We sold all the assets in the business, we paid out all the liabilities and whatever sort of residue was left after we did that. Now, most businesses don’t actually have much in the way of liquidation value because they’re more valuable as a going concern, which means they’re more valuable as the business is operating. So then the next stage and that is what is the business worth, if there’s no growth. So that’s called the earnings power value. You kind of look at what they’re making this year. You just assume that they’re basically going to keep on making that amount of money. You discount that back to the present day, and that’s earnings power value.

And then there’s this growth value. And so that’s, you know, you look at the rate of growth in the business, you look at where it can get to, like how big the market is and where it can get to over a period of a decade or two decades. And then you discount that back to the present day. So that growth, investing, the growth value is more like what Buffett does, he’s looking for very high growth businesses that are very profitable. And then he’s trying to discount that back to the present day and buy that at a big discount of that value., That’s the hardest of the three to do. I think liquidation value is the easiest of the three to do. And it’s power value is probably that’s… The problem with liquidation value is there’s just not very many of them out there.

So what I tend to do is I’m more of an earnings power guy or a method that I use is called the Acquirer’s Multiple. So basically, when you look at a business, the question is always what am I paying? And what am I getting? And what the Acquirer’s Multiple does is it says what you’re paying is you’re not just buying the equity which is the stock price, multiplied by the number of shares that are up.

You think like an acquirer. So you have to think about how much debt does this company have? Are there any *inaudible shares? Are there underfunded pensions? Are there other liabilities that I have to consider as an acquirer? And then on the other hand, you look at what you’re getting and the purest version of what you’re getting is operating income, provided that operating income matches sort of the cash flows out of business, that’s a pretty good proxy for the cash flows. And so you try to just buy as cheaply as you possibly can to get as much operating income flowing in and you hope that over time, if you buy enough of these really cheap things, that you’ll do a little bit better than the market because the market tends to be a little bit more expensive. So that’s value investing, just trying to buy something for less than it’s worth. But then the idea is really simple. The execution of it is a little bit more complicated.

Robert Leonard 7:49
Yeah, that’s exactly what I was gonna say, that last point was the concept and the idea of value investing is actually relatively simple, but putting it into practice and being successful with it, now that’s Very difficult.

Tobias Carlisle 8:01
And to make it even more complicated, once you get used to doing the valuations, the valuations aren’t really the hard thing. The growth valuation I think is very hard. Just because you find a lot of these companies that look like they’re growing at a very high rate, and at the time that you go to buy it that future growth is in question, that’s literally why they’re. They’re going through whatever issue that they’re going through that’s making them available at the time. So the challenge is really a mental, psychological, and behavioral one.

And you have to come up with some method to get over that behavioral issue that you have when you find these things. A lot of that is just doing reps. Like if you just value companies over and over again and buy them over and over again, you find that you make a lot of mistakes. You get some things that you get right, you just kind of iterate towards it. And then you do something probably, you end up doing something like what I do, which is just I think the growth stuff is really hard. So for the most part I avoid it and I just try to buy things using this earnings power value method that I call the Acquirer’s Multiple. And so that’s sort of a simpler way of doing it. I’ve got a really disciplined process around it. That saves me from making a lot of those behavioral errors.

Robert Leonard 9:10
Assuming that somebody is interested in picking individual stocks, why would a strategy like yours be better or perform better than other strategies? Like maybe a growth strategy?

Tobias Carlisle 9:21
So that’s a good question. So, I did some research in 2012 that became a book called Quantitative Value. Basically, what we did is we went and found every bit of fundamental research that had been done by academia or by industry, and tried to find the things that work so we look for, you know, how do you know if a company’s manipulating its earnings, heading off companies in financial distress, had enough of this fraud going on? How do you know if the cash flows are real and they’re sort of matching with what the accounting earnings are saying? Because that’s taken in trouble so a company like Enron, which was a pretty famous bankruptcy, it didn’t have the cash flows that matched its accounting earnings. Its accounting earnings were fictional. And one of the ways that you can pick that up was using some of these little ratios and financial metrics that we discussed in the book.

So we went through and we tested all these different ideas, how do you find good companies? How do you find financially robust companies? How do you find undervalued companies? What we found is one metric that stands out and that’s enterprise value on EBIT, which is operating income. So that’s what I call the Acquirer’s Multiple. That’s been historically been the best way of choosing companies. And then the the Buffett method, what growth guys like to use often is this return on invested capital metrics.

So what Buffett says he looks for is sustainable high returns on invested capital. So return on invested capital is how much profit does a business make out of the amount of money that’s invested in it? So if I put $100 to start a business, and that might buy a lemonade stand or whatever, if the lemonade stand makes $10 return on invested capital of that is this $10 on $100. So it’s 10%. So the average return on invested capital for S&P 500 companies is about between 11% and 13%. And that roughly matches the long run returns on the market. So the way that you can get a better return is you buy a 10% or 13% return on invested capital at a discount to the market. So you get a higher return at a lower price and you should get better returns. That’s the theory.

The problem is when you go to put it into practice. You find the business cycle interrupts what you’re trying to do. So what the business cycle says is that companies with very high returns on invested capital tend to be closer to the top of the business cycle. If you buy them cheaply, you buy them with the returns on invested capital for after you buy them. So the way that you avoid that is you look for and this is what Buffett is saying, a sustainable high return on invested capital. It’s very important. And the way that you get a sustainable high return on invested capital is through a competitive advantage. He describes it as a moat.

So that is some way of selling your products at a higher price than your competitors are selling more of them than your competitors or having a lower cost basis. So you basically make more money when you sell these things. It’s a theory that’s pretty easy to state. But again, it’s really, really hard to execute on it. So there’s been a lot of research into identifying competitive advantages. And nobody’s been able to do it really successfully and consistently. You can’t test the competitive advantage part of it, but you can test return on invested capital.

So there’s a pretty famous book by Joel Greenblatt called the The Little Book That Still Beats the Market. In there, he talks about Buffett’s strategy and he says Buffett looks for wonderful companies at fair prices. And so Buffett uses, Greenblatt uses for the wonderful companies what Buffett says he does is a high return on invested capital. And then for a fair price, he uses EV/EBIT, which is what I was talking about before as the Acquirer’s Multiple. Greenblatt calls it earnings yield.

So what he does, he just ranks every company on return on invested capital and EV/EBIT. And then he combines the rankings together to find the best. And so when he does that he finds that little strategy beats the market. That’s like a quantitative version of what Buffett does. So we tested that in Quantitative Value, we threw everything at it, we could think of, you know, making it by big companies, making it by after the filings have been out in the market for a long time. So everybody else gets an opportunity to trade in front of it. All these other things. It definitely works, it definitely beats the market that strategy.

The problem is if you look at the components of it, so the two components are, EV/EBIT that’s the value side of it, and the quality side of it is return on invested capital. The value side of it delivers all of the return and more. And the return on invested capital side detracts from the returns. And the reason for that is because of that business cycle that I was talking about before you buy these high return on invested capital companies, and their return on invested capital declines after you own them. So if you just eliminate that, and you just buy these cheap companies, you get better returns. So that’s basically what I’ve tried to do.

Robert Leonard 14:08
How can a strategy like that still exist in today’s day and age when there’s hedge funds and large investors that can generally take away those opportunities that are really driven based on quantitative data? What else are you looking at when you’re analyzing companies?

Tobias Carlisle 14:26
So that’s a really good question. So the last there are periods of time where that sort of value strategy doesn’t work. The late 1990s was a very famous one in the .com, boom, and it hasn’t worked over the last 10 years. In the data that we have going back to 1928, it hasn’t worked about six times. And every one of those six times is basically a pretty infamous bull market bubble boom, that was followed by a crash. So there’s been no crash falling this bull market. You know, you could say yet, or maybe it just goes on for… This has been a very, very long period of underperformance for this strategy. So that’s one of the reasons why I think the strategy continues to work because there’s a lot of funds that just can’t underperform for a long period of time, otherwise they go out of business. But there are a lot of guys who are value investors who are still trying to chase this kind of strategy. So there’s a lot of competition for it.

The other thing is that you can execute the strategy in a much smaller market. If you’re an individual investor, you don’t have to go and chase the very big companies that all of the hedge funds have to invest in. So I run an ETF called the Acquirer’s Fund. We invest in the largest 1500 companies because we can’t really buy below those top 1500 companies because they’re just too small that side of that, but they’re like 20,000 companies listed in the US. So you can hunt outside of that market and invest in those companies.

Again, the problem is over the last decade, small companies haven’t done as well as they have historically. So they’ve underperformed as well. So it’s a funny market where small hasn’t worked, value hasn’t worked. And that’s kind of what keeps the strategy evergreen because people can’t be in those strategies and underperforming. So you kind of have to believe in the logic of it, in order to keep on executing it through periods of time where it doesn’t work. I think that I probably seen already the bottom for this strategy because on August 27, was kind of as wide as the spread between undervalued companies and overvalued companies. That’s as wide as it got. And it’s been closing since then.

September 9 was a very notable day because it was the biggest one day gain for generic value strategies since 2001. And it was the worst day for momentum strategies since 2001 as well. And then that followed through again on the next day. So they called that… was basically there’s a lot of companies out there, a lot of hedge funds chasing boats, very high momentum stocks, so they got hit really hard. And then it’s been a pretty good run since that period. So I think that value, and I hope that value is back. But it has had a number of head fakes too already. So it looks like it’s back and it kind of goes away. And so I don’t really know. But those are pretty encouraging signa. So I think it’s a good time to be a value investor. But you have to be prepared to underperform for long periods.

Robert Leonard 17:17
Do you think there’s a psychological component to this where people who aren’t as disciplined as you take on a value strategy, and they start to do it for six months or a year, maybe even a little longer? And they see it’s underperforming. They look at the S&P 500 or they look at their friends, or just they read the news and they hear all these growth strategies are just absolutely killing it, where their value funds are either, you know, losing money, or just treading water and they jump strategies? Do you think that’s a component as to why this strategy still exists?

Tobias Carlisle 17:47
100% I think that that’s like the hardest thing about value is value investing is not doing the valuations. It’s the psychological part where you find something that’s going down You think it is undervalued, but it’s going down. So when do you buy, I mean, if you buy today, it’s probably going to keep on going down tomorrow and the next day and the next day after that. And it can go against you for a long time, you know, for months and months and months. And then that’s just an individual company, that entire strategy can go against you for years.

And it’s hard to think that for all of the effort that you’re putting in valuing these companies, that it’s not resulting in any good outcomes, that you’re doing something wrong. But I think that there’s some very good long run data on it. And that’s what sort of helps me with the psychological aspect. I’ve looked at as far back as we can go. So you can go back to I think 1920 with pretty good data in using book value data and you can get back to 51 with cash flow data and price to earnings data. If you look at that, it’s just overwhelming how much better the undervalued stuff does compared to the market and to the overvalued stuff, but you can see in it that there are these long periods, five year or 10 year periods where it doesn’t work. That’s what keeps it going.

Robert Leonard 19:01
What’s an example of an individual company that you’re interested in right now?

Tobias Carlisle 19:05
So the things that have… the sectors that have been really beaten up recently have been financials because 10 years ago, there was a terrible credit crisis. A lot of these companies look like they were gonna go to the wall, if they weren’t bailed out by the government. They’ve had to repair all of their balance sheets over 10 years. And now the rules for how much capital they have are much more strict so they’re pretty well capitalized. They’ve also unfavorable interest rate environment for them. So banks qnd financials are undervalued as a sector. And so you can go through those and you can find Bank of America I think is undervalued and a really well run bank. Wells Fargo, undervalued, really well run bank.

And then in things like energy, when the oil price is low, there’s probably a little bit of weakness in the global economy, which is like the demand side of oil and so the oil price I think is in the low 50s at the moment. A lot of these companies can’t make money at that level. So if you look around you can find there’s a company called ConocoPhillips *inaudible. I think it’s very undervalued. It’s got a huge buyback. They’ve jacked up their dividend. It’s one of those companies that it’s probably going to do fine if the oil price recovers and it doesn’t really even mean that it’s generating *what’s the cash.

The other one is Hewlett Packard. That’s one that I find particularly interesting at the moment for the market caps. Hewlett Packard is another $30 billion company, it’s got virtually no debt. So it’s a $30 billion enterprise value. They’ve said in 2020, that they’ll make $3 billion in free cash flow. So it’s a 10% free cash for you. They’ve announced a $5 billion buyback of $1.7 billion outstanding on their current buyback. So that’s $6.7 billion and a $30 billion market cap, that’s a massive buyback that they can undertake. And they’ve jacked up their dividend as well. In addition to that, Xerox is trying to bid for them. So they’re trading around 20 bucks, just $20. Xerox has been 22 which is not particularly interesting, but maybe Xerox comes back with 25. And the deal gets done. Carl Icahn is on both sides of the transaction, trying to push the transaction through. So I think that that’s kind of an interesting asymmetric bet where your downside is, is not very much because they’re doing so much good stuff in the business anyway. And then your upside is maybe you get a near term, easy 25% on that position, so I like HP Q is probably my favorite, that’s Hewlett Packard. That’s the printer side of the business.

I also do some shorting so that’s unusual for a value guy but my shorts… so I’ve had a short on Canada Goose for a little while which they make the jackets that you know you got to pay $750 for a jacket. But it probably makes more sense in Boston, it doesn’t make a great deal of sense in Los Angeles because it’s way too hot. But they’ve got, basically they lose money for three quarters of the year and they make all of their money in this quarter and they’re probably going to make more money this quarter than they did in the 2018 Q4.

But the problem is they’ve been, the balance sheet gets weaker and weaker every year, they’ve got $569 million in debt, they got $34 million in cash on the balance sheet. They’re negative free cash flowing most of the year, enterprise value to EBIT, which is what I call the Acquirer’s Multiple is 30, which is very expensive. *Breast earnings 36, very, very expensive, or a whole lot of inventory expecting a really good q4. And they’ve come out and said, Hong Kong, you know the riots and so on in Hong Kong, are impacting their sales. And that was kind of, without looking for a lot of sales growth. So I’ve had a short on, it’s been working, I think they’re down between 15% and 20%. Since we put that on, at the beginning of this quarter, in a market that’s been pretty strong so that the relative performance is good with something like Canada Goose. So that’s sort of what I do on a day to day basis. I try to find things that are cheap, try to find things that are overvalued, try to find a catalyst for realizing the underlying value and that’s what we’re doing so far.

Robert Leonard 23:01
I want to talk about two things there that you brought up, Canada Goose, I want to dive into that a little bit more. And also you just briefly mentioned it, but you mentioned Wells Fargo. And I want to talk about that, because I think it’s interesting, especially for a new value investor, where they might think it’s a value opportunity, but they hear all the negative press and they might not be sure if it’s a true issue, or if it’s just an opportunity. So how can you cut through the noise and know that Wells Fargo is just a short term issue, and they’re going to get through it. And that’s actually a value play and not a value trap? Whereas something like maybe GE is having a similar type noise of bad press, but that may or may not be as much of a value opportunity and maybe more of a value trap. So how do you kind of cut through that noise and determine if it’s really a value opportunity or if there’s a real problem with the company?

Tobias Carlisle 23:51
Yeah, that’s a great question. There’s a few differences between Wells Fargo and GE and the first difference between the two is GE has massive amounts of debt. And GE has got some near term liquidity issues that mean that the debt might become a real issue. And so it’s possible that GE is not worth anything. The balance sheet of GE is so heavily indebted that it’s possible GE is not worth anything, it has to be able to…. When I value things, I think there’s two components to the value. There’s what’s on the balance sheet, and that’s what they own and what they owe. And if there’s some residue of assets or liabilities, that’s kind of your buckstop, that’s what the balance sheet is worth.

And then you also have a business value. Some businesses are worth less than nothing because they lose money all the time. Some businesses are worth a lot because they make a lot of money and they grow really quickly. GE has good businesses, for the most part. They have very good businesses that are worth a lot of money, but the balance sheet is very weak. Balance sheet weakness is only an issue, if you have some liquidity problems. You don’t have enough cash to meet your debt as in when they fold you.

I don’t think that GE really is going to go into bankruptcy or insolvency. I don’t think that’s going to happen. But I think that it’s a much riskier proposition with something like Wells Fargo, because banks are always heavily leveraged, they’ve always got lots of debt. That’s how they make their money. You have to kind of understand, again, the business side of Wells Fargo. Wells Fargo is really good business. It’s been around for a very long time. Buffett has a big holding in it, which is, you know, that should give you some encouragement, although you do have to be careful. Every single time I’ve lost money in every single position, I’ve lost it in, it’s always been some super investor in there who’s holding the position.

So what you’re trying to do, or what I’m trying to do, I know that I’m going to make a lot of mistakes when I put these positions on and on. And I know my mistake, right is I get 52% of them right, and I get 48% of them wrong. So that’s basically a coin flip. So why would you do that? Because the winners are going to be so much bigger than the losers.

We try to truncate the losses pretty quickly. If we’ve made a mistake, we’ll just get out of them, not worry about it. If we’re in something that’s working, then we’ll stay in it for a long time, hold on to it, and try not to sell it too soon. And so we’ll try to make more money that’s trying to create these asymmetric positions. And I say asymmetric because there’s limited downside and much bigger upside. And then when I go to look at a position I’m going to put on, often, it’s a question of whether what the thing is worth. To me it looks optically cheap, which is why I’m putting the thing on. If I’m wrong, then it’s already really cheap. Like, it’s probably not going to suffer too much from where it is already. I’m probably not going to lose too much money. But if I’m right, because it’s optically cheap, it’s going to rewrite to a rating that’s closer to what the market is paying for this sort of businesses. And that’s how you make the game.

So I’m always looking for things where I love positions where there’s a big argument. So Tesla’s a good example of that. In both camps of Tesla, there are people who are rabid fans and there are rabid haters and they both think they are right. And in any given quarter, the bulls have been right and the bears have been right. It’s a really tough stock to be in but if it comes into my screen, I will short it.

I’m not going to be along Tesla because it triggers a whole lot of red flags in my system. So I’ve been shorted this quarter, but we’ve been wrong to the chin of like 44%. This quarter, it’s gone against us 44%. It doesn’t hurt us in the fund, because we only put shorts on at 1%. So it’s cost us .4% in the fund, and it’s likely that we put back on again next quarter, and it’s probably going to go the other way next quarter. So I’m not too worried about that. But that’s an interesting position because it illustrates, it’s one of those stories stocks where both sides are equally convinced that they’re right. The bears are very loud, the bulls are very loud. One side is going to be right there, that’s going to be wrong. You just want to get paid when you’re right and not get hurt too badly when you’re wrong, even though that’s an exact, that’s the worst shot that we’ve had this year.

Robert Leonard 27:43
So for somebody who has never heard of shorting or has never shorted a stock, what exactly is it?

Tobias Carlisle 27:48
So shorting is just buying something long, but reversed and the idea is that you borrow the stock, someone who owns it, and you sell it, you hope the price goes down. You can buy it back at a later date at a low price. And so you make your money, you are still trying to buy and sell high, you’re just doing it in the reverse or you’re selling high and buying low. That to confuse the matter, to make it more complicated, you have to borrow the stock. And so you have to pay the holder of the stock to borrow. When shorts are very popular, like Tesla, it’s an expensive borrow.

So it hasn’t worked out very well for us this quarter. But that’s the idea. We try not to short the most expensive short *stocks to short we screen them out. We don’t short them. But for whatever reason, the time that we went to put… then usually Tesla is one of the most heavily shorted stock so it’s not one that you can put on, the time that we went to put it on it was not in the 1% of most heavily shorted stocks. We shorted it. It went against us so it’s gone up. So we’ll cover that. We may cover that at the end of the quarter and we’ll probably lose some money on it. So that’s the problem with shorting when it goes against you and you lose money.

Robert Leonard 28:55
And so let’s go back to Canada Goose. You mentioned that there is some logistical issues or potential sales issues that they’re going to have due to the Hong Kong riots. And that certainly can be a characteristic of a good short, but you also mentioned valuation. And that’s a big proponent of why you want to short it. I know that that can be a risky component of shorting based on just valuation because obviously things can stay overvalued much longer than we can stay solvent. That’s one of my favorite quotes. So talk to us about that a little bit. How do you work through that?

Tobias Carlisle 29:30
So you don’t want to short just because you think something is expensive. That’s the wrong way to go about shorting. The way that we go about shorting is we work backwards from do we think that there’s some financial distres? And the way that we would identify financial distress is the company losing money on it? Is it negative on a cash flow basis? And then does it carry a lot of debt? If you’ve got those two things together, that means that at some stage they have to raise money. We then look for what we call broken momentum.

Broken momentum is just whether it’s stocks going up, if a stock is no longer going… So these companies that people like to short on a valuation basis, often, they get up a lot every year. There are lots of famous people who’ve been shorting Netflix for a long time, Tesla for a long time. Lululemon all these companies, because they look really expensive, but because the underlying businesses are so strong for the most part. Every quarter, they have a really good quarter. And if you’re short gets blown out 30% that just happens quarter after quarter after quarter until you cover.

So the way to avoid that is to not short on the basis of valuation, but to short for financial distress, fraud, statistical fraud, statistical earnings manipulation, then you often find that these things are way overvalued. You don’t want to short a good business basically, that you want to be short, something that has some sort of issue that must be capitalized on and must be brought to a head, probably by raising debt or by selling shares. And when they do that often, they have to be rerouted down.

So that’s why when I look at Tesla, for example, it loses money every quarter. It’s negative free cash flow. It carries an enormous amount of debt. And it’s a business that requires a lot of capital because it’s a middle bender, they make cars. It’s not like a software as a service business where the incremental sale is basically costless. To expand the capacity on a car, you need another factory. And that’s expensive to build, and it requires capital. And the only way to get that capital, if you’re losing money and you’ve got a lot of debt is by raising equity probably, or by raising a bit more debt. When they do that, they’ll have to do a lower price.

To give Musk credit, I think Musk is a genius. I think he’s done an incredible job with that company getting it to where it is. I think that they’re probably getting close to running out of the runway. I might be wrong. But you know, it’s one of those things that the question at the moment, you sort of paid the position on so that’s where we’ve had the position on we’ve probably, we may have it on again, we just need to revisit it at the end of the quarter.

Robert Leonard 31:59
So whether it be short or long, how do stocks generally end up on your radar?

Tobias Carlisle 32:05
So I have a screening process. That’s what I’ve written in the book. So the most recent book that I wrote was called the Acquirer’s Multiple that describes how we go about building our screen for the most part. Quantitative Value is the most technical book that came out in 2012. That describes all of the steps in building a quantitative value screen. And so that’s, you know, looking for financial strength, looking for business quality, looking for under valuation, and trying to avoid things that are financially distressed or have some indications of statistical fraud or statistical earnings manipulation. So that’s all built into the screen.

What that does is that it spits out a list of names and then we go and we do a forensic accounting diligence on them because a lot of the numbers need to be adjusted, because at the end of every quarter, management teams are trying to make the quarter look as good as they possibly can. So they might bring forward sales, they do lots of things. They recognize foreign currency movements, things like that, and it just kind of muddies what happens in the statement. So we need to unpack all of that and adjust it. So that our model is looking at the economic reality of the business and not just the financial statements. So we go through this forensic accounting diligence as a sort of valuation step. And then if the company’s still undervalued after doing all of that, and most of the time what you’re doing is reducing the earnings because that’s what the impact of all the accounting shenanigans are at end of every quarter. We reduce the earnings. If it’s still in undervalued, that goes in the portfolio.

Robert Leonard 33:37
So, so far, we’ve talked a lot about picking individual stocks, but is that really the best way for someone to get started investing? What if they know they would like to invest their money, but they’re not really interested in picking individual stocks themselves? Where should they start?

Tobias Carlisle 33:54
Well, there’s lots of different ways that you can do it. You can screen so that you can have some sort of quantitative strategy where you… I have a website, acquirersmultiple.com. There’s a free screener on that. You can pull down a whole list of names that have a low multiple, and also, you know, generating cash flow, doing all these other things, buying back stock, paying dividends. All the things that I like to see in a business. So that’s often the easiest way of doing it, either screening or by buying a fund.

I don’t think that you learn a great deal just by buying the fund. Lord, I think I’ve always like tried to own a little bit of Berkshire Hathaway because I like, I like the way Buffett invests, and it makes me read the annual reports more closely or read Buffett’s letters to try to understand what he does. I follow guys who are investors who I respect, so I followed Carl Icahn, followed David Einhorn, Buffett, of course. And then lots of other guys who are sort of value investors who are doing deep fundamental research. I think that’s a great way of learning.

So those are the ways of doing it, you either follow super investors, gind a mentor, or a screen that works really well, invest in a fund. I think those are the best ways of learning. But I think that the only way to learn finally is to go and do it for yourself and to do little valuations on companies, buy a little bit of the stock, see how it goes, figure out what works and what doesn’t work, find out what mistakes you keep on making. You know, you might not be a very good business analyst, you might not be a very good balance sheet analyst, you might miss the fact there’s a convertible note in the accounts. It’s all that sort of things that every time you do something and get it wrong, it teaches you a valuable lesson over time and that sort of adds up to a pretty good process. That’s what I’ve done anyway to get to this point.

Robert Leonard 35:40
And even if the listener were to have the exact calculations right, and they consider everything that they should, by buying those small positions, like you mentioned, you’ll get that psychological test, which is arguably, even more difficult.

Tobias Carlisle 35:54
100% I think that’s a good approach. If you’re thinking about buying something, you should buy a little bit of it, because that is the thing that focuses your mind on it.La like you can do a lot of research. But then until you buy a position, you don’t really, you’re not psychologically invested in as soon as you put even at 1% position on. All of a sudden you’re watching it and hoping it goes in the direction that you want it to go. If it goes against you, you’re not beating yourself up so much, because you’ve only got 1% in there and you can do some more work and figure out if you really want to put a lot of money into this thing. If it works for you, then you know you didn’t do very much work and you got a little bit lucky and so that’s good too.

Robert Leonard 36:32
Yeah, I think that’s so so true. That’s exactly what I do because with the trend or the move to zero trade commissions, it makes that even more possible. I almost did. I think it was the day of or the day after that that happened. I went out and bought 10 positions I think that I was interested in but it didn’t make sense for me to buy because for one example is Square, I had some one to get a couple shares of Square and they were like 50-60 bucks a share. $5 commission that’s almost 10% of that position. It just did not make sense but with zero commissions? Now you could go buy one share of all these companies, get them on your radar, have a psychological factor that makes you want to look into it more and now you can go research them.

Tobias Carlisle 37:11
I think that’s smart. That is one thing that you used to have to be careful of when I wasn’t investing a lot of money. You could and this was when I started out commissions for what higher than they are now. You had to be very careful. If you only had a few hundred dollars to buy a single stock and commissions for you know, $15, that’s $15 in $15 out. You got to do really well to get over the $30 gap. You know, that’s a 15% return before you’re even breaking even.

Robert Leonard 37:35
Yeah, absolutely. So we’re definitely lucky today that we have zero trade commissions. What do you think is one of the most important books for a new investor to start reading?

Tobias Carlisle 37:45
I would read for free. I would just go and read Buffett’s letters because they’re online. Each one is, you know, 5000 words long. There’s weeks and weeks of reading there. And then I’d go and read a biography on Buffett. There’s a Lowenstein Buffett Biography that’s really easy to read, you know, fascinating about the guy. That’s kind of what inspired me when I first got started. Because you find that reading through accounting is really boring. You know, understanding some of these businesses, it’s really boring.

Insurance is just a really boring business, you have to have some reason to force yourself to go through and learn accounting. So I hated accounting when I studied it at college, but I got much better at it when I had a good reason to understand it. So I think that if you read Buffett’s letters, like that’s the best education you can get in investing anywhere. Reading his biography by Lowenstein, there’s one called the Snowball. That’s a much bigger read. If you read Lowenstein and you like it, then go and get the Snowball because that’s like three times as long and in much more detail.

I don’t know that you necessarily learn that more, much more, but it’s kind of like you want that extra detail if you love it. So I think that’s kind of the best way of doing it. That’s all I did. And then just go and find, you’ll find Buffett talks about books in his letters. It’s worth tracking those books down and ¥ou’ll find him talking about people or you’ll run across interesting investors. And then as you do it, you’ll develop your own style. And so I tended to go more deep value, because that’s my training as a lawyer, but some people will find it they love, you know, internet businesses or software as a service. Maybe you like, consumer, or you like something else, another direct way that you that you develop as an investor in sort of stuff that you want to read. So I think that’s stuck with Buffett, and then kind of work your way up.

Robert Leonard 39:28
You know, once you start reading, you almost never have enough time to read all of the books that you stumble upon. Every book you read will have a recommendation to at least another book, or two or three, and then you read those and those each have their own recommendation so quickly it piles up. I know I have behind me, I have a bookshelf of about 190 books, and it’s just a combination of them just piling up and piling up.

Tobias Carlisle 39:50
Yeah, that’s it, you’ll never get to the end of it. That’s one of the nice things about investing, one of the bad things too you know, whenever I lose money, so that’s another lesson but I feel like I’m old enough and I’ve met enough mistakes now that I don’t really want many more lessons. But you know, that’s the thing about the market. It keeps on delivering the lesson. So you got to keep on reading, but to keep on improving. That’s one of the fun things about it is really, studies never finish.

Robert Leonard 40:13
Yeah, you will absolutely never know it all. You got to take action and learn that way, too. So, what has been the most valuable piece of investing advice that you’ve ever received? And why?

Tobias Carlisle 40:25
I tend to think that advice is something that you give away. And it’s not something that you should take and use yourself. There’s so many lessons, Howard Mark says that a *great book is the most important thing and the reason that he calls it the most important thing is that every single thing he says in there is like this is the most important thing. And he gives some message and then he says, “No, this is the most important thing and he gives some message. It’s hard to narrow it down.”

I would say that, for me, the most important thing is just making sure that you don’t put too much money into any individual stock. Because I’ve seen so many guys blow up because they bought they put 100 percent of what they’re worth into an individual stock. They are just certain and they’re wrong. You just have to have some humility, you have to realize that I know that I’m going to make lots of mistakes. And so I assume that every position that I’ve put on could easily be a mistake.

It’s hard because you want to be, you know, some of them are going to work out and you want to be more heavily invested in the ones that work out. That’s the problem with it. *inaudible under on the stuff that works really well and you own too much of the stuff that doesn’t work. You know that the name of the game is longevity. The longer you do it, the better you’ll become. And the more you’ll grow your capital. The worst thing that you can do is be taken out. So you just want to make sure you can stay in and one way of doing is just sort of being diversified and owning enough positions.

Robert Leonard 41:40
That reminds me of two quotes I really like. The first one is often credited to Mark Twain, and he says, “What gets us into trouble is not what we don’t know. It’s what we know for sure that just ain’t so.” And I think that is so applicable to investing and everything you were just saying. And the second is from Warren Buffett, he says, “Never forget the two most important rules of investing. Rule number one, never lose money. Rule number two, never forget rule number one.” Toby, as always, thanks so much for your time and coming on the show today. Where can the audience go to connect with you?

Tobias Carlisle 42:16
Thanks so much for having me, Robert. I’m on Twitter all the time. So I have a funny spelling. My handle is @Greenbackd, but it’s a funny spelling, it’s @Greenbackd. I have a website, acquirersmultiple.com. I have a firm called acquirersfunds.com. And I run a fund called the Acquirer’s Fund, and the ticket for that is the *ZIGZ. And you can go to acquirersfund.com. And I have an interview with Bloomberg on there. And you can see the holdings, you can see the historical performance, and you can see the thesis and what we’re sort of trying to do on there. Also the book, Acquirer’s Multiple, is probably the simplest explanation of what I do. It’s like you can read it in two hours. It describes the strategy really simply and it’s like *$9.99 on Kindle, so iit’s cheap.

Robert Leonard 43:05
Yeah, absolutely. I’ve loved the Acquirer’s Multiple book. I’ve read it a few times myself, and I’ll be sure to put links to all of your resources in the show notes. You guys should go check it out. Toby, thanks so much.

Tobias Carlisle 43:17
Thanks, Robert. Thanks for having a really appreciate it.

Robert Leonard 43:19
Alright guys, that’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week.

Outro 43:26
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