On today’s show, we talk with best selling author, Tobias Carlisle. Tobias is the founder of Carbon Beach Asset Management and is a luminary in quant value investing. He discusses his new book titled, The Acquirer’s Multiple, where an individual can effectively filter their stocks for the highest return. Tobias shares his ideas on backtesting and how it has helped him reveal the critical variable for finding stocks with large profits and low prices. Additionally, Tobias discusses how he manages risk, portfolio sizing, options, and much more.

  • In this episode, you’ll learn:
    • What is a good return on the stock market today?
    • Why is Enterprise value more useful than Market cap when you value stocks?
    • Can you be diversified owning just one asset class?
    • How do I size my positions when I buy options?

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Podcast Transcript and Summary


Preston: [00:01:44] So Toby let’s cut to the chase here so you’ve got a new book that came out and we’re really excited to talk to you about this. But we opened up the questions to our audience over Twitter and one of the main things that people were asking us was what’s the difference between your new book which is called The Acquirer’s Multiple and your last book.

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Tobias: [00:02:15] I found that as I handed a lot of people I get two main complaints. One was that it was hard to read and there was a lot of jargon in there sort of unintentionally. It’s just one of those things when when are you doing this stuff all the time you sort of forget that you know somebody who’s smart not necessarily know what it daar operating earnings or enterprise value is so I wanted to write a book for my family and friends who were interested in this stuff but weren’t necessarily what I would call stock market people going out doing it all the time. My mom and dad and various other people look and it’s not dumb down at all. So that criticism on Twitter at the point of the book is not to be dumbed down at all it’s you know I think that you can see people trying to hide weak ideas in high language. I think that the ideas are strong enough that I wanted them to be communicated to a very broad group of people who aren’t necessarily just stock market people. If you’re a smart person and you don’t have a lot of a background in this stuff and you want a nice kind of entree into it then I think this is a great book to start off with because it explains the terms it explains the kind of the argument in the value investor community between the sort of Buffet tough guys and the guys who more deep value which is what I do.
Stig: [00:03:26] Great. And Toby really decided to dig more into the approach here in the show. But the first question to have you asked religious heard about you and your journey as an investor to find the right stock investment strategy for you.
Tobias: [00:03:41] When I was in my undergrad doing business I read security analysis I found a really really hard to read and I read the first edition of security analysis because I thought that’s going to be the one that he put all the really juicy stuff in before he sort of got the chance to edit it as he went along. It really really hard to read I don’t even know if I get all the way through it. But I did get to the liquidation chapter because I was sort of really interested in the net net so I had kind of heard that that’s what grand. Then I went to law school and I started working as a lawyer and I was doing mergers and acquisitions capital raising capital markets stuff in Australia and in the U.S.. And just because of the time that I came out in the early 2000s lots of these companies that had raised a lot of money in the late 1990s now were trading really cheaply like a lot of their cash and these activist investors I don’t think they’re even called activist investors like nobody really knew what they were. They are just sort of corporate raiders from the 80s. But that wasn’t a term that people were using. They came in to try to get these companies to pay the cash. I was looking at them and I was looking at the businesses you know to the extent these companies even have a business which often they didn’t just sort of try to attract eyeballs trying to work out what they were doing and I couldn’t figure out what they were doing and I remember that Graham had taken that approach. I went back and had a look at it and then it just sort of it became a little bit clearer and I thought next time that this happens next time the market gets this cheap I will remember this and I’ll go in and I’ll start buying these little sub liquidation value companies where there’s an activist and that was that was green backed which was the bloggers start writing in 2000 and I think those kind of stocks they all did really well.
Tobias: [00:05:19] Pretty quickly you find that the problem with that strategy is that the net net just on around all the time this sort of like some sort of animal that only comes out every seven or eight years. That’s like a cycad or something like that and it comes out very occasionally. So I was looking for something that embraced that kind of idea of looking at the balance sheet as well as the business. And I had read some stuff in my undergrad business about leveraged buyouts and I went into those old books which were in the social science library at my university and I went through them and I found all these old you know from like the 70s and 80s and 90s about the bilat that’s the idea. So it’s the acquirer’s multiple. Basically it’s a way of finding in very deeply undervalued companies with sort of hidden cash on their balance sheets good operating earnings relative to what you hang and then do the sort of things that attract private equity firms and activists you can get in and do something with the business so so I guess I’m curious why do you think it made sense to you because I’m sure a lot of people out there who are listening to this are like yeah that it makes sense that you will follow an activist or see if they have hidden cash on the balance sheet but also sounds very technical to identify.
Preston: [00:06:33] So why did they appeal to you.
Tobias: [00:06:35] Well what I did find is that a lot of the time they’re just undervalued and it’s mean reversion that pushes them up to valuation. But I think you know you have to be doing this sort of stuff if you’re a discounted cash flow investor if you’re a Buffett compound or you need to be doing this kind of analysis anyway. I think the difference is what I do is I recognize my own limitations when I’m looking at a business and valuing a business. It’s very unlikely I think that I’m going to have any kind of insight that any other person out there who might be a professional in the industry might be have a background as a consultant or an investment banker in the industry who might be able to have a better idea about where that industry is going with a particular business is going to want on an approach where if I assume that I don’t have any sort of unusual insight into the business that might give me an edge How can I still protect myself and still do fairly well investing in these stocks. And I think that the way that I did that is I just try to buy them very very cheaply hoping that you get this sort of asymmetric return where a lot of the downside has been taken out of it and if something good happens you get a lot of upside.
Preston: [00:07:44] So Toby in your book you talk about Warren Buffett’s early days I think this was in the second chapter you reference a quote where Buffett said this is a really popular word that a lot of people throw out there all the time. Buffett said that he could get a 50 percent annual return if he was managing smaller money around like a million dollars. So from that you teach people that Buffett would split his investments in the regroups back whenever he was first starting out with a small sum of money to talk to us about this idea and what we can learn and take away from this.
Preston: [00:08:13] Can you identify those three groups that you reference the three groups of generals which is something that is just undervalued with no sort of clear path for the undervaluation to be removed like it’s not catalyst. It’s just the sort of you might go into evaluation find that it’s undervalued. Think that over time it should do OK and the valuation should sort of go back to average. The other two are sort of both. They’re related to each other. It’s a work here and a control situation so a workout is just any special situation of being on the show before talking about special situations but that’s basically is a known catalyst which might be a big shift back or spin off or liquidation or some event where the decision is made at a board level to bring that valuation back in line. And so that’s how you extract value from it. And there was a smaller group of that work group with Buffett was the guy who was in control and he was going to make that thing work. He was the one who was going to make the company spin off or pay some money out or liquidate or whatever. When he was doing his workouts he often said he was very happy to be a hotel writer but he was on some other good investors could tell where he was confident that that person was going to do what he would do if he was in control. So those are the three great workouts control situations and generals and coattail riding or controls whether he executed them.
Stig: [00:09:35] So on off the show press I’ve been discussing what is a good return. And this is for an investor picking individual stocks because given the high valuations I guess that one could argue that something like six to eight percent return if you can get that over the next decade. I think a lot of people would say that’s fairly decent. And then you also have you on the side of the coin whereas like you might even be able to get a higher return if you don’t invest in a stock right now because it’s so a value. You might wait for a crash and then jump into the market. So Toby I’m not going to ask you to predict when the next Mardi Gras will happen. Don’t worry that’s not the point of this question I guess I’m curious about your thought process about how to achieve a good return in the stock market without taking on too much risk. Or if you would just rather stay out of it.
Tobias: [00:10:32] Yeah that’s that’s probably the most difficult question that that you could ask anybody. I know exactly when the next crash is coming but I just can’t tell it. I’m keeping it to myself. James volunteer wrote this great article GMO a few years ago saying that we’re in this very difficult position where you have to be fully invested in low returns where you may be able to get the sort of stock market has been pretty strong the last few years even though it has been quite expensive. But you run the risk if you’re fully invested of having a big drawdown which is what often mongrel was. So if you not prepared to have a 50 percent drawdown you shouldn’t be in the market or if you whatever proportion of your money you’re not prepared to go down that much shouldn’t be invested in the market. But the other problem is that don’t want to take that risk the risk that you take is that you sit in cash which is earning nothing for a really really long period of time. How long is it going to be before there’s a crash. I have no idea.
Stig: [00:11:29] So to answer the question what’s a good return in the early 80s the market could have been expected to do something like close to 20 percent a year. And I think that’s what it delivered. I think if you look at what the valuations imply Now the returns are going to be much much lower than that. I think 2 percent is probably what the market’s going to do if you can get a little premium over that by investing in value. Because I think that value has underperformed a little bit. I think it’s got a little bit more outperformance than the market does. The extent of that outperformance. I can’t gauge but you know value has some properties that make it a little bit less attractive than the market so you know a little bit more return. I would say I don’t want it really want to put a number on it but a good return over the next decade would be a great 6 to 8 percent but I don’t think that’s what the market’s going to do. The market’s going to do it too with a big drop down in between.
Stig: [00:12:19] So Toby if I gave you the opportunity to log in 7 percent return in the next decade are you being a far better investor than the average. I know this is a reasonable question. Do you think that’s a good return for you.
Tobias: [00:12:34] That’s a really good question. I want my money to invest in my own strategies but do I think that I can beat 7 percent for no risk at 7 percent. That’s getting close to the number that I’d probably have to say maybe I’ll discuss Phishy that your hurdle rate. But right now I think it’s I think being realistic I think that’s you know because you’re guaranteeing this to read I don’t have any counterparty risk if it’s in their stride. I think that’s that’s a good time but you can’t get that anyway. That’s not a return that’s available anywhere. Risk free guaranteed.
Preston: [00:13:02] Yeah. So Toby we throw around this term enterprise value a lot on the show. So I would like you to describe to the audience what is enterprise value. So they understand what the terminology is.
Tobias: [00:13:14] It’s a great question and it’s just one of those things that you have to learn one time so that you can remember just in very broad terms the market capitalization of the company is its share price multiplied by the number of shares that it has outstanding. But that doesn’t tell you the whole story about the company because companies can have a lot of debt or a little bit of debt they can have cash they can have other types of shares preference shares and they can have unusual things like minority interests or other kind of liabilities like underfunded pensions. What the enterprise value does is it approaches the company as if it’s going to be taken over in its entirety by a choir. And when they do that they have to be prepared to support the debt they’re able to get access to the cash so you can have a company and these these companies really do exist on the stock market might have a hundred million dollars in cash might have a market capitalization of 50 million dollars. The enterprise value of that company is negative 15 million dollars because you’re in effect you can get access to that cash. Now the reality is that when you find companies like that they have terrible businesses they have no business and they just need cash. It’s like a biotech trying to find a compound or trying to get FDA approval. On the other hand you can have an enormous amount of debt with a small market capitalization say it might be $50 into the market capitalization with two million dollars in debt. And if you look at the market capitalization you’re missing that that which is a real cost that the acquirer has to bear. So it’s something that you have to bring into the equation. The Enterprise multiple is just a simple step for sort of bringing all of those things into one little quick analysis so you can see what you’re paying. And then you can compare it to what you’re going to be getting.
Preston: [00:15:03] So in really simple terms when we’re talking market cap and let’s say that we have 10 shares of a company in each of those shares is $10. The market cap would be 100. If you’re just multiplying two numbers to go if you’re talking enterprise value now you actually have to add that bet in there as well. So it’s the market cap lost the debt is your enterprise value. Whenever you’re figuring out everything I just described accurate would be 100 percent. OK. So what’s nice is when you’re looking at the enterprise value you’re accounting for the debt piece of it you’re accounting for in this thing and I talk about debt to equity and some other leverage ratios that we’d like to throw out there but when you’re talking enterprise while you’re accounting for that in the market place that you’re talking about. So now talk to us about backtesting and what it suggests and after you talk about the backtesting that you’ve done. Talk to us a little bit about comparing your backtesting results. Green Blatz backtesting results. Anybody who doesn’t know your green blad is he’s a professor out of Columbia University a very famous investor want to say his net worth close to 900 million or something 700 million way up there and he’s had enormous returns and Toby has some back testing results that are quite interesting.
Tobias: [00:16:15] Would you describe it you guys because I’m a huge fan of inlets and I have been for a very long time. He wrote this wonderful book more than a decade ago now which is a book about special situations and that was how I first found out about Greenblatt because it sort of appealed to me as a lawyer but it’s a difficult book to read and it’s a difficult strategy to implement. About a decade ago a little bit over a decade ago he wrote the little book that beats the market which is probably the most successful value investing book the last decade. The little book describes the strategy called the magic formula which he found by reading through Warren Buffett’s letters to shareholders and he found that Buffett sort of advocates these two ideas. A wonderful company at a fair price a wonderful company is something that earns a lot of money for each dollar invested in it and a fair price is a low price relative to the operating earnings of that company. The combined together to get the magic formula. And then when he backtesting that magic formula he found that it outperformed over the period that he tested it which might have been sort of 1993 to 2005 something like that. The period in the book I thought it was a fascinating strategy and I read the book in 2006 and I loved it. I have this bias for deep value and I just had this question this sort of nagging question is this buying these companies right at the top of their business cycle because that the distinction between what Greenlight is doing and what Buffett is doing is Buffett is looking for sustainable higher returns on invested capital.
Tobias: [00:17:44] Where is the magic formula is just looking for high return on invested capital at the time that they screen for. It’s much much harder to find that sustainable high return on invested capital and it is to fund a company just having a good year. So it turns out that if you just remove that requirement for the higher return on invested capital you get better returns and that’s essentially what the acquirers multiple Does it just says let’s ignore what the return on invested capital for the company is and let’s just make sure that the company is cheap and has pretty good operating earnings and it turns out that when we test that idea do we get better performance than the magic formula in a back test. Even though the magic formula does tend to beat the market by how much Toby. It varies depending on the universe you’re looking at it’s a material number. I’m always a little bit worried about giving the precise numbers because it’s sort of it’s a little bit meaningless because there’s so many different inputs and ways of doing these back practice requires multiple. I asked this machine learning value investment firm based out of Seattle called Euclidean technologies to do the back test for me and I gave them the instructions that the practice should look the same as the one that Greenglass conducted. And then I showed them my own strategy and I said can you test both of those. And they did that. It’s a few percent a year by ignoring the invested capital.
Stig: [00:19:05] Interesting I’m really glad we’re talking about this Toby because whenever we are backtesting I think a lot of people would say Will this work in the future and perhaps this question is more relevant than ever giving giving artificial intelligence and machine learning that you’re talking about too. And how would this look in the future.
Tobias: [00:19:25] Everybody knows about these strategies it’s not knowledge of these strategies that is the limiting factor in the application of them in the real world and investment. The thing that makes these strategies difficult to invest in is because they extract certain amount of pain from you as someone who’s invested in them. And the way that they do that is basically this thing called tracking error which is kind of the fancy academic term for not keeping up with the market or going down when the market’s going up. That’s really painful that’s something that any kind of value investor has experienced on and off pretty regularly for it since value investing was invented. Certainly last seven years because values sort of struggled to keep up with a very strong market. So that’s sort of the answer. These strategies are always necessarily going to be strategies that can’t get as much money into them as our past strategies or other kind of momentum’s style strategies and they have this periods of under-performance that make them unacceptable to many people who want to invest in the market and that’s sort of what keeps the performance there.
Preston: [00:20:29] Interesting. So basically what you’re also seeing here is that even if you had a fund doing artificial intelligence that I guess would I guess for fun like that. Well you try capital then saying I’m buying the best businesses what spacing what are you doing with the value and then wait for the Fireman’s Fund like that couldn’t survive even if they call is something else because if they were chasing that the value of performance that you’re talking about people would they’ll buy they’ll just take out the money whenever they see continues on the performance for your time.
Tobias: [00:21:02] You know it’s it’s very hard to know whether the reason for the underperformance is that the strategy doesn’t work or if it’s just going through one of it’s sort of periodic under-performance times. And it’s that point where everybody just says this stuff no longer works and getting out when value investors look the dumbest. That’s the time that value I think is generally about to start working.
Stig: [00:21:23] All right. Interesting takeaway. So Tony I’m super excited to ask this question and you really feeling forward to it. We’ve been following DeLeo you for a long time here on the show and him and also other great investors that talk about how important it is to have 15 uncorrelated bets with a low downside and a high upside. And specifically there in two different asset classes now whenever I’m speaking to you and also reading into your material when they were we talking about these excess returns they come from buy a basket of the third of the cheapest stocks. I’m curious to hear how diversified you find that bet and specifically with the uncorrelated part.
Tobias: [00:22:10] Because I’m curious what up or do the guys like Dalio who are global macro style investors can find in lots of different markets that there are uncorrelated bets. They might be able to find some particular trend following commodities strategy value investing equities strategy momentum equity strategy and I might be able to find that in a market doing it long short as well and they find that if they put them all together because you can sort of rebalance the portfolios at different times so when one is losing you can take all the money from one that might be winning and feed it to the one that’s losing and you can get a sort of smoother return and by putting these uncorrelated bets together value is a component of that. But it is not an uncorrelated strategy by itself. You know the way that you can sort of get some of that impact is by holding some cash and when value is going very well you take a little bit of money away and you increase your cash holding them and values going worse. You take away from your cash holding and you invest more into the stocks. Value investing does have its sort of own idiosyncratic Return-Path it doesn’t exactly follow the market that’s a little bit of that tracking error that we were talking about before and that’s a tracking error is actually indicative of strategies that work if they have more tracking error they tend to do better. It’s just it’s a painful thing to go through when they’re underperforming but they are quite correlated with the market just by virtue of the fact that it’s a long equity strategy and the market is also a long equities strategy so there is some correlation and it varies depending on the low correlation now because the market’s doing so well and value has been underperforming. There are periods of time where the correlations one. If we go into a big enough crash the correlation will be one which means that it will be going down the same speed as the market.
Preston: [00:23:58] Is it a problem that it’s not as diversified and I think my question gets at how do you look at diversification. Are you more like looking at this as you know it’s 30 companies and they’re real companies. It’s not an asset class in itself that they’re stocks. So you don’t need necessarily to diversify into bonds goals. What we want to call it is how you see it. I want to piggyback on stick’s question Toby because he threw out the number 30 from all the things that we’ve read from Green Black Dahlia and other people they’re saying that the number is 15. So I’m kind of curious if you the number part of it as well is this 2 questions.
Tobias: [00:24:35] That’s what I was talking about is uncorrelated strategies. So he’s talking about a value investing strategy with a momentum strategy with a trend following commodities futures strategy maybe with an option strategy you know maybe in international equities on a global macro type of approach that diversification is a slightly different question. Are you holding enough stocks that if any one of those stocks goes to zero. Will your portfolio sort of survive. That’s a question that when I read concentrated investing that’s exactly what I was trying to dig into in in concentrated investing. It’s one of those times when the academic literature and the sort of rule of thumb from old school value investors basically coincide so if you ask the academics they tell you that 30 stocks somewhere between 20 and 30 stocks gives you enough diversification where if you try and buy a whole lot more stocks it’s just become too expensive and too hard to manage. Three additional diversification that you get few within sort of 15. And by adding an additional stock which might not be that much more expensive do you get sort of a material improvement in your diversification. But the old school value investors like Graham and clomb and they’ll tell you it’s approximately the same number it’s around sort of 20 or 30. If I could find 14 uncorrelated bets I don’t know that would probably make me a global macro guy. I think I’ve conquered one or maybe you have any concrete. I’ve just I’ve been trying to understand one and that’s sort of all I’m capable of.
Stig: [00:26:03] So the reason why I have really asked into this is also that right after reading de-value I read extensively about modally you and it was really interesting to go through your work and think about stocks not just stocks in itself like the worst stocks you can ever think of and how they are performed and and how you still might get that sense of managing your risk because after all you did have 20 or 30 or whatever you want to call it so that wouldn’t just be one company that would go bankrupt. Then after what you would be reading about Dalio and how he’s talking about not just U.S. stocks international stocks bonds he was talking about gold he was talking about commodities and talking about how important diversification this and how that is if not free then. One of the best ways of mitigating the risk without compromising too much on your terms. What’s your thought process of doing something like that compared to your own strategy.
Tobias: [00:27:01] That asset allocation question is often one for individual investors and they can allocate to value investing strategy or markets you know just a passive market strategy the things that they are doing is driven by the fact that he’s got 100 billion dollars under management and he needs a sort of fairly exotic sophisticated approach to attract that hundred billion dollars and then to put it to work. He’s got a whole lot of guys at Bridgewater who are working these strategies all the time. I’m an old school value investor who I think I can sort of value a company and I know the reasons why it underperforms and I know the reasons why it outperforms So I sort of feel like I know it well enough that I can just sit in it and let it run all right so to be this next question comes to you from Ted darling on our Twitter feed and he asks Do you get rid of stocks with a high amount of short interest from the acquirers malt or water.
Preston: [00:27:56] Is there an additional filter layer where you’re trying to extract it that are really uglier than ugly.
Tobias: [00:28:04] The website screener takes a lot from the book quantitative Valley where we sort of went into the mechanics of screening and there are lots of different things that you can do. You can look at financial distress risk earnings manipulation by itself and also as sort of a guide to potentially being fraud. And there are lots of statistical ways of doing it. So I use those statistical methods to filter out particular types of stocks. I also use short interest as a way of identifying things that maybe I can’t figure out where the risk is or the statistical methods haven’t quite got there but the short sellers have been able to identify that there is something going on there that’s not quite run. The reason I do that is that heavily shorted stocks tend to want to perform. That’s what the research shows us that doesn’t necessarily mean you want to go and short them because by virtue of the fact that heavily short it that means that the borrower can be quite expensive for a long investor. If you’re approaching these things quantitatively not buying the things that are heavily shorted seems to be a way to get a little bit more performance. So I do feel throughout the things that are heavily shorted. I don’t use a fixed hard cutoff. I just say that the 5 percent of stocks that are currently the most heavily shorted and it’s short interest as a proportion of their outstanding float are the ones that we don’t want to look at. So something can be cheap undervalued and acquires multiple basis and should be in the screen and it can appear in the screen and then the short interest might build up in the stock because somebody has got a view about the fundamental picture or something else is going on and so it’ll come out often they come back after a while. The short interest sort of leaked out and settle down at a low price. But I definitely use.
Preston: [00:29:48] So I’m curious. Is there a reason that you settled at 5 percent. Was there some artistical evidence that supported a 5 percent versus 10 percent or 15 percent.
Tobias: [00:29:57] Well you’ve got two problems that needs to be enough stocks sort of getting through the filter to allow the ranking methods to do that job because for the most part the cheaper something is the better the performance over time. But equally you don’t want things that are too heavily shorted So 5 percent I can’t remember whether that gave the best performance or not. I’m not entirely sure but it just felt like when I ran. Often this is what I do or run a screen and I look at things that have been pulled out and I’ll just look at the names and see if those are names that that I would feel uncomfortable buying for whatever reason. And mostly it’s a more interesting sort of balance sheet issues than I am with business issues it’s just that again that’s my bias. I think I probably did two things I was probably looking at the performance and then looking at whether that was pulling out too many names and just sort of a rough rule of thumb I thought that was the best approach.
Preston: [00:30:49] So this next question comes from here in McCarthy and he’s curious about your use of options with your investing strategy.
Tobias: [00:30:58] We use options in our special situations portfolio not in the deep quantitative value portfolios. The thing about options is they’re highly leveraged instruments so that means that they can generate a lot of return and they’re also able to offer gigantic holes in the portfolio. So you need to be very careful when you use them and you need to sort of understand what they’re going to do the way that I like to do them is the way that Glenn described them in his little yellow book that’s basically there are two ways if something is very cheap and the volatility in the position is very high you can sell it and that creates a return profile that looks like being long the equity. I don’t want this to be too technical but basically your downside is an equity downside. So if you sell a put and it might have a dollar premium in and it’s a $10 stock your downside is the other nine dollars. So they need to be careful when you’re doing that. Another way of doing it is to buy a leap which is a cool option that has more than 12 months to run in. And so you would do that if you thought the stock was really cheap and there was low volatility in the coals. It’s something I love to do when the premium is a very small amount relative to the price of the stock because that means a small movement in the stock price gives you a very large move in the value of the option. But the reverse is also true if it’s smaller than that down a zero is entirely possible so when using call options you need to be aware that 0 is a very real possibility. And when you short puts it to be aware that you can lose an enormous amount of money on those you need to be very careful the way that you use them.
Stig: [00:32:40] How do you size. How about the call options first and perhaps intuitive that also makes slightly more sense. Basically what you’re saying is that you can just all go out the window. So obviously you don’t want to put 50 percent or whatever your portfolio on that. How much should you put in.
Tobias: [00:32:57] If you want to manage your risk on any it depends a little bit on how many positions you have in your portfolio but let’s say you’re running 10 positions 10 stock positions each which has 10 percent in the portfolio. If you find one that you think look this is a really really cheap stock the outcome but for whatever reason the balance sheet isn’t ideal or there’s some risk in the stock and you think this stock could go down 50 percent the stock could go to zero. But there’s a chance that the stock goes up 10 times or it goes up two times or five times or whatever. So you think I don’t want to put my money at risk that 10 percent of the portfolio because if it goes to zero it’ll blow up 10 percent. But I want to have that possibility of capturing that to five 10 times upside. So then I would go and look at the price of the coal and I might put one percent of the portfolio value which would be 10 percent premium relative to the position because 10 percent of 10 percent is 1 percent. So that way if it goes to zero I’ve only lost the 1 percent of the portfolio that I put into it. If it goes up two times or five times or 10 times it’s as if I’ve been long 10 percent of the stock. So my return can be that sort of size. So that’s where I approach the calls. So typically I’m using them. I’m using them because the volatility is very low and it’s just a way to play that volatility as well.
Preston: [00:34:21] All right. So tell me the last question we have from you this one comes from Brandon. So Brandon wrote to read the book loved it and you have him walk through implementation of the screen.
Tobias: [00:34:33] When the buy sell in rebalance it really depends on how much time you want to spend doing it. A run on the side. There’s a two basic approaches to it there’s a quantitative approach which just means you’re going to buy everything on the screen without fear or favor relying on the sort of statistical performance of value over time. Or you can do this business or approach with as we were talking about before you go through and you actually do the valuations putting aside the business center approach which is to people who really want to spend a lot of time doing it the quantity approach you can buy the 30 positions once per year and revisit it a year minus one day. It’s 364 days late. You sell you losers. So the stocks that are down so that you capture all of the short term losses in this tax year and then you wait 366 days so that when you sell the winners you get long term capital gains. And ideally you sort of push the long term capital gains into the next taxable year. You can do it more regularly than that. You could do it on a quarterly basis just checking into sort of so and buy some more. When is that. That seems to work fine. That might give your own portfolio might make the returns a little bit closer to the sort of the value factors for turns. But it’s it’s perfectly fine to only do it once a year because of the nature of value is that it takes undervalued stocks up to five years to sort of get active valuation so the vast bulk of the return comes out in the first year. But they still tend to be performing five years down the road.
Preston: [00:36:10] So I know knowing your screener at the acquirer’s mall or you have the large cap open for anybody to go there and use. But I’m curious how do you find yourself investing. Do you find yourself typically buying the large cap or mid-cap small cap. I’m just curious.
Tobias: [00:36:25] Yeah my portfolio is not so big that I’m forced into a large cap. So I tend to use the old investible That’s the largest 50 percent but the best returns have tended to come from the small cap stocks if you really like small cap stocks and you realize that small cap stocks can be a little bit more difficult to invest in. I have why to bid ask spreads. I tend to chop around a lot. There’s a lot of volatility in the small cap stocks if that doesn’t worry being down a lot on occasion doesn’t worry so much than the small cap stocks. That was where I started out. I find them really fun to sort of go through. But just because I tend to be pretty busy in the business I think that the all investible is the easiest to sort of implement. They’re all fairly liquid and easy to trade and you can get into them and Altham pretty pretty easily. The small in there I think is a sort of 250 million dollar market capitalisation might be even a little bit bigger than that now. So they’re liquid and they’re easy to invest in. So for me it’s the old investible.
Preston: [00:37:21] Awesome. All right Toby So thank you so much for coming back on the show. I know our audience always really looks forward to you coming back on and you’re always sharing such insightful information. If people don’t know who you are and you want to learn more about your work and they find you.
S Tobias: [00:37:35] Thanks so much for having me. It’s always a great pleasure. On this show the Web site is acquirer’s multiple dot com. The new book is called the acquirer’s multiple and it’s in Amazon. You can get it in paperback or Kindle 999 and kindle 15 99 in the U.S. or you can follow me on Twitter at greenback. It’s a funny spelling. It’s Greenbackd.com. And on this sort of all day long answering questions and posting stuff I’m liking and usually doing things. It’s really fun. So if you want to interact I’m always there and ready to chat it.

Books and Resources Mentioned in this Podcast

Tobias Carlisle’s new book, The Acquirer’s Multiple – read reviews of this book

Tobias Carlisle’s Blog: GreenBackd.com

Tobias Carlisle’s Acquirer’s Multiple Web page: AcquirersMultiple.com

Tobias Carlisle’s fund: Carbon Beach LLC

Tobias Carlisle’s book, Deep Value – Read reviews of this book.

Tweet directly to Tobias Carlisle



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