Tobias Carlisle BidAndAsk

How to Pocket Exceptional Returns with Minimal Effort Using “The Acquirer’s Multiple” [BidAndAsk]Tobias Carlisle

Alvin Chow
Alvin Chow

You want exceptional investment returns with minimum effort?

Here’s the man who says that his strategy can.

We have the honor of interviewing Tobias Carlisle, Fund Manager of Carbon Beach Asset Management and Author of “The Acquirer’ Multiple” in this episode of BidAndAsk:

Key Topics We Discussed During The Interview

2 Strategies That Allow Small, DIY Investors To Beat The Market, With Little Effort

When it comes to investing, most people will reference Warren Buffett. We have mentioned in our recent videos, why you cannot invest like Warren Buffett, the billionaire.

Instead, here are 2 strategies that allows the DIY investors with smaller capital to beat the market:

  • Joel Greenblatt’s “The Magic Formula”
  • Tobias Carlisle’s “The Acquirer’s Multiple”

“The Magic Formula”


In 2006, Joel Greenblatt wrote a book called The Little Book that Beats the Market in which he introduced an investment strategy called the “The Magic Formula”.

It is a simple quantitative application of Warren Buffett’s investment strategy; “buying wonderful companies at fair prices

In summary, “The Magic Formula” points out companies that are:

  1. very profitable (have very high returns on invested capital) and,
  2. fairly priced (based on an operating earnings to enterprise value ratio)

Does “The Magic Formula” really work?

In 2012, Tobias Carlisle partnered with a PhD student from the Byrd School of Business, to test “The Magic Formula”.

They applied extreme market conditions to test if “The Magic Formula” could still deliver market beating returns.

And they found that it does in fact beat the market pretty comprehensively!

“The Acquirer’s Multiple”

Tobias and his team did not stop there.

“The Magic Formula” was known to relied on two factors – “quality and “value”. Tobias’ team broke down the returns to find out if the factors contributed equally to the returns.

Surprisingly, they discovered that the quality factor (i.e. return on invested capital) actually dragged down the return. If used alone, it would have underperformed the market.

On the flip side, the value factor (i.e. the operating income on enterprise value factor) generates all of the returns and more. It was able to mask the negative effect from the quality factor!

Tobias’ theory on why “Return on Invested Capital” dragged down returns?

Investor strategist, Michael Mauboussin has been searching for distinct reasons that could point out companies which could maintain their profitability over 10 years.

He studied companies within rolling 10-year periods and used DuPont Analysis to break down and determine what drives their returns. However, he has yet to find a scientific method that consistently identifies stocks that can outperform in the following 10 years.

However, he did notice that at the end of the 10 years, that about 4% of stocks do maintain their profitability over the full period.

Which leads to the next question: “are you able to identify that 4%?

Further studies are not conclusive. The ability to identify the 4% is through random chance.

The “return on invested capital” could be due to one of two things:

  • a moat (i.e. good)
  • the company at the top of its business cycle (i.e. bad)

This means that if you invested based on “return on invested capital”, there is a chance of getting into companies that are at the top of their business cycle.

Tobias believes that by removing the “return on invested capital”, you can get better returns.

Hence, the Acquirer’s Multiple only relies on the ‘Value’ factor:

How to Quantify Value with “The Acquirer’s Multiple”

The Acquirer’s Multiple = Enterprise Value / Operating Earnings, where:

  • Enterprise Value= Market Cap + Preferred Equity + Non-Controlling Interests + Total Debt – Cash and Equivalents and,
  • Operating Earnings = Revenue – (Cost of goods sold + Selling, general and administrative costs + Depreciation and amortization)

Tobias reveals more in his book, The Acquirer’s Multiple as well as at his website,

In a nutshell, Tobias looks for companies that are:

  • Cheap,
  • At the bottom of their business cycle,
  • Generating lots of cash flow,
  • Have cash in the bank,
  • It’s okay for them to not be ‘great’ companies at the point of investment

He also reminds us that a value investor’s advantage is his ability to hold investments over longer terms.

A ‘bad’ looking, deep value company with sufficient cash and cashflow would be able to survive through your investment period of at least 2-3 years.

He noticed that once the company survives the ‘bad’ years, it tends to start looking healthier and doing better.

3 Tell-Tale Signs You Must Avoid

The ‘Value’ factor alone is great. But some companies deserve to be priced lowly because of their situations. They do not hold any value that you can unlock.

Tobias suggests digging deeper into the company’s financials. You should look out these 3 tell-tale signs:

  • fraud,
  • earnings manipulation
  • financial distress

From Tobias’ experience, you’d often find them all together.

And, these situations are often only detected after the collapse, rather than during the bull market. Simply because it is easier to connect the dots only after a collapse.

Value investors have to be vigilant during the bull market, and do their due diligence before investing in deep value stocks.

How to Identify Potential Fraud In Companies

As a fundamental investor, you’ll need to look at a company’s financial statements.

Tobias suggests that you should ask the following questions when you are analysing the financial statements:

  1. Does the cash flow match the reported accounting earnings?
  2. Does the reported assets match the cash flow?
  3. How much money does the company have in the bank?

You should avoid companies that have conflicting figures.

Why Quantitative Deep Value Investing Strategy is Suitable for Beginners

Truth is, it’s actually very difficult to pick out all the intricacies of financial statements when you first start out.

You can learn all about financial statements at a university or through a CFA, but it takes experience and practice to really understand how the numbers really work, the subtle hints within the numbers and how one industry varies from another industry.

A good quantitative method employs criteria that removes the need for an investor to analyse financial statements deeply, by themselves.

It gives you a simpler way to work with the numbers.

With that said, Tobias also noticed that new investors may not be clear about their investing goals.

Many are satisfied with market returns, and they really don’t need a DIY approach to investing.

His advise for new beginners investors is to buy a cheap index fund to get market returns, while they learn about the intricacies of investing.

For those who want to beat the market, you should know that it’s very very difficult to do. Even the professionals can’t do it most times.

Tobias Carlisle on “beating the market

Tobias mentioned that the only way for an investor to beat the market, is to do something different from the rest of the market.

Instead of buying hot stocks like Tesla, Netflix or Amazon, you’d be investing in companies that nobody’s ever heard of, or they think it’s a disaster.

You hope to be proven right (based on your research and analysis) down the road.

At the same time, you must understand that there’s always a risk that there’s a black swan out there, and it could send the company to zero. That’s why it’s cheap.

As an investor, you should be going in and finding other things that could sharpen upyour analysis of a company.

With all that said, you’ve to bear in mind that you might be finding a broken leg too:

The “Broken Leg Phenomenon” and How It Can Affect Your Investment Returns

Research have shown that statistical rules tend beat the experts’ results.

An expert who is given access to the simple statistical model, but decide not to follow it, usually does worse than the model. This is due to “The Broken Leg Phenomenon”.

What is “The Broken Leg Phenomenon”?

Imagine you have a model that tells you whether somebody will go to the cinema on a Friday night. This model could include criteria like; “whether it’s raining or not”, “the type of movie that’s on”, etc.

And you learn one day that a movie-goer had a broken leg. That information has not been considered by your current model.

Should you include that as a new criteria in your current model?

The answer is NO.

Because you’ll find too many reasons to override the model, to many new criteria for your model; there are just too many “broken legs”.

Impact of ‘The Broken Leg Phenomenon” on Your Investing Return

Tobias warns that when you’re looking at deep value companies; they’ve all got “broken legs”. And the “broken leg” is the reason why they’re cheap!

When you buy a company knowing that it’s got a “broken leg”, you believe that once the broken leg gets fixed, the company should be trading much higher.

If you eliminate a company for your own reasoning, you might be picking out the stocks that could potentially bring you the excess returns.

By the way, Joel Greenblatt has also mentioned that people who try to cherry-pick from the list of “Magic Formula” stocks, did worse than the index.

Why Is It Difficult For Most Investors To Practice “The Acquirer’s Multiple“?

Firstly, Tobias have noticed that it is very confronting to learn that a model that is as simple as “The Acquirer’s Multiple”, seems to do very well over long periods of time.

Especially since about 80% of professional money managers can’t beat the market.

Most investors simply can’t believe that this is all you’d need to beat the market.

Secondly, as with most value investing strategies, the “Acquirer’s Multiple” does experience periods of underperformance.

And when it’s underperforming, investors will start to question the strategy. Some will make tweaks that  nullifies the system.

Tobias’ Personal Experience With The Acquirer’s Multiple

Tobias shares that he too has to struggle with doubts when he looks at his portfolio…and he does so frequently.

But when he looks closely at those stocks individually, often they check all the boxes;

  • they have a lot of cash on the balance sheet,
  • they are generating lots of free cash flow,
  • they have lots of operating income and,
  • they’re very cheap.

This means, if these companies can survive for another 12 months, they should become much more valuable stocks thereafter.

And that’s what Tobias and his team has experienced over the last 12 months.

He shares of a particular experience:

Last year, Airlines had a very good run. I was buying Airlines before Buffett announced that he was buying Airlines. There were six or seven of them at one time in the screen, so I bought them. And then shortly thereafter they announced that Buffet bought some of the same shares and that was a good one.

Tobias Carlisle’s Experience with Airline Stocks

Why Tobias Thinks You Cannot Invest Like Warren Buffett

Most investors tend to follow Buffet and he has described his investment strategy pretty comprehensively in his letters. If you have read the letters, really what he’s talking about all the time is how to find a moat.

However, most investors would not be able to follow Warren Buffett’s strategy.

Instead, you’d probably do better if you can find a methodology that suits your lifestyle.

Tobias says “The Acquirer’s Multiple” suits his investing style, plus it works if you can buy stocks cheaply enough.

But here’s the funny thing. Apple came into my screen a few years ago and it was one of the cheapest 10% of large-cap stocks.

Probably because people were concerned that the iPhone is getting boring or there’s other competition for the Apple TV, it got very very cheap. And so I’ve sorted the screen again and I tweeted out about it and told everybody that it was in the top 30 cheapest socks in the States at the time in the large cap sector. And Buffett bought it afterwards. 

Tobias Carlisle On ‘Apple’

How Buffett Invests…

Tobias have noticed that Buffett buys companies at such huge discounts that it doesn’t actually matter if a moat exists or not.

But he also notes that Buffett has more than 60 years of investment experience. So he has the ability to look at super cheap companies and decide if they have a good chance of surviving and maintaining their moat.

Most of us don’t have that ability.

Can You Apply “The Acquirer’s Multiple” in the Asian Stock Market?

In short, yes.

Tobias shares that here have been research done on the application of “The Acquirer’s Multiple” to every developed market and every large stock market in the world.

In every developed market be it in Asia, in Europe, the U.S., the UK, Australia, New Zealand, it has been shown to be able to generate higher returns.

He is confident that “The Acquirer’s Multiple” is very good at identifying the cheap stocks, the overvalued stocks, and the spread between the two. The bigger the spread between the cheap stocks and the expensive stocks, the better the return.

If you buy “The Acquirer’s Multiple” stocks as a portfolio and if you have enough time, they will tend to beat the market.

Are Paid Financial Data Necessary For The DIY Investor?

Most countries have a pretty good financial data. There are lots of good services that help you with screening for cheap companies.

Of course, if you’d want the data calculated and churned for you, those services will require a fee. Most are not cheap.

Instead, you can hand calculate these things. You can find the financial statements to calculate the operating earnings and the enterprise value.

“The Acquirer’s Multiple” ratio is revealed in its entirety in the book as well as on Tobias’ website,

Should You Avoid Family-Dominated Companies?

Many investors are wary of family-dominated companies because it is believe that these companies do not wish to unlock value. They could become value traps that ties down your capital over a long period of time.

To counter this, Tobias suggests that you should monitor them over the course of a year to understand if the management or the major shareholder is abusing their position.

If you spot anything after the first year, you might want to get out.

But sometimes this is the “broken leg”, or the reason that the stock is so cheap.

Hence, Tobias suggests that if the stock is considered cheap, even when you consider the potential value trap situation, it might be worth holding on.

You should still monitor and reassess the stock on a yearly basis.

How Many Stocks Should You Invest In?

concentrated investing

In his previous book “Concentrated Investing“, Tobias and his co-authors talked about two ideas;

  1. Diversification: how diversified do you need to be in order to be protected from any individual stock getting too big.
  2. Concentration: the way that you generate better returns.

Pros and Cons of A Concentrated Portfolio

An example of a concentrated portfolio is a portfolio of say, 5 stocks.

The problem with investing in a small number of stocks is that it is enormously volatile.

The performance of any given stock is essentially 20% of your whole portfolio. If one of those companies goes to zero, you would have lost 20% of your capital. 

Tobias tells us that concentrated portfolio works well in backtests. (which are not exposed to potential impulsive decisions made by investors)

With a good metric, you will tend to get better performance with a concentrated portfolio.

If you experience a crash and the markets down 50%, you might be down 80%. But on the flip side, when the market goes up 30%, you go up 50%.

However, there’s a lot of risk in managing a concentrated portfolio. Tobias urges that unless you are very experienced and know how to manage your bids well, most investors should avoid using a concentrated portfolio.

How To Use The ”Acquirer’s Multiple” to Manage a Concentrated Portfolio?

Using “The Acquirer’s Multiple” screener, you can either select the top 5 or carry out qualitative analysis on stocks that appear on the top of the screener and fish out 5 suitable stocks.

Again, you have to be careful with a concentration portfolio because there’s a lot of volatility and you can lose a lot of money.

How To Use The ”Acquirer’s Multiple” to Manage a Diversified Portfolio?

If you are going for a diversified portfolio, then you would want to buy the cheapest stocks.

You’re better off with about 20 – 30 positions. That means if any one of them goes to zero, you’ve lost only ~3.3% of your capital.

#1 Investing Advice That Tobias Says You Should NOT Follow

There’s a lot of bad advice out there. We asked Tobias Carlisle for the ONE he hates most.

Tobias’ #1  peeve is the “efficient market hypothesis”. He says it makes investors think in the wrong way.

However, he admits that if you don’t want to spend a lot of time thinking about your investments, it’s probably not a bad way to go.

The efficient market hypothesis, is a bad philosophical background for a pretty good idea of just buying the market index.

Tobias Carlisle on the “efficient market hypothesis”

He explains why:

If you buy the market index during the bull market, it’s filled with very expensive, overvalued stocks.

Indices are market capitalization weighted, which means the more expensive the stock is, the bigger proportion of the portfolio it takes up.

So if you’re buying the market index during the bull market, you are buying a lot of expensive companies and the risk reward isn’t very good.

How You Should Be Investing Instead

The advice above would be okay for folks who just want market returns, and cannot be bothered to learn more about investing.

As for investors who want more, Tobias thinks you’re better off finding value—doing value investing yourself or finding managers who have a good process that’s clearly articulated and that they actually adhere to that process.

You must also recognise that there will be periods of underperformance. These periods makes investors anxious and cause them to lose their conviction about the investment strategy that they’re following.

2 Strategies that Carbon Beach Asset Management Use To Deliver Exceptional Returns To Their Clients

Tobias highlights the 2 main strategies they use at Carbon Beach Asset Management:

  1. Deep Value, Long Short Side Strategy
  2. Special Situations

1) Deep Value, Long Short Side Strategy

In summary:

  • For the cheap companies, they go long.
  • For the financially distressed, potential frauds, earnings manipulation, ugly balance sheet, deteriorating financials, they go short.

Carbon Beach go long on undervalued cash generative companies, or the hedges. I.e. If the market looks like it’s falling or if the market goes into a downtrend, it would hedge in an effort to generate returns that don’t match the market.

Carbon Beach also carries out additional research

They dig into the company data to make sure the data is correct.

They look for other things that cannot be screened for.

They try to find things that might affect their valuation.

Once they decide on the valuation, they go quantitative from that point on. They’ll buy and sell based on that valuation they had calculated previously.

Stop Trying to Analyse Businesses, Do This Instead

To add on to the previous point, Tobias emphasis that Carbon Beach does not analyse business at all.

The question of “will this business survive” is a very difficult question to foretell, and could lead to a broken leg phenomenon.

Instead, they ask if “the company’s financial statements are accurate?”

If yes, they will proceed to making a buying decision quantitatively.

If not, Carbon Beach looks into the discrepancy between what the company is showing on its financial statements and what’s actually going on in the business of the company.

If it indicates fraud or earnings manipulation, and that’s a company that they would avoid.

Sometimes it could just be a timing issue or the way that the business generate income.

Some examples include; an insurance business that has difficulty matching assets and liabilities, or a bank that has a different style of balance sheet, or maybe a traditional industrial company.

Tobias emphasis that they don’t eliminate stocks simply because they don’t like the business. Rather, they look through the nature of the business and how it’s reflected in the financial sentence.

2) Carbon Beach’s Special Situations Strategy

The other strategy that Tobias and his team run is something they term: “Special Situations”. It is a slightly more high level strategy that requires active management and deep research.

According to Tobias, a special situation is something that turns on a corporate act – i.e. there’s a board level decision made to:

  • sell an asset
  • buy an asset
  • buy back stock
  • pay a special dividend
  • return capital
  • liquidate
  • buy another company
  • etc

When those decisions are made, sometimes there’s a difference between where the stock is trading in the stock market and an implied valuation when the event closes.

They look for all of those different types of trades.

For example, the traditional merger arbitrage. When a company is being taken over. The bid might be $10, and the stock might be trading at $9.75. You could buy the company that’s being taken over and short the company that’s doing the acquisition, to try and get that arbitrage of $0.25 between the two.

Carbon Beach doesn’t buy into traditional merger arbitrage directly, instead they wait until the deal gets into trouble.

If there’s some risk that the transaction may not go through, or if it looks like the transactions are not going to go through, usually the stock prices will drop.

If Tobias and his team think that the company that’s being acquired is still very cheap, they would weigh their odds.

The downside might be that the company doesn’t get acquired. If that happens, Carbon Beach would have already bought the stock for cheap.

They’d also estimate the likelihood of the acquisition going through and factor the potential risk and reward into their analysis.

Tobias shares an example:

“Let’s say the likelihood of the acquisition going through is a 1/5 chance. That would mean; there is 1/5 chance that you get a very good return. AND, there’s a 4/5 chance that you end up holding a very undervalued stock—it should be worth more down the line anyway.”

They’ll look at a position and make an investing decision by weighing the risk-reward ratio for each scenario.

Their aim is to try to invest in the way that gives them the best expression of the risk-reward for the situation.

More about Tobias Carlisle

If you’d like to get in touch with Tobias Carlisle, you can reach him via Twitter, @greenbackd. He has just released “The Acquirer’s Multiple”, along with a free screener at, which has got the cheapest 30 of the top thousand stocks in the US at any given time.

Useful Resources:

Alvin Chow
Alvin Chow
CEO of Dr Wealth. Built a business to empower DIY investors to make better investments. A believer of the Factor-based Investing approach and runs a Multi-Factor Portfolio that taps on the Value, Size, and Profitability Factors. Conducts the flagship Intelligent Investor Immersive program under Dr Wealth. An author of Secrets of Singapore Trading Gurus and Singapore Permanent Portfolio. Featured on various media such as MoneyFM 89.3, Kiss92, Straits Times and Lianhe Zaobao. Given talks at events organised by SGX, DBS, CPF and many others.
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