This episode I chat with Toby Carlisle, a managing member at Carbon Beach Asset Management and author of popular value investing books such as Deep Value and The Acquirer’s Multiple. Toby’s approach to value investing evolved from his observations as a corporate lawyer in Australia during the burst of the dot-com bubble. Watching investors target cash-rich, business poor dot-com companies confused his traditional, discounted-cash flow mentality. But after watching these activists get their hands dirty, Toby realized that even bad companies can be attractive if they’re trading at a deep discount to liquidation value.
We navigate a wide range of topics, including uses and limits of quantitative investing in the realm of special situations, how Apple can be a deep value stock, and why using the opposite of your signal to build a short book might be a bad idea.
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2:09 – Toby starts at the beginning: with school classes that included sheering sheep in Australia.
4:03 – The peak of the dot-com bubble, mergers & acquisitions, and, “you can’t do a DCF on something that’s losing money.”
4:40 – How Toby became an “activist” and the influence of the latter chapters of Benjamin Graham’s Security Analysis.
7:16 – Corey asks Toby to discuss the differences between the Australian and U.S. equity markets.
8:51 – The catalyst for starting Toby’s blog, Greenbackd and the net-net opportunities available in the credit crisis.
10:14 – Toby reflects on his 250% return in 2009 and learns a significant lesson.
12:14 – The common occurrence in deep value investing: it’s scary because it’s often the companies that are losing the most money.
13:42 – The influence of James Montier’s Painting by Numbers: An Ode to Quant and evidence suggesting that simple models can beat experts.
16:28 – The broken leg theory and asking, “when is it okay to override my model?”
17:35 – Toby discusses the origins of The Acquirer’s Multiple.
19:48 – Discussing Joel Greenblatt’s The Little Book That Beats the Market and the mean-reversionary nature of return on invested capital.
23:38 – Re-reading Buffett’s letters and why ROIC may be a poor measure of a “moat.”
27:06 – Corey asks Toby to provide his perspective on the value investing landscape, where he falls within it, and why the Acquirer’s Multiple is the right metric for the investing problem he is trying to solve.
31:34 – Toby discusses why Apple can screen well when using the Acquirer’s Multiple.
34:15 – Corey asks Toby pivot to discussing special situations and whether it is possible to employ a systematic investment approach.
40:41 – Toby provides an example of why special situations is more of a “Swiss army knife” approach to investing.
43:01 – Toby discusses how he thinks about sourcing ideas and building a book of special situations investments.
44:54 – Looking for a “lazy” balance sheet.
47:07 – Why using the inverse of your long signals may not be sufficient for creating an effective short book.
51:03 – Moving beyond the Acquirer’s Multiple and thinking about how to build a portfolio of deep value stocks.
53:29 – Corey asks Toby about the results of the quant value “horse race” that was performed in Toby’s book Quantitative Value (co-authored with Wesley Gray). Toby discusses using compound versus individual measures of value.
56:18 – If you were an investment strategy, what would you be and why?