The Acquirer's Multiple

Tobias Carlisle argues that the simplest measure of cheapness outperforms more sophisticated value approaches, and that the specific measure to use is enterprise value divided by operating earnings, which he calls the acquirer's multiple because it is what a buyer of the whole business would look at.

His argument against quality-adjusted value is the more interesting part. Joel Greenblatt's magic formula combines cheapness with return on capital, and Carlisle's backtests find that the cheapness component alone outperforms the combination. His explanation is mean reversion: high returns on capital attract competition and decline, low returns attract exit and improve, and paying for current quality means paying for a characteristic that will erode. Buying cheapness alone means buying businesses whose current results are poor and whose future results will be better than the price implies.

He supports this with backtests, with the academic literature on value and on mean reversion, and with the behaviour of activist investors, who target exactly the cheap companies with poor current returns and force the change. He also covers Buffett's evolution from Graham's statistical cheapness toward quality, and argues that Buffett's approach works for Buffett because of scale and permanence rather than because it dominates generally. The backtests are the author's own and the sample periods are chosen by him, which readers should discount. The book is short and the argument is clearly stated and testable, which is more than most investment books offer.

Australian-born fund manager and founder of Acquirers Funds; writes on deep-value screening and systematic value investing.

Deep Value examines why the cheapest, most beaten-down companies outperform higher-quality compounders on average, and traces the activist and liquidation history behind that result. The Acquirer's Multiple sets out the enterprise-value-to-operating-earnings screen he runs, and Quantitative Value tests value rules against the data with the discretionary error removed.

Acquirers Funds