, I’m accompanied by my co-host, Stig Brodersen. We got our good friend here with us, Toby Carlisle from The Acquirer’s Multiple. He’s part of our Mastermind group. Toby, welcome back to the show.

Tobias Carlisle  1:16  

Thanks so much, guys. I love being on this show. This is a special one for me. I’m excited to be on. I’m very glad to be talking to you today.

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Preston Pysh  1:26  

Dude, we’re always so pumped to have you on here. We always just have so much fun chatting with you.

You’re doing something really cool here. Stig and I are excited to kind of pick your brain on it because we don’t know a lot about what it takes to set up your own ETF. And that’s what you’re working on right now. I’m kind of curious about some of the mechanics. 

I’m sure it is going to be really interesting for people to hear what it’s like to go about doing this. But before we go into some of that stuff, I want to talk to you. There are people that are joining us and they might not know you from our past episodes or whatever.

Let’s just quickly go over some of your fundamental core beliefs, which are all rooted in value investing. It’s Warren Buffett’s style of value investing. If you had to describe deep value to a person in elementary school, how would you describe it to somebody in fifth grade?

Tobias Carlisle  2:18  

The way I always like to describe it is Buffet looks for wonderful companies at fair prices. He’s looking for a good business. He has a special definition of a good business, which is one that earns a very high return on invested capital. 

Invested capital is basically the capital in the business that it needs to run its business. I often have some excess. They might have a little bit of cash that they don’t need that they could pay as a dividend, or they might have some capital that they can grow with.  

You can perform an analysis. There are several different ways of doing it. One can get down to the core of the business and find out what sort of capital it needs and how much income it’s generating from that. That’s your return on invested capital. The higher it is, the better. That’s sort of a company that’s much more profitable per dollar invested in. That’s better than another company that doesn’t earn as much. 


That’s what makes it wonderful. What makes it a value investment is you have to sort of see if the earnings, the assets and the cash flow are something that you can get for a reasonable price. And so what’s a reasonable price? Well, it depends on lots of different things. It could be interest rates and risk of the business. It’s basically cheaper and better. You want to pay less for the income than otherwise. 

That’s what Buffett’s trying to do. What I try to do and what makes a deep value is that the businesses I’m trying to buy aren’t good businesses. They’re “okay” businesses. They’re fair businesses, but they’re available very cheaply.

The reason that I like to do that is I have done some testing. I’ve done some quantitative testing. In my estimation for somebody with my skill set, Buffett is an incredible genius. He’s been doing this for a very long time. He has photographic memory. I don’t have those things, so I do it in a different way. 


When I test it, I find that my way does at least as well. Joel Greenblatt very famously wrote this book called “The Little Book that Still Beats the Market.” It’s one of the most successful value investing books ever written. 

He describes in his magic formula, which is this sort of quantitative version of what Buffett does, “Wonderful companies at fair prices.” When I wrote a book in 2012 called “Quantitative Value,” we tested that idea. We found that that did in fact, beat the market. We do all these things to it to make it hard for it to work.

When we tested it, we found that it did in fact work. I have my own version of that, which is called The Acquirer’s Multiple. Basically, I just took away the quality metric, or the return on invested capital. And when we test that, we find that that does even better again, than the magic formula.


The reasons are because most businesses aren’t the sort of very high quality businesses. Most businesses have a cycle to them. What you want to do is you want to buy them at the bottom of this cycle when they’re cheap, you get the improvement in the business, and then you get a closing between the discount to the intrinsic value and the price. If you get both of those things, you’ll do a little bit better. 

If you’re in the magic formula, sometimes you’re buying stocks at the top of their business cycle that look cheap, even though what’s going to happen is that the business is going to start doing progressively worse over time. You may have paid too much. That’s essentially the difference. I’m trying to buy fair companies at wonderful prices, while Buffett buys wonderful companies at fair prices.

Stig Brodersen  5:20  

Thank you for that explanation, Toby. Keeping that in mind, please tell us about your new company and your new ETF.

Tobias Carlisle  5:27  

The new firm is called Acquirers Funds. It’s going to be focused on The Acquirer’s Multiple. I wanted to start the firm, specifically tailored to the individual investor. The first thing that we’re doing, but the only thing that we’re doing is this deep value strategy that’s based on my Acquirer’s Multiple. we’re putting it into an ETF. 

The ETF is called the Acquirers Fund. The ticker is going to be ZIG, as in you should zig when the market zags. The idea basically is that you have the website Acquirer’s Multiple. It puts up the stock screens all the time. People can come and subscribe and get the ones that cover the entire market. There’s a free version of it. That’s just the largest thousand stocks. 

I found people using it over time. It is hard to rebalance. It’s hard to use the fund. It’s hard to use the screeners and get tax issues to worry about. You’ve got rebalancing, and all those things are quite difficult to do. I’ve often had people ask if I could put the strategy into an ETF. 


I finally got around to doing it. I’ve waited until now because I’ve had this view that the market is very expensive. You and I often talk about that. We’re of the same mind about the market itself being very expensive. I look at the market, but I’m a value investor. I’m mostly concerned about undervalued stocks. I’m trying to put those sorts of positions into my portfolio. 

One thing that I don’t often talk about in the show, but one thing that I do is to short. I think in a market like this where value spreads are very wide. We can talk about what that means in a little while, but basically the overvalued stocks are unprecedentedly overvalued. They’ve reached this level. They’re all the sort of the techie kind of businesses that you would expect. 

They’re losing lots of cash. They’re issuing stocks to stay afloat. They’re raising debt. They’re not the kind of stocks that as a value investor, I would buy. In fact, they’re the kind of stocks that aren’t short. 

Preston Pysh  7:16  

You’re not talking about Tesla, are you? 

Tobias Carlisle  7:18  

That is one of my shorts. I kind of like Elon Musk. I think that he’s a great entrepreneur, and businessman. I’ve got this quantitative approach to value though. I’ve got a look at the financial statements. When I look at the financial statements, it’s a short for me. 

We can talk about one a little bit. I think we’re at this unique or this very rare point in the markets where the spread is so wide between the overvalued stocks and the undervalued stocks. Just because undervalued stocks have been completely left behind, values underperform. 

For coming up on 10 years, the money’s been flowing to growth. Because I’m a value guy and a contrarian, I want to bet on mean reversion. My feeling is that over the next decade, or over the next five years, or next three years, it’s more likely that that spread starts closing. 

Often the way that that happens is the overvalued stocks going to become less overvalued. That’s going to happen probably in a dramatic fashion. The undervalued stocks are probably going to become a little bit more undervalued too, but less. Once that sort of market has cleared, it’s going to take off.

Stig Brodersen  8:18  

Do you think the rise of ETFs is the primary reason for the disparity that we’ve seen here for value stocks that’s been underperforming for quite a few years? So much capital are being pumped into ETFs. Many of these ETFs are following an index or whatnot, and that’s just not the value companies that would then be popped up in price.

Tobias Carlisle  8:39  

It’s not so much the ETFs in and of themselves. It’s not the wrapper. It’s the fact that they’re tracking these indexes. So the passive indexing means that once a company gets big, if it’s in the S&P 500 or the Russell 1000, or whatever the case may be, as it gets bigger it attracts more capital. They ignore the price. They ignore the valuation. The money flows into those kinds of positions. 

It’s not the ETF itself. The ETF could be like my ETF where I’m aiming for a huge active share in the ETF. I’m trying to make a bet that is very different from what the passive index looks like. What that means is that it’s going to behave differently to those passive indexes like the S&P 500.

For many of the last years over the last decade, that would have been a bad thing. It would have underperformed in any given year. It would have underperformed over that full period. But when the market gets as dislocated as it is now with overvalued stocks– very overvalued, while undervalued stocks are much cheaper relative to those overvalued stocks– it’s much more likely that that gets closed and you get some good performance out of that. That is if you’re a value investor.

Preston Pysh  9:40  

I’m kind of curious to hear your thoughts on this one. What I’m seeing in a lot of the filters that I use is that financials are extremely undervalued right now. In fact, they’re just all through the filters that I’m looking at from a value investing standpoint. 

Tobias Carlisle  9:53  

I couldn’t agree more. We’re recording this before the ETF is actually launched. But I don’t anticipate that there’ll be much changes in my portfolio. It’s pretty boring stocks. But I can tell you right now, there’s a lot of commercial banks in there. There’s a lot of insurance. Capital markets are represented in there. It’s all sort of things that just haven’t really kept up with the market over the last 10 years. It’s been a bad decade for those stocks. 

The decade before then was a very good decade for them. They got smacked in the financial crisis in 2007 to 2009. I think people are very wary of them now. What has happened is that they’ve become pretty good value. Now, I think they’re sort of deep value names. So, I agree with you 100%.

Stig Brodersen  10:33  

You mentioned the value spread before, Toby. What is that? What do you think through finding a value spread? 

Tobias Carlisle  10:40  

The traditional way of doing it was this academic way of looking at price to book. You have the most overvalued companies which have the very highest price to book. They might trade at many multiples of their book value, which is basically their assets. 

Once you back out the liabilities, it’s the accounting equity value of the company. The very cheapest sort of traded some fraction of their own book value. Book values have become a less useful metric over time. There have been changes to the accounting standards, which means it’s not as good.

It’s the traditional kind of quantitative approach to measuring value. It’s the value factor. But I don’t really think that it’s a great representation of value. What I prefer to use with these is The Acquirer’s Multiple primarily, but I also use all these other composite of value metrics. It would give you a better understanding of whether a company is overvalued or undervalued. 


We look at a spread of those. We can take a universe. I can look at say the S&P 1500, which is the largest 1500 stocks. It covers about 90% of the stocks by market capitalization. That’s the universe that I draw my picks from for the ETF. I can rank them in sort of 10 different groups. I have the most expensive group. It’s the most expensive 150, according to a variety of these metrics. 

The cheapest ones are the cheapest 150. I’ve been able to track the relative valuations of those two groups over time. They’ve got wider apart. The value stocks just get left behind, and all of the love goes to those that are really overvalued. 

There’s a lot of biotech in there. There’s a lot of tech. The sort of stocks whose story names make good headlines. People love to be in them because they’re hot and they can pop. But as a group over time, they don’t do as well as the undervalued stocks. 


We’ve been through this unusual period where it looks like value investing doesn’t work. It looks like the overvalued stocks are where you want to be. These unusual periods happen every now and again. They happen and it runs up the.com bubble. It happened regularly before including the run up to the Great Depression in the stock market crash of 1929. 

We’re at this point in the market where there’s only two times when the spread has been wider. That was in the last legs of the run up in 1929. That was last 1999, which is the last year of the.com boom before the bust. 

I think that both we’re in this market which looks a lot like those. It’s hard to point to what is really driving it. There are tech names in there. But there’s a lot of stuff that’s just overvalued that you don’t want to own. You probably ideally want to be a little bit short because it gives you a little bit of a cushion if the market comes off. It’s better than just being long only.

Preston Pysh  13:08  

I think a lot of people in our audience understand what an ETF is. I’m kind of curious because you have some experience with mutual funds. Talk to us about the difference between a mutual fund and ETF. Why is one more superior than the other, and whatnot? I’m just kind of curious to hear your pitch.

Tobias Carlisle  13:24  

We launched and shut down a mutual fund pretty quickly in 2016. The reason was, it’s very hard for an independent manager like me to get a mutual fund onto a brokerage account that somebody else can buy. 

The bigger players have sort of created these rules that make it very difficult for smaller independent shops like mine to get their products in there. Whereas an ETF circumvents that problem because it’s traded like a stock. You can go to your brokerage account, pull up the ticker, and then buy some like you’re buying a company. It’s like you’re buying any sort of stock that you want to buy out there. That’s one thing that makes them a better product. They’re easier to invest in.

The other thing is this tax. If you own a mutual fund and the manager does some buying and selling inside the mutual fund, that can create capital gains tax for you as a holder, even though you haven’t traded the mutual fund.


In an ETF, provided that the ETF is managed in the right way, those capital gains are leaked out through this special process called the “custom basket create redeem.” It’s not that complicated, but it’s sort of a little bit beside the point. 

Basically, all you have to know is that the capital gains don’t get put out to you through that structure. You bought at $10, and you sell at $15. Your capital gain is the difference between the two. You don’t have to worry about what the manager is doing inside the ETF.

Stig Brodersen  14:45  

Toby, I guess what we’re all thinking is how do you expect your new ETF to perform? We talked about multiple times here on the show also with you that the market is overvalued. What’s a good balanced view on the expected performance of the ETF?

Tobias Carlisle  15:00  

That would be the question that I would ask. How can you have these two thoughts in your mind? One is that the market is very overvalued, particularly for US equities. And the other is that I think that value is going to do well relative to the market. But I think that long short value, which is what I’m going to do, and which is what the fund does, is going to do very well. 

The reason for that is that one of the things that I’ve learned over a long period of time in the markets is that value investing strategies are idiosyncratic. They do things that the market doesn’t do.

If you were a value investor in the late 1990s, that was a terrible time to be a value investor. You underperformed while the market was taking off. Warren Buffett and a lot of other value investors were down over that period while the market was up many times. 


Then there was this catch-up period through the early 2000s. Value was just being long. Owning undervalued names actually went up while the market was falling. 

I don’t necessarily expect that to happen this time around. I think more likely what happens is that the undervalued stocks get a little bit more undervalued, but I think that the overvalued stuff is going to crash hard. I think that the market is probably going to crash along with it.

Basically, you want to have some sort of short protection in this somehow. You could do it if I was to run a long only fund. You could go and then short something yourself. You could short an index that was a representative of. It was drawn from the same universe as the stocks that I’m trying to buy long. That would be a perfectly valid way of doing it. 


But I think that if I can find individual shorts that are worse than the average stock, I think that they will go down more than the average stock. I think that you can get more cushioning from the shorts that I put in there. 

My short is no secret that it’s Tesla because I’ve talked about Tesla in the past. That’s one of them. It’s one of those stocks that brings out a lot of emotions. I think the cars are beautiful. I think Elon Musk is a very good entrepreneur. 

The financial statements are the way that they are. I just sort of ignore both the longs and the shorts. I look at the financial statements and they say to me, “This is a better bit as a short.” 


There’s a little bit of time to go before this podcast comes out. It’s possible that I’m out of it. I’m very risk-averse with the shorts. They come into the portfolio. They’re very small at 1% at inception. We rebalance them regularly because we don’t want them getting too big because that’s a risk. 

But as a portfolio, those shorts provide a little bit of ballast to the rest of the longs in the event that the market goes down. The other stuff that I’ve had in there for a long time is Snapchat. It’s just one of us. I think it’s sort of emblematic of what has occurred. It’s not as good as Instagram. It’s listed by itself. It’s one of those things that I think has been a better short than it’s been along. It’s been going down for the most part.

Preston Pysh  17:36  

Toby, I’m kind of curious at how a person would look at the ETF. You’re doing some shorts inside of your ETF. How much of a percentage if a person would get involved with your ETF? How much of that is being short? How much of it is long value? Talk to us a little bit about that.

Tobias Carlisle  17:53  

Basically, there’s two portfolios there. There’s a portfolio that’s 100% long undervalued stocks. That’s the process that I often talk about when I’m on the show with you guys. I look for deeply undervalued stuff. And in fact, the long’s are likely to be names that I discussed on this show over a long period of time. 

I’ve discussed Micron and Fiat Chrysler lots of times. I’ve discussed AGO, a short guarantee. I discussed that a long time ago. I think I’ve discussed Tesla as a short before. 

I don’t think that anybody who’s been listening to your show for a long time and heard me appear on it will recognize all of the names. I’m loyal to the names that I really like. They’re likely to be in there. 


Basically, what we’ve done is we’ve created two portfolios. There’s one that’s just 100% long. If you use the Acquirer’s Multiple website, even if you’re a free user, you’re going to recognize some of the names that I put in there. 

That’s exactly how my process is. I use that screen. That’s sort of my candidate for the portfolio. I do a valuation on them and try to find things that are undervalued. The way that I like to look at valuation is as a deep value guy. And then I also do this “forensic accounting diligence”, as I call it.

They’re just things that the numbers in the financial statements don’t capture. It’s necessary to go and have a look at the management discussion. Take a look through the notes, and see if there are things like underfunded pension liabilities that I think that they’re transitioning into financial statements, but they’re not there yet. There are various other things that should be included in the valuation. 


That process is partially done with some machine learning. It is very buzzy right now, but that’s a good way of just picking out the issues while using a computer to do that. I look at it. For people who don’t know, I was a mergers and acquisitions attorney for a decade in Australia, in San Francisco, California. 

Part of your journey when you start out, you do a lot of due diligence. That means they send you to a data room, you sit there and you look through a whole lot of documents. That’s sort of what I spent a lot of my days as a junior lawyer. I still do it to this day. I look through the stocks to make sure that there’s sort of nothing hiding in there. No landmines in the positions. 

We use a service that pulls these out for us. The process in its entirety is sort of quantamental. It’s not quantitative. So again, in the quantitative process, you might have a very large portfolio. It might have hundreds of different names in it. 


No human being interferes with the process from start to finish. The computer picks stocks and they appear in a portfolio. That’s not what I do. I have a quantitative screening process that pulls out the names.

The screens that you see on The Acquirer’s Multiple website is where the process starts. Then there’s a valuation. There’s this diligence that I use off-the-shelf service. It pulls out all these little interesting tidbits if I put in the ticker. It tells me about the company and then that has to be put into the valuations. 

Basically, what we’re trying to work out is: Are the financial statements a fair representation of what’s happening? Does that describe the economic reality of this business?


Often, you find that the financial statements are misleading. They may paint a very pretty picture, but the underlying business isn’t doing that well. Here’s an example of the way that you would find out something like that. Accounting profits are going very well and they’re increasing every year but the cash flow is negative and growing worse for years. That’s not uncommon, like that’s Tesla that I’m describing there.

If you look at Tesla’s cash flow, every time Tesla sells more cars, it loses more money. I think you see that in the financial statements. You don’t have to dig into the management discussion to sort of see that one. That’s the idea.

I want the economic reality of the business. I need to understand that before I can do a valuation. Once that is understood, or it’s understandable, then that becomes a position that is either long or short.

And sometimes, you’ll find these things that are very overvalued. They’ve got a misleading trend in their earnings relative to their cash flows. They’re issuing stock to stay alive or they’re borrowing to stay alive. And inside is a selling. All of these sorts of things are signals that you don’t want to be long.

Stig Brodersen  21:41  

Just to summarize. If you put in $100 into an ETF, how much is long, and how much is short?

Tobias Carlisle  21:47  

It’s $130 long, and then it’s $30 short. 

Stig Brodersen  21:51  

Got you. 

Tobias Carlisle  21:52  

There’s a reason for that. You could construct a market neutral version of this where you have $100 long and $100 short, or a $190 long and $190 short. The reason I don’t like to do that is because I do think that over time, the stock market tends to make money even at very overvalued points.

If we look forward to 10 years, we’re still likely to be slightly up from where we are now. Where the market is in now is not predicting negative returns. It’s predicting very low positive returns.

You don’t want to be short, low positive returns from here. You want to be long though. That’s the 100% portion. And then there’s a 30/30 long/short in there. That’s the arbitrage between the spread. 

Preston Pysh  22:32  

You’ve obviously done a lot of backtesting on various strategies. Have you found that when you implement this long by $130 and short by $30, you get the best or most optimal results? Is that why you kind of gravitated towards that ratio?

Tobias Carlisle  22:47  

Well, it’s a balance between being aggressive and wanting to generate as much performance as I possibly can. At the same time, I’m a reasonably conservative guy. It’s like being long [in] the market with this 30/30 long/short portion attached to it. It’s probably a little bit more aggressive than being long only, but it’s not super aggressive. You can find 2x to 3x livid versions of most strategies out there. 

I don’t like getting that long, even in a market neutral position. A lot of things can happen. The spreads can blow out further. The market is always about to do something that you’ve never seen before. I try to run it as conservatively as possible so that if we’re talking about this in 25 years time and I hope we are. 

I hope The Investor’s Podcast is its own channel on my TV that I get to come on occasionally. I’m hoping we get to talk about it then. I’m hoping that it’s still going and has survived because that’s really the name of the game, particularly in value investing. It is survival.

The rough periods can be very rough, but you need to be there. I have been very brief. But for the good times when they come along, I can’t really ever predict when they’re going to come. 

Preston Pysh  23:55  

When we did our thing in New York with Wes Gray, I think we remember West saying: “The reason value investing continues to work over time is because there’s periods where it doesn’t work.” 

Tobias Carlisle  24:06  

That’s exactly right. 

Preston Pysh  24:07  

People give up on it. I thought that was such a great way of saying it.

Tobias Carlisle  24:10  

I think that’s exactly right. There are two things that value does. It’s this tracking error. The tracking error doesn’t follow the market. I have people ask me all the time: “What happened in 2011? Why was that such a bad year?” I wish I knew. I’d be a multibillionaire now if I knew when this thing was going to work and when it wasn’t going to work. Nobody sort of figured out how to time it.

Stig Brodersen  24:30  

Toby, I can help but think. Why don’t we see more ETFs like this?

Tobias Carlisle  24:35  

The problem is that the short portion is hard to implement. It’s a pain to track it and rebalance it all the time. The reason that I do it is because I love it. I love finding these junky overvalued companies and holding them through a little portion of the justice that is served out to them.

It’s so hard buying the deeply undervalued stuff and seeing really good businesses struggle. When at the same time, there are these businesses that are undeserving and extremely overvalued. I’m prepared to put up with it just because I enjoy that process so much. I love this kind of carnage of shorting. 

It’s very high touch. You need someone who knows what they’re doing and are always doing it. But because of the low fees that ETFs attract, people often don’t want to do it. 


The other thing is that it’s just been such a tough period for value. People are scared to kind of do these things long/ short. They’re using only value. They sort of want to try to put in some momentum or some other things, which is fine.

I think those strategies do work. But sometimes if you want a concentrated bet on value, which I really want to concentrate on right now. This is the way to do it. You need to be long/ short. You need to be short in a way that captures that overvalued, and need to be long in a way that captures the undervalued. 

There are a lot of the other implementations of these. They use the value factor implemented, which might be relying heavily on book value or something like that. The E-value is not a factor. Value is a philosophy. 


What I mean by that is I’m looking for something that is undervalued across a variety of different metrics. That is the way that I look at it. Is the balance sheet robust enough to survive this rough period that it’s going through? Is it generating enough free cash flow to sort of survive and grow? Is management doing the right stuff? Are they buying back stock? Are they paying down debt or doing something appropriate when they’re undervalued? 

I think that if you approach it as the philosophy of value. You’re looking for something that is undervalued, rather than just an implementation of the factor, which is sometimes it’s a little bit agnostic. Buffett has said that a low price to book value is not necessarily indicative of something that is undervalued. It can be a low price to book value and be overvalued. 

The converse can be true. It can be a high price to book value and be undervalued. I don’t want to use it as a fact. I try to implement the philosophy which is not something that is easy to reduce to the numbers for one of the biggest shops to bring out some sort of factor-based portfolio. I tend to trade pretty poorly. So that’s why.

Preston Pysh  27:04  

Talk to us about the shorting. If I put on a short position, it’s typically through an ETF because it’s distributing the whole piece of it across the whole market. But doing like an individual company, I’ve just found that Tesla’s probably not a great example. It’s so big. The buyout side of it is maybe not so much of a concern.

But with a lot of companies that don’t have such a huge market cap, there’s the prospect that they could be bought out, then you just absolutely get crushed in that short position. I guess my question for you is, how do you set a stop on a short position? How do you think through that piece of it where you’ve put it on, and it’s moved in the opposite direction of what you thought? And where’s your breaking point? How do you know where that’s at? How do you know when to get out of it by saying, “I was just wrong.”

Tobias Carlisle  27:57  

This last decade has been very good for me as a shorter. The decade before then was an easy period for a value guy to do short. If you short it on valuation, basically it worked. If you were long on valuation, basically that worked too. 

We’re at this different point in the market over the last decade where the intuition for value guys was wrong. The stuff that you’re short tended to keep on going up. The stuff that you are long tend to keep on going down. 

That’s why guys like David Einhorn, who I think is a very good investor, his performance hasn’t looked very good over the last few years. He’s been in these wrong positions. 


That really made me sit down and think hard. I did that about five years ago. I’d been suffering for about five years to sort of think about the way that I shorted, and the way I went about that. I did add something extra in. 

These are my general rules for shorting. I only short up an individual name. I would never short more than 1% of the portfolio at a time. My long positions are 4.3%. That’s 1% for my shorts. And the reason for that is for the reasons that you’ve just discussed.

Somebody can come in and buy them. If they get 100% premium, or more, then that hurts me to the extent of 1% in the portfolio. It is something that I’m prepared to put up with. The whole portfolio I think, delivers these better returns. This is the short portfolio I’m talking about. *inaudible* better returns. 


The other thing that I have done, and this is one that I’ve sort of learned over the last five years. This is the thing that stands out for me. I don’t short companies that have an enormous amount of momentum. 

Netflix is a good example. Netflix doesn’t look great from a financial statement perspective. But clearly, it’s a very good business. They have a good subscription model business. The stock has been very strong. 

If you  have thought, “Well, Netflix is overvalued and the balance sheet doesn’t look great, I might get short.” That’s been a terrible decision for a really long period of time. I have this approach now where I don’t short things that are going up a lot. I don’t make those sort of mistakes anymore. I still make lots of other different mistakes, but I don’t make that particular mistake anymore. 


I think this is kind of interesting. I have two automobile stocks in the portfolio. I have one long and one short. I just think it’s interesting to compare.

The long is Fiat Chrysler, and the short is Tesla. It’s entirely possible that there’s been a rebalancing before this airs. But at the time that we’re talking about it, this is the portfolio. 

The market cap on Fiat is $25 billion. The market cap on Tesla is almost double that which is at $46 billion. I like to look at the enterprise value, which includes all the dead pulled on.

Fiat’s total enterprise value is $27 billion. Tesla’s total enterprise value is $56 billion. It’s more than double. If you’re paying twice as much for Tesla versus Fiat, what do you get? 

Preston Pysh  30:40  

More debt.

Tobias Carlisle  30:42  

More debt, but the operating income from Tesla over the last 12 months has been about $252 million in the red, whereas Fiat Chrysler has generated $6.5 billion in the black. 

In addition to the $6.5 billion operating income that Fiat has generated, it has also generated more than $5 billion in free cash flow. Whereas Tesla’s been negative free cash flow to the tune of $220 million. 

I appreciate that Tesla is sort of a tech-type stock. I get all of those sorts of arguments. But at some stage, it has to sort of turn into profitability and free cash flow. I know that Tesla’s a beautiful car. 


The reason that it has to happen eventually is that a car company is an asset-intensive business. It’s a capital-intensive business. The capital has to be funded. The assets have to be funded. How do you figure out how they’re funded? You go and look at the balance sheet. 

The balance sheet for Tesla has a lot of debt on it. There’s a little bit of debt in Fiat as well. But Fiat is generating multiples of operating income to its debt. Whereas, Tesla doesn’t have any operating income. It’s got negative operating income. 

My hat’s off to Elon Musk. He has done an incredible job running this business to this point, but it’s still running like a startup. At some stage, it has to start making money. Otherwise, it’s going to raise capital.

Preston Pysh  32:02  

Toby, this was an awesome discussion. I really enjoyed learning about this. For people that are listening, the ticker is ZIG. That’s he wants to zig when everyone else zags, which I think is brilliant. I love it. Go ahead and check it out. 

We’ll have the prospectus for his ETF in the show notes if people want to check that out. Toby, anything else you want to highlight or tell people about?

Tobias Carlisle  32:28  

It’s called the Acquirers Fund. It is listed on the NYSE. It’s the only thing that I’m doing. All of my money is going into it. All of my family money’s going into it. I’m a believer. 

Of course, I’m biased. You can back out my bias from this. But I think that the data really does support the position, so I’m extremely excited. The management fee is 0.79% because of the way that shorts are treated. The dividends from the shorts are reflected in the expense ratio. The expense ratio is likely to be a little bit higher than that.

I think it’s a modest fee for what is really a hedge fund-type strategy. I’m super excited to be getting it out there and running. It’s something I’ve been trying to do since I moved to the States, which was a little bit over eight years ago. I hope that we’re talking about it in 10 to 30 years from now.

Preston Pysh  33:18  

I’m excited for you, man. It’s really fun to have you on here. Thank you so much for your time, Toby.

Tobias Carlisle  33:24  

Thanks, Preston. I love you guys. I’m so happy that I was able to come on and launch it here with you.

Stig Brodersen  33:29  

You’re always more than welcome here on the show, Toby.

Alright guys, at this point in time of the show, we will play a question from the audience. This question comes from Michael.

Audience 1  33:40  

Hi, Preston and Stig. My name is Michael. I’m from Washington, DC. I just want to thank you guys both so much for your effort with the podcast. I’ve been listening for about a year and it has truly transformed my investing knowledge. 

My question relates to my beginning because I was a complete newbie. As I looked up books to kind of build a foundation. I was inundated with a myriad of reading lists and recommendations from Buffett to Munger to Pabrai. It was easy for me to get overwhelmed.

My question for you is if you two were to build a value investor curriculum for a brand new investor, what books would it contain, and in what order should one read them? Thanks again, guys. I look forward to hearing the answer to this question.

Stig Brodersen  34:25  

All right, Michael. I love that question. It’s very relevant for anyone who is starting to invest. I for sure, also asked myself that very same question when I was still starting out.There were so many resources, but it’s not grouped into a curriculum.

I definitely did not read the books in the right order. For example, it didn’t take long before I started reading “Security Analysis” because that’s just what I heard. Like, you’re supposed to read “Security Analysis” if you want to analyze stocks. Don’t get me wrong. It’s a great book, but it’s not something I would put into a curriculum at all for a new investor.


If you’re completely new, and you would like to take an education in value investing, I’ve come up with the following four steps. The first step is reading the book “The Education of a Value Investor.” That is a book by a good friend Guy Spier.

This is a book that I absolutely love. It’s not really only a good foundation on how to understand and think about investing, but also more about living your life as a value investor. Being successful in value investing is as much a choice of lifestyle which is not for everyone. 

The second step is, “The Warren Buffett Investment Strategy Course,” which is a free course that you can find here in TIP Academy. This is a course that Preston created to explain the principles behind Warren Buffett’s investing method. As much as I’m an avid reader, I also like to recommend courses. They illustrate many of the points about investing a lot better and easier than you can in a book. 


The third book is actually a book Mohnish Pabrai recommended here on the previous episode. It’s called “The Essays of Warren Buffett.” 

Instead of recommending Warren Buffett’s shareholder letters, which are absolutely amazing and something that I think all the value investors should read, Larry Cunningham did really well in neatly grouping all of Buffett’s teachings into topics in his book. Topics include Corporate Finance, Investing, Valuation and much more. 

I just looked it up on Amazon. The paperback is $13. Even though you can’t find the letters for free, I think it’s well worth your money. You can save time and get a better overview of the different topics. Just one thing to keep in mind is that currently, the newest one is the fourth edition. Remember to get the most updated edition to ensure that you cover as many of the letters as possible. 


The last step is really about accounting. I’m all for thinking about stocks the right way, and living your life the right way. This includes understanding Mr. Market and concepts like Margin of Safety.

However, sooner or later, you need to be able to understand how to refinance the statements before it can value a stock. I can easily recommend “Warren Buffett Accounting Book” that Preston and I wrote about this very topic. It will help you understand the nuts and bolts about financial statements. It will teach a business person how to use it as much as an investor.

The book, “Financial Statements: A Step-by-step Guide to Understanding and Creating Financial Reports” is such a wonderful and simple book that gives you a really good foundation. If you do pick it up, I would highly recommend that you have a set of real financial statements next to you. 


Make sure you’re not analyzing banks or insurance companies. Those financial statements are a bit harder to understand. Choose a company with more conventional financial statements.

For instance, a production company. That’s really what it’s all about right now. You can always advance from that step. We’re going to include all the links in the show notes to these four steps. 

Michael, it’s very hard to come up with recommendations for a curriculum. I hope that these four steps in that order will help you in your journey to becoming a value investor.

Preston Pysh  38:37  

Michael, I really love this question. In fact, I believe this was the most important question I asked myself when I first started out. 

Like most people, when Warren Buffett says that there are a couple of books which he finds are the most important, I immediately tried to read those books. But the problem that I ran into was I didn’t understand the terminology when I first started reading books like the “Intelligent Investor” and “Security Analysis.”

The terminology is all about accounting. Like anyone else, I quickly realized that I needed to understand the basics of accounting before I could follow on and read these books. 


One other point is, Ben Graham is not the most entertaining author. In fact, his writing style is very academic. This is what I tell you: find a way to learn accounting that will keep it fun.

You might not get that knowledge from reading a book. I’m obviously biased by the content at buffettsbooks.com because I created that website. The whole intent behind that was to teach the terminology of accounting in an easy and fun manner for people. You can check that out. It’s completely free. Just go to buffettsbooks.com.

But there are other sources out there to learn this language of accounting. I would just challenge you to try to find whatever that source is. I don’t care if it’s a dummies book or whatever, but find a book that is easy for you to understand.


At the end of it, you need to understand how the three financial statements: your income statement, the balance sheet and the cash flow statement, are tied together, and how they work. Once you understand that, everything is going to start making sense. 

After you get that knowledge of accounting, I would tell you, you can try to tackle some of the books that Buffett and Munger are recommending. Additionally, I would tell you that I personally like Seth Klarman’s book, “Margin of Safety” way better than I liked the “Intelligent Investor” or “Security Analysis.” 

I’m sure that’s very arguable amongst many people in the investing community, but that’s just my personal opinion. So without reiterating a lot of the recommendations that Stig had because we have very similar recommendations in very similar ways of viewing this, I’ll just leave you with that. 


All right, Michael, as a token of our appreciation for leaving your question, we’re going to give you access to one of our free courses on the TIP Academy page on our website. The course that we’re going to give you is our Intrinsic Value course. 

Our Intrinsic Value course teaches people how to determine the value of an individual stock. It also teaches you how to think about the market cycle, when you’re buying your stock. It also teaches you some stuff about options trading.

We’re really excited to give you this course. If anybody else out there wants to check out the course, you can go to tipintrinsicvalue.com, or you can just go to our website and click on Academy. It’s a link at the top of the page. It courses right there. 

If anyone else wants to leave a question on the show, go to asktheinvestors.com. If your question gets played on the show, you’ll get a free course.

Stig Brodersen  41:40  

All right guys, that was all the Preston and I had for this week’s episode of The Investor’s Podcast. We’ll see each other again next week.

Outro 41:47  

Thanks for listening to TIP. Ro access the show notes, courses or forums, go to the investorspodcast.com. To get your questions played on the show, go to asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. 

This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP Network. Written permission must be granted before syndication or rebroadcasting.


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