The Acquirer’s

Multiple:
How the
Billionaire
Contrarians of
Deep Value Beat
the Market

TOBIAS E. CARLISLE
Copyright © 2017 Tobias E. Carlisle
All rights reserved.
ISBN: 0692928855
ISBN-13: 978-0692928851
 DEDICATION

For Nick, Stell, Tom, and Olly.

 ACKNOWLEDGMENTS

I am grateful to the reviewers of this book, notably Johnny

Hopkins, Jacob Taylor and Lonnie Rush at Farnam Street
Investments, Michael Seckler and John Alberg at
Euclidean Technologies, Jan Cliff at Kevin Bay
Investments and my wife, Nick.

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 THE ACQUIRER’S MULTIPLE

ABOUT THE AUTHOR

Tobias Carlisle is the founder and
managing director of Acquirers Funds,
LLC. He serves as portfolio manager of
Acquirers Funds managed accounts and
funds.

He is the author of the bestselling

book Deep Value: Why Activists Investors
and Other Contrarians Battle for Control of
Losing Corporations (2014, Wiley
Finance). He is a coauthor of Concentrated Investing: Strategies
of the World’s Greatest Concentrated Value Investors (2016,
Wiley Finance) and Quantitative Value: A Practitioner’s
Guide to Automating Intelligent Investment and Eliminating
Behavioral Errors (2012, Wiley Finance). His books have
been translated into five languages. Tobias also runs the
websites [Link]—home of The Acquirer’s
Multiple stock screeners—and [Link]. His
Twitter handle is @greenbackd.

He has broad experience in investment management,

business valuation, corporate governance, and corporate
law. Before founding the precursor to Acquirers Funds in
2010, Tobias was an analyst at an activist hedge fund,
general counsel of a company listed on the Australian Stock
Exchange, and a corporate advisory lawyer. As a lawyer
specializing in mergers and acquisitions, he has advised on
deals across a range of industries in the United States, the
United Kingdom, China, Australia, Singapore, Bermuda,
Papua New Guinea, New Zealand, and Guam.

He is a graduate of the University of Queensland in

Australia with degrees in law (2001) and business
(management) (1999).

v
 1. HOW THE BILLIONAIRE
CONTRARIANS ZIG

Sweet Spot: A Good Idea That Seems Like a Bad Idea

Source: Paul Graham, “Black Swan Farming,” September 2012,
Available at [Link]

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 THE ACQUIRER’S MULTIPLE

Outsized Returns: Right and Nonconsensus

Source: Andy Rachleff, “Demystifying Venture Capital Economics, Part 1,”
Available at [Link]

Mean Reversion: Things Go Back Toward Normal

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 TOBIAS E. CARLISLE

Extrapolation: We Find the Trend and Extrapolate It

Competition: Growth and Profits Attract Competitors

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 THE ACQUIRER’S MULTIPLE

Fundamentals: Undervaluation Attracts Investors

Margin of Safety: The Bigger, the Better the Return

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 TOBIAS E. CARLISLE

Overreaction: Price Over-/Underestimates Profit

The Worst-Case Scenario: Time to Buy

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THE ACQUIRER’S MULTIPLE

Zig: Contrarians Expect Mean Reversion

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 TOBIAS E. CARLISLE

$10,000 Invested in the S&P 500 and the Magic

Formula (1973 to 2017)

Thirty Stocks with Market Cap $50 Million and Above

$10,000 Invested in the Acquirer’s Multiple,

Magic Formula, and S&P 500 (1973 to 2017)

Thirty Stocks with Market Cap $50 Million and Above

12
2. YOUNG BUFFETT’S HEDGE FUND

Buffett Partnership versus Dow (1957 to 1968)

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 TOBIAS E. CARLISLE

Buffett Partnership Performance (1957 to 1968)

Buffett Dow
Year Partnership Jones
1957 10.4% –8.4%
1958 40.9% 38.5%
1959 25.9% 20.0%
1960 22.8% –6.2%
1961 45.9% 22.4%
1962 13.9% –7.6%
1963 38.7% 20.6%
1964 27.8% 18.7%
1965 47.2% 14.2%
1966 20.4% –15.6%
1967 35.9% 19.0%
1968 58.8% 7.7%
Average
Return 31.6% 9.1%

14
 4. BUFFETT’S WONDERFUL
COMPANIES AT FAIR PRICES

Return on Capital: High Profitability Is Worth More

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 TOBIAS E. CARLISLE

Valuation: Low Return on Capital Means a Discount

High Return on Capital: Growth Creates Value

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 THE ACQUIRER’S MULTIPLE

Low Return on Capital: Growth Destroys Value

Business Cycle: High Returns Mean Revert Down

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 TOBIAS E. CARLISLE

Franchises: High Returns Resist Mean Reversion

18
 5. HOW TO BEAT THE LITTLE BOOK
THAT BEATS THE MARKET

$10,000 Invested in the S&P 500 and Magic

Formula (1973 to 2017)

Thirty Stocks with Market Cap $1 Billion and Above

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 TOBIAS E. CARLISLE

6. THE ACQUIRER’S MULTIPLE

Market Cap and a Share: Pizza and a Slice

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 THE ACQUIRER’S MULTIPLE

Market Cap and Share Prices: Up and Down

Market Cap, Shares, and Prices: How Many?

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 TOBIAS E. CARLISLE

Enterprise Value: The Whole Iceberg

Enterprise Value: Debt is Bad and Cash is Good

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 THE ACQUIRER’S MULTIPLE

Negative Enterprise Value: Extra Cash Is Great

Operating Earnings =
Revenue
- Cost of Goods Sold
- Selling, General, and Administrative Costs
- Depreciation and Amortization

23
 7. THE SECRET TO BEATING THE
MARKET

Market Cap $50 Million And Above

$10,000 Invested in Acquirer’s Multiple, Magic

Formula, and S&P 500 (1973 to 2017)

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 THE ACQUIRER’S MULTIPLE

Market Cap $200 Million And Above

$10,000 Invested in Acquirer’s Multiple, Magic

Formula, and S&P 500 (1973 to 2017)

Market Cap $1 Billion And Above

$10,000 Invested in Acquirer’s Multiple, Magic

Formula, and S&P 500 (1973 to 2017)

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 TOBIAS E. CARLISLE

Market Cap $50 Million And Above

$10,000 Invested in Acquirer’s Multiple, Magic

Formula, and Pure Charlie (1973 to 2017)

Market Cap $200 Million And Above

$10,000 Invested in Acquirer’s Multiple, Magic

Formula, and Pure Charlie (1973 to 2017)

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 THE ACQUIRER’S MULTIPLE

Market Cap $1 Billion And Above

$10,000 Invested in Acquirer’s Multiple, Magic

Formula, and Pure Charlie (1973 to 2017)

27
8. THE MECHANICS OF DEEP VALUE

Mean Reversion: Profit Trends Toward Average

Source: Michael J. Mauboussin, The Success Equation: Untangling Skill and Luck
in Business, Sports, and Investing. (Boston: Harvard Business Review Press), 2012.

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 THE ACQUIRER’S MULTIPLE

Overreaction: The Profit Trend Extrapolated Too Far

Overreaction: Profit Trend before Buying (1966–1983)

Data Source: Werner F. M. De Bondt and Richard Thaler. “Further Evidence
on Investor Overreaction and Stock Market Seasonality,” The Journal of Finance 42,
no. 3 (1987), 557–581, doi:10.2307/2328371.

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 TOBIAS E. CARLISLE

Mean Reversion: Profit Trend after Buying (1966–

1983)
Data Source: Werner F. M. De Bondt and Richard Thaler. “Further Evidence
on Investor Overreaction and Stock Market Seasonality,” The Journal of Finance 42,
no. 3 (1987), 557–581, doi:10.2307/2328371.

Peters’s “Excellent” Stocks versus Clayman’s

“Unexcellent” Stocks (1976 to 1980)

Excellent Unexcellent
Asset Growth 22% 6%
Return on Equity 19% 7%
Price-to-Book Value 2.5× 0.6×

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 THE ACQUIRER’S MULTIPLE

Unexcellent Stocks Beat Excellent Stocks and S&P 500

Data Source: Barry B. Bannister and Jesse Cantor. “In Search of “Un-
Excellence”—An Endorsement of Value-style Investing” Stifel Financial Corp.
July 16, 2013..

31
 9. THE PIRATE KING

Three Months High After

Target Prior To Attempt Attempt At
Company At Target Target
Tappan $8 $18
Warner Swasey $29 $80
National Airlines $15 $50
Wylain $13 $28 ½
Flintkote $30 $55
Source: Mark Stevens, King Icahn (New York: Penguin Group, 1993).

32
 10. NEW GENTLEMEN OF FORTUNE

Apple, Inc.’s Summary Financial Data

Summary Balance Sheet
Net Cash and Equivalents $150 billion
Other Assets $60 billion
Total Assets $210 billion

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 TOBIAS E. CARLISLE

Summary Income Statement

Operating Earnings $50 billion
Net Income $37 billion
Other Statistics and Ratios
Market Cap $500 billion
Enterprise Value $350 billion
PE Multiple 14×
Acquirer’s Multiple 7×
Return on Equity 67%
10-Year T-Bond Yield 3%

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35
 APPENDIX: SIMULATION DETAILS
“A scrutiny so minute as to bring an object under an
untrue angle of vision, is a poorer guide to a man’s
judgment than a sweeping glance which sees things in their
true proportion.”
—Alexander Kinglake, The Invasion of the Crimea (1863)

This appendix contains the details of the simulations.

You can live a long and fruitful life without reading this part.
But I know there are some who won’t be satisfied without
it. So here it is.

Assumptions
1. The historical simulation results do not represent the
results of actual trading and may not reflect the impact that
material economic and market factors may have had on an
investor’s decision if the investor was actually managing
money. The simulated results were achieved through the
retroactive application of a model designed with the benefit
of hindsight. No investment strategy or risk-management
technique can guarantee return or eliminate risk in any
market environment.

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 THE ACQUIRER’S MULTIPLE

2. In the simulation, Standard & Poor’s Compustat database

was used as a source for all information about companies
and securities for the entire simulated time period. From
1987 to 2017, Compustat’s Snapshot (point-in-time)
database was used such that the simulation processed
financial data concurrent with the time that the financial
data became available to the public. Prior to 1987, the
period when the timing of company financial data releases
has been less comprehensively cataloged, the simulations
assume that financial data was not available to investors
until ninety days following the end of the applicable fiscal
quarter.

3. The simulations were restricted to nonfinancial

companies listed on the NYSE, NASDAQ, and AMEX
stock exchanges.

4. Companies in the investable universe were ranked by

earnings yield and return on invested capital (ROIC). In
each of the simulations, these ranks were combined by a
specific weighting of earnings yield and ROIC.

5. To minimize the potential impact, positive or negative, of

market timing and to show how an equally weighted thirty-
position portfolio might have performed at each point in
time, the portfolios were rebalanced monthly to equally
weight the thirty securities in each portfolio.

6. The purchase- and sale-prices for a security were the

volume-weighted average closing price for the security over
the first ten trading days of each month. The simulations
assumed a trading cost of $0.01 per share. The simulations
also assumed a maximum participation of 10 percent of a
target holding’s daily volume over the ten-day trading
window.

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 TOBIAS E. CARLISLE

7. The simulation performance does not reflect the

deduction of any investment advisory fees.

8. Simulated performance results have certain inherent

limitations. No representation is being made that any model
or model mix will achieve performance similar to that
shown. Simulated performance and actual prior
performance provide no guarantee of future performance.

$50 Million and Greater

Yearly Returns (1973 to 2017)
Pure Magic Acquirer’s S&P
Charlie Formula Multiple 500 TR
1973 —40.1% —48.6% —37.0% —14.8%
1974 —49.0% —23.6% —17.2% —26.5%
1975 59.7% 73.6% 67.0% 37.3%
1976 42.9% 64.2% 67.7% 23.7%
1977 19.7% 24.6% 28.3% —7.4%
1978 18.1% 33.6% 32.0% 6.4%
1979 42.9% 43.7% 43.2% 18.4%
1980 26.4% 43.0% 49.0% 32.3%
1981 13.6% 5.1% 17.2% —5.1%
1982 36.4% 35.3% 41.5% 21.5%
1983 24.8% 48.0% 46.5% 22.5%
1984 —3.6% —10.4% 5.7% 6.2%
1985 37.7% 38.7% 46.7% 31.6%
1986 9.3% 25.5% 34.7% 18.6%
1987 9.1% —11.5% —12.6% 5.2%
1988 17.5% 40.8% 25.5% 16.6%
1989 15.3% 21.2% 14.0% 31.7%
1990 2.1% —5.8% —24.5% —3.1%
1991 52.8% 73.9% 59.5% 30.5%

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 THE ACQUIRER’S MULTIPLE

1992 9.9% 16.8% 23.3% 7.6%

1993 24.3% 1.1% 17.8% 10.1%
1994 9.5% 6.6% —10.8% 1.3%
1995 48.0% 20.5% 23.2% 37.6%
1996 21.2% 32.7% 28.7% 23.0%
1997 24.6% 13.5% 30.0% 33.4%
1998 15.0% 1.8% —5.8% 28.6%
1999 23.3% 18.4% 22.9% 21.0%
2000 —2.9% 23.9% 24.8% —9.1%
2001 27.5% 32.5% 57.3% —11.9%
2002 6.3% 26.1% 4.7% —22.1%
2003 67.4% 65.4% 84.9% 28.7%
2004 43.8% 31.5% 36.5% 10.9%
2005 10.2% 8.0% 3.6% 4.9%
2006 19.0% 11.6% 25.9% 15.8%
2007 4.0% —1.8% —11.7% 5.5%
2008 —43.0% —40.4% —29.3% —37.0%
2009 37.6% 51.6% 91.0% 26.5%
2010 21.6% 15.8% 44.2% 15.1%
2011 12.4% —6.1% —21.2% 2.1%
2012 10.7% 3.8% 6.4% 16.0%
2013 39.5% 50.9% 31.5% 32.4%
2014 11.4% 6.9% 5.2% 13.7%
2015 —4.8% —19.5% —13.2% 1.4%
2016 15.7% 22.4% 29.5% 12.0%
2017 Q1 5.8% 3.1% —1.0% 6.1%
CAGR 15.1% 16.2% 18.5% 10.2%

39
 TOBIAS E. CARLISLE

$10,000 Invested in S&P 500, Pure Charlie,

Magic Formula, and Acquirer’s Multiple (1973
to 2017) Log

$50 Million and Greater, Thirty Stocks

$50 Million Sample Statistics (1973 to 2017)

S&P
Pure Magic Acquirer’s 500
Charlie Formula Multiple TR
Return 15.1% 16.2% 18.6% 10.2%
Standard
19.4% 22.6% 23.2% 15.3%
Dev.
Tracking
11.8% 15.0% 16.1% N/A
Error
Max
69.5% 60.7% 51.2% 50.9%
Drawdown
Sharpe
0.53 0.50 0.59 0.36
Ratio

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 THE ACQUIRER’S MULTIPLE

Sortino
0.50 0.50 0.60 0.33
Ratio
CAPM
4.3% 4.7% 7.0% N/A
Alpha
CAPM Beta 1.02 1.12 1.10 N/A
Correlation
w S&P 500 0.80 0.76 0.74 N/A
TR

$200 Million and Greater

Yearly Returns (1973 to 2017)
Pure Magic Acquirer’s S&P
Charlie Formula Multiple 500 TR
1973 —39.5% —43.7% —33.2% —14.8%
1974 —45.2% —22.6% —22.2% —26.5%
1975 67.8% 67.1% 59.2% 37.3%
1976 39.4% 55.4% 60.5% 23.7%
1977 18.2% 20.4% 15.8% —7.4%
1978 17.1% 32.2% 29.2% 6.4%
1979 38.9% 47.9% 46.1% 18.4%
1980 28.1% 42.5% 39.8% 32.3%
1981 12.8% 5.2% 4.4% —5.1%
1982 43.6% 27.1% 28.3% 21.5%
1983 20.8% 36.0% 40.2% 22.5%
1984 —1.0% 4.2% 15.3% 6.2%
1985 30.0% 36.5% 33.2% 31.6%
1986 14.1% 10.8% 22.9% 18.6%
1987 2.0% —14.6% —15.4% 5.2%
1988 15.9% 50.2% 34.5% 16.6%
1989 19.8% 20.0% 16.2% 31.7%
1990 9.1% —4.0% —16.2% —3.1%
1991 58.6% 64.9% 44.9% 30.5%

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 TOBIAS E. CARLISLE

1992 17.4% 32.3% 26.8% 7.6%

1993 18.9% —4.6% 13.0% 10.1%
1994 4.5% 9.6% 2.1% 1.3%
1995 50.9% 28.1% 27.4% 37.6%
1996 23.8% 27.0% 34.9% 23.0%
1997 33.2% 31.4% 26.9% 33.4%
1998 16.7% 21.0% —4.6% 28.6%
1999 13.7% 11.6% 18.5% 21.0%
2000 6.4% 34.9% 20.9% —9.1%
2001 12.4% 29.7% 44.1% —11.9%
2002 —1.5% 20.1% 15.3% —22.1%
2003 50.4% 60.4% 61.7% 28.7%
2004 32.1% 32.6% 40.9% 10.9%
2005 8.7% 7.2% 16.0% 4.9%
2006 13.1% 12.8% 24.5% 15.8%
2007 5.9% 4.7% —10.0% 5.5%
2008 —39.6% —37.3% —32.1% —37.0%
2009 34.4% 40.8% 66.2% 26.5%
2010 27.3% 18.2% 39.4% 15.1%
2011 11.0% —2.7% —11.5% 2.1%
2012 11.0% 6.7% 14.3% 16.0%
2013 41.4% 56.9% 42.1% 32.4%
2014 15.7% 13.7% 1.4% 13.7%
2015 —4.1% —15.2% —6.6% 1.4%
2016 9.9% 11.8% 21.9% 12.0%
2017 Q1 4.1% 2.2% —2.8% 6.1%
CAGR 14.8% 17.2% 17.5% 10.2%

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 THE ACQUIRER’S MULTIPLE

$10,000 Invested in S&P 500, Pure Charlie,

Magic Formula, and Acquirer’s Multiple (1973
to 2017) Log

$200 Million and Greater, Thirty Stocks

$200 Million Sample Statistics (1973 to 2017)

S&P
Pure Magic Acquirer’s 500
Charlie Formula Multiple TR
Return 14.8% 17.2% 17.5% 10.2%
Standard
19.3% 21.8% 22.4% 15.3%
Dev.
Tracking
11.1% 13.6% 14.4% N/A
Error
Max
66.9% 56.4% 54.5% 50.9%
Drawdown
Sharpe
0.52 0.57 0.57 0.36
Ratio

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 TOBIAS E. CARLISLE

Sortino
0.47 0.56 0.56 0.33
Ratio
CAPM
3.9% 5.6% 5.8% N/A
Alpha
CAPM Beta 1.05 1.13 1.15 N/A
Correlation
w S&P 500 0.83 0.79 0.78 N/A
TR

$1 Billion and Greater

Yearly Returns (1973 to 2017)
Pure Magic Acquirer’s S&P
Charlie Formula Multiple 500 TR
1973 —38.3% —33.9% —31.2% —14.8%
1974 —35.9% —21.4% —17.3% —26.5%
1975 40.2% 53.6% 47.6% 37.3%
1976 19.8% 52.0% 64.7% 23.7%
1977 6.0% 8.7% 11.3% —7.4%
1978 19.7% 23.3% 19.9% 6.4%
1979 32.5% 38.3% 47.1% 18.4%
1980 24.7% 32.2% 29.6% 32.3%
1981 0.0% 0.2% 10.6% —5.1%
1982 52.2% 21.3% 18.6% 21.5%
1983 20.7% 26.9% 31.0% 22.5%
1984 12.7% 9.4% 20.7% 6.2%
1985 43.1% 40.3% 40.4% 31.6%
1986 16.5% 20.4% 22.5% 18.6%
1987 6.7% —3.1% 7.7% 5.2%
1988 11.1% 28.0% 37.0% 16.6%
1989 14.2% 17.2% 16.0% 31.7%
1990 8.1% 6.0% —7.9% —3.1%
1991 67.5% 50.4% 36.9% 30.5%

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 THE ACQUIRER’S MULTIPLE

1992 13.4% 21.9% 25.3% 7.6%

1993 15.9% —0.6% 14.4% 10.1%
1994 7.0% 14.5% 15.1% 1.3%
1995 51.4% 38.5% 36.6% 37.6%
1996 20.2% 17.8% 18.1% 23.0%
1997 27.8% 28.4% 28.4% 33.4%
1998 36.2% 10.3% —0.3% 28.6%
1999 21.0% 8.5% 8.9% 21.0%
2000 —8.3% 18.8% 16.1% —9.1%
2001 1.7% 39.1% 34.5% —11.9%
2002 —9.1% 1.0% —2.9% —22.1%
2003 38.4% 51.6% 65.5% 28.7%
2004 17.1% 25.5% 36.8% 10.9%
2005 7.5% 19.4% 35.5% 4.9%
2006 7.1% 19.7% 15.7% 15.8%
2007 12.8% 12.7% 8.2% 5.5%
2008 —35.6% —43.0% —44.2% —37.0%
2009 45.8% 56.7% 77.9% 26.5%
2010 9.5% 7.5% 14.2% 15.1%
2011 2.6% 13.0% 5.3% 2.1%
2012 14.1% 5.6% 19.5% 16.0%
2013 38.1% 54.2% 47.4% 32.4%
2014 19.6% 17.4% 17.7% 13.7%
2015 11.3% —8.8% —11.6% 1.4%
2016 11.2% 9.3% 15.3% 12.0%
2017 Q1 4.4% 5.0% 1.0% 6.1%
CAGR 13.7% 16.2% 17.9% 10.2%

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 TOBIAS E. CARLISLE

$10,000 Invested in S&P 500, Pure Charlie,

Magic Formula, and Acquirer’s Multiple (1973
to 2017) Log

$1 Billion and Greater, Thirty Stocks

$1 Billion Sample Statistics (1973 to 2017)

S&P
Pure Magic Acquirer’s 500
Charlie Formula Multiple TR
Return 13.7% 16.2% 17.9% 10.2%
Standard
19.6% 20.3% 21.4% 15.3%
Dev.
Tracking
10.0% 11.2% 12.8% N/A
Error
Max
65.2% 54.2% 57.8% 50.9%
Drawdown
Sharpe
0.45 0.56 0.61 0.36
Ratio

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 THE ACQUIRER’S MULTIPLE

Sortino
0.43 0.54 0.61 0.33
Ratio
CAPM
2.5% 4.7% 6.3% N/A
Alpha
CAPM Beta 1.12 1.13 1.13 N/A
Correlation
w S&P 500 0.87 0.85 0.81 N/A
TR

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48