7 October 2022

On today’s show, Clay Finck chats with Tobias Carlisle about what led him to become a value investor, what mean reversion is and how it relates to his overall investment strategy, how inflation impacts his investment process, what the shiller PE is and why it’s something to be mindful of, what his thoughts are on determining an appropriate discount rate, and much, much more!

Tobias Carlisle is the founder of The Acquirer’s Multiple®. He is also the founder of Acquirers Funds® which manages ZIG, the Acquirers Fund, and DEEP, the Roundhill Acquirers Deep Value Fund.



  • How Tobias ended up becoming a value investor.
  • What investors had a big impact on Tobias’s own development.
  • How inflation impacts his overall thought process for stock investing.
  • Tobias’s thoughts on an appropriate discount rate, and what discount rate Warren Buffett might be using in his valuation process.
  • And much, much more!


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.

Tobias Carlisle (00:03):

You don’t see a Shiller PE of 40 at a trough. You see a Shiller PE of 40 like very, very rarely very close to the peak. And so the last time we saw a Shiller PE of 40 was, I forget exactly, but it might have been February, 2009, and had about nine or 10 months before we hit 45 just to give you an idea of how fast the market ran up then. There’s nothing magic about 45 either. The Chinese stock market got to a hundred times, the Japanese stock market got to a hundred times.

Clay Finck (00:36):

On today’s episode, I sit down and chat with Toby Carlisle. Toby is the founder of the Acquirer’s Multiple, and the Acquirers Funds, which manages tickers ZIG and DEEP, ZIG and DEEP. Toby has extensive experience in investment management, business valuation, public company governance, and corporate law, and he’s also the author of a number of books, including The Acquirer’s Multiple and Deep Value. Toby is also a part of the mastermind group on TIP’s flagship show, We Study Billionaires. During the episode, we chat about what led Toby to become a value investor, what mean reversion is and how it relates to his overall investment strategy, how inflation impacts his investment process, what the Shiller PE is and why it’s something to be mindful of, what his thoughts are on determining an appropriate discount rate, and much, much more. Now, without further delay, sit back and enjoy this episode with Toby Carlisle.

Intro (01:28):

You’re listening to Millennial Investing by The Investor’s Podcast Network, where your hosts, Robert Leonard and Clay Finck, interview successful entrepreneurs, business leaders, and investors to help educate and inspire the millennial generation.

Clay Finck (01:49):

Hey everyone. Welcome to the Millennial Investing Podcast. I’m your host, Clay Finck, and on today’s show, I’m joined by Toby Carlisle. Toby, welcome to the show.

Tobias Carlisle (01:58):

Thanks Clay. Good to see you.

Clay Finck (02:00):

You’ve been on the Millennial Investing Podcast with Robert. That was episode 25 released way back in March, 2020. That was probably recorded just prior to the crash we saw during that time period. You’ve also been on many episodes on TIP’s flagship show, We Study Billionaires. In particular, they’re quarterly mastermind episodes. I highly recommend that the listeners check those out as well. And like many of us at TIP, you are a value investor and a fan of Warren Buffett. I’m curious, how did you end up becoming a value investor yourself?

Tobias Carlisle (02:34):

I was studying, I was in Australia. I was at university and did undergrad and then I did law and graduated from law in the early 2000s. A friend of mine said, “The richest man in the world is Warren Buffett and he owns an insurance company.” And I said, “That sounds awful. Good for him.” And he said, “He writes these letters that are on the internet which you can read for free which are like these extraordinary explanations of what business is all about.” We were kind of interested in it. We were like, it’s the dotcom heyday, dotcom boom. I think like everybody at the time, everybody kind of knew it was a little bit Fugazi, it was fake, but it was hard not to get caught up in it. So we were looking for something that was a little bit more real.

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Tobias Carlisle (03:23):

I bought the Buffett book. I bought it on Amazon, which was like that was kind of a new thing in Australia. So I bought the Roger Lowenstein book, Making of an American Capitalist. Read the book and I was like, “Oh, this is for me. I like this idea of studying businesses.” It’s something that you can take your time. It’s okay to sort of be patient and take time and learn these things. You don’t have to be trading all the time or any of that kind of stuff, because I didn’t really want to do that. I do like business. I think they’re kind of interesting little puzzles to solve and investing is an interesting little puzzle to solve. Every day, I get to look at a new little puzzle and try to solve that puzzle. So it appealed to me.

Tobias Carlisle (04:05):

But I was already studying law or about to start studying law. And so I did that and started practicing law. I did that for almost 10 years as a merger and acquisitions guy. Funnily enough, I did tech M&A. So I got transferred to San Francisco from Australia to our San Francisco office where I was doing like Yahoo. Actually I was doing a lot of that. I was doing a lot of their bolt-on acquisitions. It was kind of fun. There wasn’t much going on in San Francisco at the time. It was kind of quiet. It was 2004, 5, 6, which was like, I think Google went public in 2004. Did this reverse Dutch auction, which was a disaster and it was listed. I don’t know what it translates into now but it was like 80 bucks.

Tobias Carlisle (04:47):

I was really interested in it and I had a look at it. I knew lots of software engineers in Silicon Valley and they were all trying to come up with things that used Google Maps, which was the new thing at the time and trying to build something. Like you’d come up with a mission burrito locator and sell that. Aqui-hire, which is like they really want to hire the engineer because he sort of knows what he’s doing with Google Maps but they don’t want to buy the business so much, they just get the business and shuttle the business, a little mission burrito locator. But now they’ve got a guy, he knows what he’s doing, that sort of stuff. So you get a little hiring bonus.

Tobias Carlisle (05:26):

I thought, there’s nothing going on here. I’m going to go back to Australia and be a general council of an Australian stock exchange listed telecommunications, like dark fiber infrastructure company. That was fun, they got bought. And then I had a little bit of money and I decided I wanted to go back to being an investor again. Or go back to learn how to become an investor, not go back to being an investor again. I had remembered that in the early 2000s, I was interested in like the Ben Graham Net Nets, which are things that are trading below sub liquidation values, the most conservative assessment of value that you can do.

Tobias Carlisle (06:01):

I had seen in the early 2000s all of these things. They don’t come out very often. You only see them at the bottom of a bust. And when they do, they generate really good returns. I thought, if that ever happens again, I’ll go back and start doing that stuff. And in 2007, 8, 9 at the bottom of that bust, there were all these net nets around. So I started a little blog called greenbackd.com and I just wrote about little net nets that had an activist who was planning to bust the company up or get the money out or do something like that. It was a good strategy for the time but it kind of disappeared again pretty quickly.

Tobias Carlisle (06:37):

So then I was concentrating on trying to develop my own investment style, being probably more towards the more traditional end of value than even Buffett. I think that as I’ve gone along, I’ve learned more about business quality and I’ve got better at assessing businesses and things like that. So that’s where I find myself now. I run two funds, a midcap and bigger fund called the Acquirers Fund, which is the ticker ZIG. That very traditional kind of maybe not quite where Buffett is where Buffett is sort of looking for that wonderful business at a fair price. I’m still a little bit more at the fair business end of that but at a very deep price, very cheap price.

Tobias Carlisle (07:20):

And then there’s a small and micro version of ZIG called DEEP, D-E-E-P, and it does exact, it’s exactly the same. It’s just in the universe that is not ZIG. So it’s the small and micro universe, exactly the same investment style. Something could come out of DEEP and go into ZIG or vice versa if it gets too small, and that’s sort of, that’s the path basically.

Clay Finck (07:43):

Yeah. You mentioned your funds. I’d like to dig into those a little bit later and dig into your investment process first and how you think as an investor. You talked about Benjamin Graham and Warren Buffett. Were there any other investors that had a big influence on your development as an investor?

Tobias Carlisle (08:03):

Well, Graham was an early activist. People who like to read Security Analysis, which is the old Graham and Dodd book, which is a really, really tough read. I mean, the first one that I got, it’s like this. You’re declaring who you are as an investor, which version of it you buy. So I bought the like, you could get the original, it was like… It’s a reprint of the original. I haven’t got the original version of it, I’ve got some bootleg. I think it’s published by the same publisher, and I bought it like in 1997 or something like that. It was just brutal to read it but I kind of got all the way through it. And then I didn’t touch it for 10 years until I started trying it, or more than that, when I tried to start doing this stuff again.

Tobias Carlisle (08:48):

I just remembered that he had written the chapter on liquidation value. I forget exactly where it is now, but it’s like chapter 38 or something like that. And then the next chapter is the chapter on the relationship of management and it’s a little bit about activism. And so if you start along that path, you find yourself with Carl Icahn. I found this great book on Carl Icahn. I had to buy it from like a… It’s been reprinted out but it like, I think it’s called King Icahn. I bought it from like a, I had to go and find a secondhand bookstore or a vintage bookstore. I bought that and I read it and I was like, “Oh, this is pretty fun what he’s kind of trying to do.” It’s like a more modern version of what Graham was doing.

Tobias Carlisle (09:33):

And so I became interested in that for a long period of time. Eventually I sort of figured out the problems with his approach. It really does require you to get control and that you need certain amounts of capital to kind of do that and you really need to know what you’re doing. It’s expensive to go through it. I had done this as a corporate lawyer. I’d gone through proxy fights and hostile take overs and liquidations and LBOs and all that sort of stuff and I kind of had an idea how much work was involved and how much expense, particularly if you got a corporate law firm doing that stuff. Like you’re going to write some really big checks as an investor.

Tobias Carlisle (10:10):

And it just, it became clear to me that that was really not a… There is not a realistic approach for me and probably for most investors. And so then I thought, well, if you can’t get control of these things, what are you going to look for? And if you can’t get control, you need to be pretty confident that management is doing a good job. And then how do you assess where the management’s doing a good job? I think it’s things like looking for, are they taking advantage of them? If the company is undervalued, so let’s stipulate that we’re all already value guys. We’re going and we’re finding these things that are under valued. What would you want management to do? What would you do as an outside investor? Okay. What would you want management to do? You want them to buy back stock. You want them to do stuff like that.

Tobias Carlisle (10:46):

So that became a bigger part of the process that what is management doing with this undervaluation. Now there’s lots of research that shows that all of the steps that… I try to do all of these things that add probabilistically to help me in the outcome. One of them is buying stuff that is undervalued is a very powerful tool to help you generate very good returns. Buying stuff where management is buying back a material amount of stock is another really good way to help you with good turns. And then you want to be able to make some assessments about the business.

Tobias Carlisle (11:21):

I became very interested in that research and I posted a lot of it on Greenbackd in 2008, 9, 10, when I was sort of writing that consistently. And then I partnered with Wes Gray. He was a booth PhD candidate at the time. We went and found every bit of industry and academic research we could on fundamental analysis and credit and stuff like that. And so we went through and we booked this model which became a book called Quantitative Value which came out in 2012. And that’s sort of the, it’s less individual personalities and more sort of what quantitatively drives returns for fundamental investors. That’s sort of how I’ve developed as an investor. So since then, I’ve just refined that approach.

Clay Finck (12:02):

Now, when I did research on you, you talk a ton about mean reversion and over the last decade, we have seen growth outperform value by a significant margin and growth seems to just get more and more expensive relative to value. Could you tell our audience what mean reversion is from an investment standpoint and how it relates to your investment strategy?

Tobias Carlisle (12:24):

There are two broad theories about why value app performs. One is the Fama and French theory that value generates higher returns because it is riskier. Often they point to the fact that value firms tend to be, particularly if you’re using price to book as your value definition which most academics do, you’ll find that they tend… What you think you’re buying is like a billion dollars of assets for $100 million and that’s a price to book of one of like 10, something like that, one-tenth. In fact, what you’re doing is buying a billion of assets with $900 million of debt for $10 million so it gets you the same price to book, same amount of assets, but it’s heavily livid and therefore it’s riskier and that’s where all the return comes from.

Tobias Carlisle (13:09):

And they might be in declining businesses, lots of other things might be going on that make them riskier to assess from the outset. I used the scare quotes, the air quotes that kind of they’re not necessarily riskier. The other view is this Lakonishok, Shleifer, Vishny paper called Contrarian Value, came out in 1994. They said the driver of values returns is behavioral and it’s because investors extrapolate good returns too far into the future or bad returns too far into the future or bad stock price trajectories, sales, like take your pick, whatever series that you can get that’s either fundamental or stock price. They just keep on assuming that whatever trend the company’s currently on goes on, or when there’s some sort of shock to the business. Some bad news comes out, they sell off really hard, they overreact.

Tobias Carlisle (13:59):

And it’s this overreaction, under reaction that creates opportunities for people who are what they call contrarian investors, but it’s basically a value investor, to come in and buy it. And then it mean reverts. So it goes back to where it was. That’s very simple kind of concept to understand. I feel like that is a more realistic explanation of what I actually have seen in the market repeatedly. And if you see some bad news in a company, it will violently sell off. And then often that will continue on for a few days or weeks or months, even at some point it might get too cheap.

Tobias Carlisle (14:32):

And if you’ve got some objective way of assessing the valuation that doesn’t look at the stock price and you can go in and say, well, this was bad news but this doesn’t really impact their business so much, or it impacts their business much, much less than the stock price would suggest, then this might be an opportunity for some better performance. And on the other side, you might say, well, this thing, it has been doing very well for a long period of time but it sort of departed from its fundamentals a long time ago and now it’s really trading on sentiment. People talk about it at dinner parties or at bars or they talk about it with their friends. They can see this thing. It went up 30% last year, went up 80% the year before that, this thing just goes up.

Tobias Carlisle (15:10):

And so they buy and then it gets that ski slope kind of trend to the stock price and they’re like, you can’t lose on this thing, and that’s over extrapolation to the upside. So that’s the idea. Mean reversion is this idea that things go back to the mean, go back to average. The mean moves around. Your job as an analyst is to sort of figure out where the valuation is. I think the mean is about valuation. Stock prices do tend to sort of circulate around the mean and they sort of fluctuate a lot over the course of the year. I think the statistic was something like from its peak to its trough, the average stock is like one third or up three times. So if you have a way of assessing the value and you can find it trading at a big discount, you buy it. Eventually the stock price goes back to its value or even beyond it. And then that’s mean reversion, that’s how value investors are really generating their returns.

Clay Finck (16:05):

Like you mentioned, part of that is human psychology when things are good and stocks “only go up”, people will pay whatever price necessary to get in on the action. And when there’s blood on the streets, people will do whatever they can to get rid of their shares no matter the price.

Tobias Carlisle (16:23):

And we’ve seen it over the last year or so with many of the high flyers, the names that we just couldn’t not own at any price it go. Just they were going up all the time. Zoom is a great example where Zoom was just going to dominate everything else. Like a lot of these names are off 50 to 60 to 70% and their underlying businesses are still pretty good. Their businesses are growing. They’re still making money. They’re growing fast. It’s just that the valuation gets so far ahead of them that you can’t make money as an investor even if the business does very well, and vice versa. Something that often it hasn’t been a strategy that’s worked well for the last 10 years, so a lot of people have completely dismissed value, but there is this other idea that you can assess a business and say, “This is not a great business but this is a sufficiently good business and I’m like a handicapper at a racetrack.”

Tobias Carlisle (17:16):

It’s not a great business but it’s being priced as if it’s an absolute garbage business that’s going out of business completely. Like it might be liquidated. And here it is. It doesn’t have to do much, like it’s got to get out of bed in the morning and keep on going and you get pretty good returns. And that’s sort of the opportunities that I’m looking for, stuff that doesn’t have to do anything heroic to generate pretty good returns. That’s a strategy that hasn’t worked for a little while but it seems to have turned the corner in about September last year and there might be more of a return to a sort of fundamental value I think.

Clay Finck (17:44):

One metric I’ve heard you mention before is the Shiller PE ratio. Today, that’s sitting at around 40. The only time it’s ever been higher than that is during the dotcom bubble where it almost touched 45 before the market crashed. Could you touch on what the Shiller PE ratio is and why it’s something that’s on your radar?

Tobias Carlisle (18:08):

This is not something that I… I don’t use this in my investment process at all. This is sort of more of a macro indicator looking at where the market itself is, the index is. I just use it to contextualize a little bit where we are in the cycle. You don’t see a Shiller PE of 40 at a trough. You see a Shiller PE of 40 like very, very rarely very close to the peak. And so the last time we saw a Shiller PE of 40 was, I forget exactly but it might have been February, 2009, and had about nine or 10 months before we hit 45 just to give you an idea of how fast the market ran up then. There’s nothing magic about 45 either. The Chinese stock market got to a hundred times, the Japanese stock market got to a hundred times. But they have subsequently had, Japan particularly, we all know that Japan’s had terrible returns since it peaked in like 1990 or 1992, something like that. It’s been very tough for Japanese investors to make money at the index level.

Tobias Carlisle (19:11):

What the Shiller PE is, the reason I say 40 is, you don’t see that at trough… You may see 40 on the single year PE. So if we just look at this year’s earnings, I think the single year PE for the index might only be like 27, something like that. And that’s because there’s this business cycle in earnings. Earnings go up through the business cycle. Then they go down through the trough. And so in 2008, when the banks wrote off all of their earnings, the earnings for the entire index was zero. So that the P was in trough, which would make you think it’s very expensive but it was actually one of the best times to buy.

Tobias Carlisle (19:44):

The thing that was being cheaper was the Shiller P. And the reason that it was able to do that is it uses a 10 year average of inflation adjusted earnings. So it grosses up. Earnings from 10 years ago are going to be lower just by virtue of the fact that we’ve printed a whole lot more money since then. So you have to adjust those earnings from 10 years ago up for inflation. And then you just take an average of all of them and you compare that to the current price, and you can track that serious through time back to about 1850. That’s why we know that it got expensive in 1929. It was unusually cheap in 1980. You can see these sort of peaks and troughs, and you’d recognize every single peak as a very famous boom, bubble stock market, bull market. And you see the troughs is all very famous states where, or infamous states where people would write the death of equities type articles appearing in Newsweek and things like that when they’re about to go on a great run.

Tobias Carlisle (20:36):

You can do this analysis. Just the Shiller PE doesn’t tell you much other than the market is overvalued or undervalued, but you can make some assumptions that, all right, we know we’re going to get a dividend. Well, this is where we are right now. We’re going to get a dividend of about 1.3%. If we assume that we return to, so we do some mean reversion. We assume that over a decade, we’re going to go back to about the long run Shiller PE, which is 16 or 17. What will that mean for the index? Well, it’s negative returns on the index to the tune of about 1.2% a year. So the whole market will generate returns of about -1.2, but that includes 1.3% in dividends. So your total return is only negative to the tune of about 0.1% per year, but you’re going to be a dividend clipper.

Tobias Carlisle (21:19):

So it’s possible that in a decade, the index is where it is today and through the interim, you’ve got 1.3% a year in dividends. Now, those aren’t great returns. The reason we are where we are is because interest rates are so low. I think the 10-year today is something like 1.5%. So 1.3% in a dividend might be attractive. It’s not for me. I think you can look at the… You don’t have to buy the index. You can buy value stocks, and value is relative to the index at a very, very wide spread, which means that value is reasonably cheap at the moment. So that’s why, it hasn’t happened yet but I do think at some stage the index will sort of wake up to reality. And typically what happens is there’s either a crash or stagnation for a long period of time. Like Japan has stagnated, but value did very well in Japan.

Tobias Carlisle (22:06):

If you were just a simple, you bought price to book, price to earnings, price to cash, where you just buy the cheapest stuff, buy and hold it for a year, rebalance the portfolio. At the end of the year, you’ve actually generated really, really good returns in Japan over that period because that mechanism of buying too cheaply and then selling when it gets a little bit more expensive and then rebalancing back into cheap stuff and selling as they go up a little bit, as they get close to the mean, that little bit of mean reversion, that’s been a way to generate returns in Japan. There’s a reasonable chance that that is what happens here.

Tobias Carlisle (22:39):

I’m not relying on that. I don’t need any sort of multiple expansion for my portfolio to work because I can do another assessment of value in the portfolio, which is a little bit like I referred to before, but you get a dividend yield and then I can look at the return on equity and the payout ratio for a company so I know roughly what it’s reinvesting in itself, and I can look at the rate that it’s likely to earn. So the return on equity tells you what it’s going to earn on the reinvestment, and that gives you the incremental growth over a year. And with that dividend yield and that incremental growth, you can generate unexpected return for stocks.

Tobias Carlisle (23:12):

I think that the expected return for value is higher than it ordinarily is right now, even ignoring the likelihood of the multiple expanding to get closer to the average multiple which per month generates an additional return but it’s unnecessary. It’s pure an expected return. So I think that it’s I’m sort of in two minds. In one hand, I am nervous about the index itself because typically there are sell offs when they get to these kinds of levels and that will undoubtedly impact my stocks as well. They won’t be immune to something like that. But I can see an expected return for my stocks that is pretty good, higher than usual. I think that they should do pretty well, but value will probably have a similar performance to the one that it had in the early 2000s through to the mid 2000s where it was doing pretty well while the index was flat.

Clay Finck (24:05):

So you mentioned that the overall market could very well be flat over the next decade. Like you mentioned, part of that is human psychology when things are good and stocks “only go up”, people will pay whatever price necessary to get in on the action. And when there’s blood on the streets, people will do whatever they can to get rid of their shares no matter the price and that value has higher than expected returns than what we typically see. If you had to put a number on that, what is your expected return?

Tobias Carlisle (24:36):

I don’t want to like step into any compliance issues when giving numbers, but I think that you could… What I like to do is really simple things to do. You could go to Morningstar, you could pull up my funds and you could do that calculation there. People always say there’s not much information in multiples. So price earnings, price to book, dividend yield. Well, what does the underlying business look like? How good is the underlying business? So I always find that really funny because if you have the price to book ratio of a portfolio and the price to earnings ratio of a portfolio, if you can take out the price so you can invert both of those, eliminate the price, now you’ve got earnings on book and that’s return on equity, if we have the dividend yield, we know how much money is being paid out from the earnings and we know now how much is been reinvested. So we have the reinvestment rate by the return on equity.

Tobias Carlisle (25:30):

And so we can see what we have now. We have the yield and the incremental returns, and that’s an expected return. So I know that that’s a little bit complicated. There’s a great book. If you want to learn about this stuff as a younger investor, the best book I think is the one written by Bruce Greenwald. He’s now retired but he was the Graham and Dodd chair of Value Investing at Columbia, which is basically where… That’s where Graham taught. It’s the best value school in the country or regarded us the best value school in the country.

Tobias Carlisle (26:00):

His book is the best book just outlining how you think through a valuation. And he says, you can calculate the liquidation value of a company. Then you can calculate this thing that he calls the earnings power value, which is what the earnings are like without any growth. And then you can calculate a growth value for the company, which is similar to that explanation that I just gave where you have a dividend yield and a reinvestment rate by return on equity, and that will tell you what these things are worth. And then you can reverse engineer that and apply that to just about any scenario.

Tobias Carlisle (26:28):

So it’s a really, really simple kind of a tool for assessing these things. Once you’ve programmed it once into Excel, you can just drop the numbers in and it will give you an expected return number. And then you can spend the rest of your time thinking about whether the company will actually do these numbers in the future, which is where you should be spending most of your time. The quantitative stuff takes care of itself pretty quickly. The more difficult assessment is so that that kind of valuation wouldn’t be appropriate for a cyclical, like a commodity type business, but it might be more appropriate for a business that has some pricing power that has some visibility into where it’s earnings are likely to be in the future.

Tobias Carlisle (27:06):

And I think you can use it for portfolios too because portfolios have a mix of different businesses and it sort of eliminates the randomness from that kind of business. And so that book is an excellent book. It’s like Value Investing From Graham to Buffett and Beyond. It’s in its second edition by Bruce Greenwald. I think that most people regard that as one of the best introductory books to value and that will give you that little tool that I discussed.

Tobias Carlisle (27:31):

So I think that you can… I can see. So there are very growthy companies, very growthy portfolios out there, and I can take that little assessment and I can drop that in and I can see what the expected return for those growthy companies are, and this assumes no mean reversion, just assumes no change in the multiple. That’s the most important thing. And so then you can see or you can get two portfolios that have the same expected return but one trades at a huge premium to the market and one trades at a huge discount to the market. And it’s possible that as an investor, you don’t get the expected return in the one that trades at the premium because mean reversion does still exist over time. Those multiples will come into market, multiple will close to it in both directions.

Tobias Carlisle (28:07):

And so that’s probably what distinguishes me from a lot of other value investors in this market that I do still pay attention to that stuff. I can look at two portfolios that have the same expected return and I just prefer the one that has the lower multiple to the one that has the higher multiple.

Clay Finck (28:20):

Makes sense and it’s a very interesting approach. Now let’s talk about inflation. It’s a very hot topic in 2021, got a lot of people talking about it. The CPI numbers released this month were 6.2% for October, I believe, which many suspect is understated to a large degree. What do you make of the inflation numbers released?

Tobias Carlisle (28:46):

If you want to look really foolish in the future, what you should do is try to predict where inflation’s going. I hope someone’s listening to this in 2025 or something like that and says, “Wow, you got that wrong.” From my perspective what has happened is we’ve had that flash crash in 2020 that rebounded very quickly. The Fed responded very aggressively and printed a lot of money, which it had been doing beforehand. You can look at the growth in the Fed balance sheet has been absolutely extraordinary and become… It’s asymptotically approaching infinite, I think, at this point. It’s a very big increase. And at the same time we’ve had this supply disruption where goods aren’t getting to the states because they’re all on container ships that are floating out off the coast here. I can see them every day when I go for a drive around. You can walk to Catalina Island from Los Angeles, there are so many boats out there and it’s affected the air quality here. That’s how many container ships are flooding around out there.

Tobias Carlisle (29:43):

But the result of that, a whole lot of money dumped into the system and a restriction in the goods has created this scenario where we’ve got this massive increase in the cost of goods, the CPI. There are two arguments essentially. One is that this is transitory. The supply shortages will resolve themselves over time and we’ll go back to that sort of low inflation. I’m using the scare quotes constantly. I never use them. I don’t know why I’ve got them out repeatedly for this, but I’ve seen low inflation so I don’t think it’s necessarily low inflation. I think the CPI sort of understates the true rate of inflation, because there are lots of government programs attached to CPI that if CPI goes up too fast, they have to spend increasing amounts of money, pensions and so on.

Tobias Carlisle (30:30):

The other argument that says that it’s not transitory is that basically we have to keep on printing money at these very high rates or the lack of liquidity may cause the stock market to stall out and to crash. So we need to keep on jamming the money in. And then on the other side, that restriction and supply of all these goods that’s sitting on the ships out here, that is a scenario that won’t be resolved on optimistic assumptions until the end of 2023. When I hear someone saying end of 2023, just knowing how good humans are at assessing the likelihood of things happening, that may be the really optimistic outcome and it may be good.

Tobias Carlisle (31:11):

We don’t know when that’s going to be resolved. And as of today, it’s the worst that it’s ever been, which means it’s got progressively worse and you can pull up these scary looking charts about stuff sitting out there and how long it’s been there and it just keeps on going up every single day and there’s just no way to resolve that situation. There’s a finite number of port facilities. There’s a finite number of container ships. There are empty containers. It’s a broken supply chain at the moment. We’ve seen this sort of stuff before in the ’70s where you have the cost of consumer goods going up very quickly, wages not keeping up. It looks like wages may be going up now a little bit over in real terms. They’ve gone backwards over the last 12 months despite the fact that everybody thinks they’re going up in real terms. They have gone up in nominal terms.

Tobias Carlisle (31:57):

My gut feeling is that this inflation is here to stay for longer. When these scenarios play out, it’s better for value guys. As sad as it is for everybody else, it is a good thing for value because value just tends to do better in higher inflationary periods. They’ll put interest rates up at some set, just sort of have to. That will probably precipitate some sort of crash in the stock market and then it’ll be a tough period to invest through, it’ll be a tough period to live through but it’ll be good for value guys. So I guess that’s the silver lining for a handful of people like me. I don’t think it’ll be good for Americans when it happens.

Clay Finck (32:35):

So does a higher rate of inflation that we’re seeing today, does that affect your investing process at all or your thought process?

Tobias Carlisle (32:44):

No, because it’s just it’s too hard to predict. Either way, low inflation or high inflation, I would still be trying to buy. I’m still trying to buy cash flows that go out into the future. I’m trying to buy them as cheaply as I possibly can because business is tough and there’s lots of competition out there. I expect that my businesses decline slightly, but the fact that I’ve bought them so cheaply, it doesn’t matter. Things like the level of the stock market and inflation is so hard to predict, so hard to know where they’re going to go. You just can’t factor that into a process. I know that they people who’ll say, well, go buy gold, go buy crypto. That’s one way of protecting.

Tobias Carlisle (33:24):

You can look at what gold’s done for the last 12 months, a pretty good period where inflation supposedly didn’t show up. Maybe it went through to crypto. Maybe people have got a preference for crypto over gold. Then maybe that creates a scenario where gold’s going to run really hard and crypto’s not because it’s expensive, but I just I don’t have the tools to assess those things, and I don’t think that anybody else does either. So I think that you just have to be humble and careful through this period. And even being humble and careful, I fully expect to get whacked pretty hard as this happens.

Clay Finck (33:58):

Yeah. Makes sense. It remains me when COVID first hit in March, April, 2020, stocks were just going down, down, down. It was hitting the limit every single day. I wasn’t hearing too many people say go out and buy stocks because no one knew what the virus was going to do, the effects it would have on the economy. I think that’s kind of what we’re seeing with the inflation and supply chain stuff. I don’t think anyone really knows the potential impacts over the next at least a few years out.

Tobias Carlisle (34:28):

At least a few years. I think that stuff did get pretty cheap and I think I was recording podcasts at the time. We’re doing them live. We’re doing them in real time. I think our first live one was whatever Tuesday was closest to the March 2020 bottom. But I would say that for people who went through that and think that that is what a bear market looks like, you should go back and have a look at 2007 to 2009. Like just see how long that is, 2000 to 2001. And then there are others. There are other ’73, ’74, those sort of bear markets are different to the flash crash that we saw. The difference is that in a bear market, every rally gets sold to a lower low and it happens over and over and over again for a very long period of time and you get to this point where you think there’s no way in the world, like the 15th rally that gets sold 18 months after the peak, you just you’re punch drunk and you don’t think that it’ll ever recover.

Tobias Carlisle (35:27):

That’s often the point that it does recover but there’s nobody left to sort of see it happen. You’ve got to get your mind right for when these things happen, that you’re going to feel like an idiot increasingly stupid as this thing goes on. The only thing you can do is sort of concentrate on your plan that you have beforehand. If you’re still earning an income, it’s actually great because it means that you are investing and buying more and more of the things that you want to own and you should just keep on doing that. And at some point, it does recover and then you’ll feel great. A few years later, it doesn’t feel good when you’re going through it though.

Clay Finck (36:03):

I was curious, in your valuation process, you’re looking at liquidation values and other types of values and calculations you’re doing. And today we have very low interest rates and very high inflation. So I was curious, are you using a discount rate in your analysis? And if so, how are you coming up with that?

Tobias Carlisle (36:22):

That’s actually a great question and it’s one of the things that is… If you’re doing a DCF, you need a discount rate. For discounted cashflow, literally has it in the name, you need the discount rate. It’s really, really hard. This has been the hardest thing over the last decade is what’s the right discount rate. I don’t know and I don’t think anybody else does either. I think that you could say… Well, here’s how Buffett does it. Buffett just doesn’t pay more than 10 times. That’s kind of his approach and I respect it. It just means that he just doesn’t ever pay up for stuff. He just waits until it gets cheap enough.

Clay Finck (36:55):

Buffett’s metric is 10 times what?

Tobias Carlisle (36:58):

10 times earnings, 10 times his calculation of owner earnings. Good catch there. I was going to let that one go. Yeah, 10 times owner earnings, which is it’s not the bottom line, that’s what he thinks it’s going to generate probably in cash terms for the business. Apple sat there for a very long period of time. When Apple got cheap enough, he just, he put a third of his book into it and then it rallied three times. I still think that’s the greatest trade ever because it’s the most amount of money deployed in a single trade and then recovered so quickly and he’s so disciplined. He just sits in there. He’s got $140 billion in cash still sitting there waiting for something like that.

Tobias Carlisle (37:32):

He uses 10 times. I invest in a way that doesn’t actually require a discount rate because that little explanation that I gave before, the one that is based on Greenwald’s investment process or investment sort of tool, there’s no discount rate in that. And I like that because it takes away that necessity of like is 1.5% the appropriate discount rate, because that’s the 10-year right now. Or you want to take the long run average of the 10-year, which is about 6%, and that’s historically what people have done, taken about 6% then added some risk premium on top of them. I think that’s what Buffett’s doing, 6% plus a risk premium probably gets him to about 10%. He hasn’t seemed to have stepped it down much at all through this period, but I do it without using a discount rate.

Tobias Carlisle (38:18):

So there’s no discount rate in that like look at currently what the thing is earning, look at what it’s going to reinvest in its business. Look at what that will do incrementally. One of the nice things about that is it does have built into it the multiple which it’s just hard to, if you don’t get enough of a yield back out, you don’t get enough reinvestment back in. And so you’re sort of forced into these lower things and you might then say, well, I know roughly what the market is expecting. So the market return on equity is about 13.3% for the S&P 500, reinvestment rate I think is about 60%.

Tobias Carlisle (38:53):

And so you can look at that and say, is this thing that I’m currently looking at a better company than average? Is it cheaper than average? I’m in a pretty good position here, I think, to do well. I tend to like drive, I want much, much cheaper than average and like about the average in terms of business quality. So I tend to pay a little bit less than 10 times but I’m no Buffett. So if I was a better analyst, I might pay more.

Clay Finck (39:19):

Now, let’s talk a bit more about your funds. The first fund I believe you started was the Acquirers Fund. Could you tell us a little bit more about that one?

Tobias Carlisle (39:27):

Yeah. Launched in May, 2019. At the time, the spread between the most overvalued and the most undervalued was extraordinarily wide, historically wide. It’s proceeded to get wider since then, which that’s not good for value guys. The idea is that it’s just trying to buy the cheapest 30 names in the market. I look at balance sheet and business quality and I try to buy things that they’re cheaper than they appear optically and they’re probably better than they appear optically and I’m trying to buy them at a price that allows me to generate pretty good. So I want sort of 15% or better returns from each name in the book. Typically I try to aim for about 17 and a half percent just because I think that there’s a lot that can go wrong in business. A lot of these names aren’t going to generate those returns.

Tobias Carlisle (40:16):

So I’m not saying that these are the returns the fund is going to do, I’m telling you what the raw input is at the top. And then whatever happens to these businesses happens to them. I think that you probably likely see returns that are lower than that because competition and whatever else happens. And then I want businesses that, they have to be rock solid from a balance sheet perspective. Good businesses that are sustainable with pretty good margins. I’m sort of mostly interested in margins. I’m less interested in return on equity because I think it’s a mean reverting series for the most part both ways. And I want management to be doing something about that undervaluation, so I want them in there buying back material and active stock.

Tobias Carlisle (40:55):

So you’ll find there’s lots of companies out there that buy back enough stock to sort of mop up the options that they issue to management every year. So it might even be like a 15% buyback. It looks really good, but on a net buyback basis and net shares repurchased, it’s flat or it’s even the share count is going up. I want something that for a decade they’ve opportunistically bought back stock at really good times. And that’s often, so Lockheed Martin is one that’s in my book right now. I picked it up before Michael Burry did, or I picked it up at the same time that he did. I didn’t buy it because he bought it.

Tobias Carlisle (41:25):

If you look at the share count, I’ve bought back about 17% of their business over the last decade. It still generates really good returns on equity. It’s a very strong balance sheet, very high transmission of earnings into cashflow. And it’s a very, very stable business. I think that that’s one of those businesses that can sort of generate mid teens returns for an extended period of time and you’re not paying very much for it right now. So that’s kind of pretty good representation of what ends up in the portfolio. Just cheap rock solid business, rock solid balance sheet, and what happens happens after I buy it.

Clay Finck (41:58):

Does the fund go short some companies as well? How does that work?

Tobias Carlisle (42:03):

The fund has shorted in the past. There are going to be some regulatory changes here that make it much more difficult to be short. And I also think that I’ve kind of reassessed myself as an investor having gone through March, 2020, and what I think that I want to do, what we’re doing now is we’re going to remove the short book for the reason that it introduces. While having a short book means that I would inevitably do better in a draw down, it sort of protects you on a market-to-market basis, it does introduce this existential risk that any one of those positions could blow up. Now, I short very small. I short 1% of the book or less and I rebalance very regularly, and I tend to be in stuff that’s not heavily shorted. So I already do all of those things.

Tobias Carlisle (42:50):

But nevertheless, you still run the risk when you have a short on that you get caught in. Tesla could go up many, many… Not that I’m short in Tesla, but you could be short Tesla and have it go up as many times as it has, but that’s happened before with VW. I just forget who it was with though, but they got squeezed and it can go up 10 times. We’ve seen it with AMC, we’ve seen it with GME. We’ve seen it regularly. It’s not a new phenomenon that short squeezes occur, but can I imagine that if I stay short a book of names for the next 40 years that I will get short squeezed and this sometimes sort of seems almost inevitable to me?

Tobias Carlisle (43:30):

So I think that what I would like to do instead is to remove the short book and just remove that risk completely and I just rely on the fact that I can identify these undervalued names and over a long enough period of time, the market should wake up to the fact that they are in fact undervalued and they should be able to generate returns without the short book. So that’s what I’ve done. We’re in the process of taking off the shorts. We’ve already announced it to the market. It’ll happen December 7th. And then from then on, it’ll be a long only fund, just for that reason that I’m trying to eliminate any little bit of risk that I can find in anything that could blow me up.

Clay Finck (44:03):

Yeah. That makes sense. So your other fund is the Acquirers DEEP value fund, is that right?

Tobias Carlisle (44:10):

That’s the small and micro fund that I partner with Roundhill to do that. It’s exactly the same approach. It’s long only, but it small and micro. They’re all US focused only, so there’s no international stocks although there might be some like Canadian or there might be some stuff that’s got a secondary listing in the states that I will buy. It just has to be traded in the states. I love small and micro because it’s where I started. The opportunity in small and micro continues to be one of the best that I’ve ever seen. It’s just been so beaten up for so long.

Tobias Carlisle (44:38):

What the market has been for the last decade has been high growth, large cap have really been the beneficiaries. And so again, if you go to Morningstar and you have a look at the Style Boxes of the funds that have done very well like Arc, for example, like their centroid will be high growth, large cap, and their distribution is all like heavily slanted up into that right hand corner. And if you look at the funds that I run, they tend to be on the exact opposite side. They’ll be smaller and they’re extreme value.

Tobias Carlisle (45:08):

When any sort of external party does a third party factor analysis of my funds, the first thing that stands out is they are the deepest value funds that you’ll find out there. And the second thing that stands out is they tend to be very high quality because I like cash flows and stock being brought back that hasn’t done very well in this market until about February this year. It has started to do a little bit better relatively, but the ordinary course is that that approach to the market, smaller and better and value, has typically been a good way to generate better returns than the market. So I think that over time, given enough time, that’s sort of what we’ll see.

Clay Finck (45:47):

Tobias, thank you so much for coming under our show and sharing your knowledge. I think just with the current environment, it’s so important for people to learn about and at least hear about value investing and consider how it might fit into their own portfolios. Now, before I close things out, where can the audience go to connect with you and learn more about you and your funds?

Tobias Carlisle (46:08):

Hey, thanks so much for having me on, Clay. I really enjoyed the conversation. Some great questions in there. My firm is called Acquirers Funds and it’s acquirersfunds.com. I have a little website called acquirersmultiple.com which has got like a free stock screener. We post podcasts and blog posts, just sort of walking through value investing and deep value investing and people who are in this space and what’s happening, what people have said. I do this with two buddies of mine who are both value investors. We have a little podcast where we chat about cookie queries podcast.

Tobias Carlisle (46:42):

I’m on Twitter @Greenbackd, G-R-E-E-N-B-A-C-K-D. It’s a funny spelling. I’ll probably have to change that at some point, but I post the links to all the stuff that we do on that if that’s your preferred approach. The two funds are The Acquirers Fund, which is the midcap and larger, that’s Z-I-G, ZIG, because you want zig when the market zags. And then the small and micro one is DEEP because that’s, deep value is the approach, but they’re the same approach to the market. Just one is midcap and large cap and the other one is small and micro.

Clay Finck (47:12):

Got it. I will say that I do enjoy listening to you, Jake and Bill talk about the markets on your show.

Tobias Carlisle (47:18):

I appreciate that. It’s called Value: After Hours. We try to recreate these conversations that we were having. I mean, we were having these conversations on Zoom and I just thought this would be fun if we could keep on doing this and people hear what we say, because this is what you guys talked about behind closed doors or in the bar after hours and we’re pretty open. You’ve seen, we’re open about what we think about Tesla or crypto or NFTs, for example. We get lots of nice emails, we get lots of nasty email, but it’s all authentic, it’s the real thing.

Clay Finck (47:53):

I love it. Toby, thank you so much for coming on.

Tobias Carlisle (47:56):

Thanks Clay. My absolute pleasure.

Clay Finck (47:59):

All right, everybody. I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app so you can get these episodes delivered automatically. And if you haven’t already done so, be sure to check out our website, theinvestorspodcast.com. There you’ll find all of our episodes, some educational resources we have, as well as some tools you can use as an investor. And with that, we’ll see you again next time.

Outro (48:21):

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