Cameron  00:06

Welcome back to QAV. This is episode 533. We’re recording this Wednesday the 24th of August, 9:03am on the east coast of Australia, probably late in the afternoon in LA, and I mention that because our guests — to welcome back on the show, his first time back since July 2020 when we were all going “oh my god, we’re all gonna die” — is Tobias Carlisle from Acquires Funds. Author of two of the best books on value investing, The Acquirers Multiple and Deep Value, co-host of The Acquirers podcast — that’s when you know you’ve really made it, when you get your own podcast — chosen as value investing monthly magazine’s Sexiest Value Investor 2022. I just made that up. But if it’s not a thing it should be…

Tony  00:53

Who came second? Warren or Charlie?

Cameron  00:58

There’s not a lot of competition.

Tobias  01:02

I’d be one of the young ones.

Cameron  01:05

Roger Montgomery is a good-looking dude. It’d be between him and Roger Montgomery, I think.

Tobias  01:10

He’s a good looking fellow.

Cameron  01:11

Yeah. Welcome back to the show, Tobias Carlisle.

Tobias  01:15

Thanks Cameron. Thanks, Tony. Thanks for having me.

Cameron  01:18

Mate, how’s it been for you the last couple of years? Last time we spoke to you, as I said July 2020, we were in peak COVID lock down. In Brisbane, it was pretty cruisy. We went through the next couple of years with hardly any cases, hardly any lock downs. Sydney was a little bit harder. Melbourne had it really tough as I’m sure you heard; they were locked down pretty much for a year. I was in LA just recently, and people were still walking around wearing masks everywhere. It was a bit of a culture shock to me to go from Australia where we haven’t had masks for a long time, or lock downs, whatever, to see LA. I know the governor there, or somebody, was talking about, “oh, we might have to go back into lockdown.” This is about a month ago, I left. What’s life been like for you? We’ll get into investing, but how’s the last couple of years been for you? COVID-wise, business-wise, all that kind of stuff?

Tobias  02:07

Yeah, I mostly ignore COVID, and I don’t wear a mask or anything like that. The whole family caught it really early on and I haven’t worried about it since. So, it’s been a non-event for me, too. I always find it a little bit odd when I go out and see people in their masks, I always forget that that’s going on. Other than that, you know, business is good. I would like value to get its bid, but I’m guessing we’re going to talk about that a little bit. But aside from that, you know, I can’t complain.

Cameron  02:36

As the podcast goes, you guys always seem to be having a lot of fun on that. Its a good, fun show.

Tobias  02:41

Yeah, it’s really fun. It’s, you know, the idea is that it’s supposed to be the way that we would talk to each other in a bar after a conference, like that was the idea: “value after-hours”. So, its supposed to be pretty loose and it’s supposed to be what we would talk about. It ends up being a little bit more structured than that, but that’s the idea. Basically, we just bring something that we’ve seen and that we want to talk about. It’s very easy to do and I like talking amongst the guys.

Cameron  03:07

And, what’s going on in the world of value for you? Finding anything under the rocks when you’re turning them over?

Tobias  03:15

So, in my universe I’ve got two funds. I’ve got the Acquirers Fund, which is mid cap and large cap domestic US equities; and I have another fund too, Acquirer’s Deep Value Fund, which is a small and micro fund and that’s also domestic US. In both of those funds, the holdings, I think, naturally, I think that they’re deeply undervalued. But I think that anytime there’s any external analysis of those funds, they always score very highly on a few fronts; they score very highly on the value ratios which you’d expect — I mean, they’re cheap on a value ratio — they also score quite well on a return on capital basis, which you probably wouldn’t expect. But I think that we’re in this unusual time in the market, and the same thing happened in 2000 as well, where the value portfolios are higher quality than the expensive portfolios. And the driver of that is that we’ve had a lot of incredibly expensive profitless tech making up the most expensive stuff, and that has come back. But I don’t think people appreciate that if you have profitless tech and it comes back 90%, it can still be expensive down 90% — and that’s what I think is the case. In 2000 we had profitless tech go, then more profitable tech went second, and the rest of the market went third. I think we saw that this time as well. We’re in this funny space now where If I had to bet on it, and I am, I would say that this is a little Bear market bounce, and we probably haven’t seen the full extent of the selling yet and that’s coming. I don’t think that’s a very popular point of view, but I think that’s where the data lead me.

Cameron  04:58

What do you think, TK?

Tony  04:59

We probably have a different perspective. I don’t really look at the cycles in the market other than, I agree with you, the last two years felt like 1999 and 2000 again in that growth was just ridiculously being bought with a FOMO mentality without trying to value the companies of all. And we’ve had growth investors on the podcast and ask them what their metrics were and how do they value a company, and it was like, “valuation. Don’t worry about it.

Tobias  05:28

“That’s what’s holding you back.”

Tony  05:29

If you buy a stock and you get the valuation wrong, it’ll only go up two times, not three times. Yeah right. I’ve found in my experience is I still find good companies in all sorts of markets, and they regress to the mean. And it’s, it’s the fact that a lot of the market divides itself into these boxes like tech and growth and value that gives you the opportunities to buy things that are out of favour and wait until they become in favour. There’s a lot of macro stuff going on in the world at the moment; China’s still cutting interest rates, there’s property problems over there, there’s the Ukraine war — which I thought would be wrapped up within a month, it’s still going on — there’s gas shortages in Europe, inflation I saw yesterday is predicted to go to 19% in the UK. So, there’s still a lot that can go wrong which could be the start of a bear market. But again, who knows? And who knows what the secondary effects of all those things are. So, I personally ignore the macro. What about you, Tobias? Do you pay attention to macro in how you invest?

Tobias  06:32

It doesn’t enter into my investment process at all, but I do pay attention to it just because it’s, it’s fun. You know what they say, it’s astrology for men. That’s basically the way I feel about it. It’s not so much that it’s just unpredictable, as you say, you can be right about the event, and you might be completely wrong about how the market reacts to that event because everybody thought that was what was going to happen and that was what they were preparing for. And I’ve seen that plenty of times in companies. I do some merger arbitrage sometimes, and it’s that uncertainty that is what creates the discount. And in that uncertainty, you have the best-case outcome and the worst-case outcome, and sometimes, or often, the worst-case outcome is what actually manifests. That’s what happens. And you still get a rally on that, because the market prefers the worst-case outcome to the uncertainty.

Tony  07:28


Tobias  07:28

And so, you are agnostic to it, but I just try to use it to temper my own expectations about what the portfolio will do. Because, if we go into a big drawdown then it’s inevitable that the portfolio follows, so I never let myself get too excited about the future. I’m always assuming the worst and hoping that we can survive it or positioning to survive it.

Tony  07:53

Well, how do you position, then, if you’re hoping for the worst. Do you go to cash? Do you hold any cash, or are you fully invested?

Tobias  07:59

No, that’s the obvious question. No, I don’t do that. I assume in every position that I put on that the worst-case scenario will manifest after I put it on. And so, I want a company that can survive through its worst-case scenario. We were talking about this this morning when I recorded the podcast: it used to be very simple to go back and look ten years back, and you’d always have a recession or depression to give you an idea how a company performed through that period of time. Now, it’s been so long in the States in any case, and Australia I think it’s even longer, right? You can’t find out what happened. I remember doing some analysis on the Australian banks — this was quite a long time ago, this was probably in 2010 — and running the banks back and trying to find a recession and going through copies of data and had to go back to like 1993, or something like that.

Tony  08:48

’93 was the last recession in Australia, yeah.

Tobias  08:51

That’s crazy. That’s amazing. So, we’ve solved that, we’ve solved the business cycle.

Cameron  08:54

Well, they were trying to solve it for us, I think.

Tony  08:57

Yeah, maybe. I mean, certainly the Reserve Bank thinks they’ve solved the business cycle, and they just print money when things look tough. But, that chickens gonna come home to roost, I have a feeling.

Tobias  09:10

How is it going to come home to roost? What do you think happens?

Tony  09:13

Yeah, but, like, inflation in Australia is high-ish but not enough to inflate away debt quickly. It’s got to get way up there before that’s going to happen. And that’s a bad thing for the economy anyway, so, yeah.

Tony  09:13

Well, if you’ve got lots of debt still sitting there, it’s got to get paid off at some stage — or written off. So, it’s going to be a hit either way.

Tobias  09:21

Or inflated away.

Tony  09:22

Or inflated away, yep.

Tobias  09:24

Seems to be their preference.

Cameron  09:26

Sorry, explain that to a dummy like me. How do you inflate away the debt? How does that work?

Tobias  09:43

There’s generally a drift. We’re generally printing money over time, there’s generally more money outstanding. Any asset or debt is denominated in that token that you’re printing more of all the time. The purchasing power of that token goes down. The value of that asset denominated in that token goes up, even though on a purchasing power basis it might be static, and the value of that debt on a purchasing power basis goes down. So, the debt figure, you might just be paying back the interest and leaving the principle there. But you know, what would have seemed like an extraordinarily large amount of money fifty years ago, or thirty years ago, is a very modest sum of money these days. To be a millionaire used to be something really impressive, and now that means you’ve paid off your house, or something like that.

Tony  10:31

And that’s probably the best example that people might relate to. If you take out a mortgage for $500,000 in twenty- or thirty-years’ time, it’s gonna be so insignificant you’re not even going to worry about it because the house value’s gone up and the currency’s inflated, so $500,000 is worth probably a couple $100,000 in the future. The same thing with government debt, right, over time what might be in the billions now won’t seem that bad in twenty-thirty years’ time because inflation has just inflated money past it.

Cameron  11:03

Okay, thanks.

Tony  11:05

It also assumes that you don’t keep borrowing at the same rate. And that’s, you know, that’s the other side.

Tobias  11:10

There’s the problem.

Tony  11:11

If governments have gotten used to winning elections because they make lots of promises and then borrow to pay them, that’s not going to stop quickly.

Tobias  11:18

Someone’s got a great line like that, where they say, “an election is like an auction on future spending,” or something like that. I forget who said that it’s probably one of the Austrian economists.

Tony  11:30

Well, it’s become a real business plan in Australia. You see the government’s here will stop spending in the last two years of their term so they can save it up to promise as one big hit at election time.

Tobias  11:41

Ah, clever.

Tony  11:43

So, you grew up in Australia so you would have paid attention to the Australian market, but your funds are US based. Can you tell me what the difference between the Australian market and the US market is? I know you have quarterly reporting over there, we have six monthly. If I was looking at a balance sheet for an Australian company, do I have to translate it to US speak, or is it essentially the same thing? Is operating cash flow in Australia the same thing as operating cash flow in the States, for example?

Tobias  12:09

They are mostly equivalent. They’re largely equivalent. It’s just it’s a slightly different language, because GAAP is US GAAP, and Australia is Australian IFRS, that’s International Financial Reporting Standards. And so, every country that’s not the US or Canada has IFRS, and they have their own local implementation of IFRS. I used to know it much, much better than I do now because I’ve got lazy, because I don’t really look outside the US much. I’m mostly focusing on GAAP and all my systems are built for GAAP. Aside from the reporting, though, there are some significant structural differences between the markets. One of them is that they have market makers here. So, I don’t really understand the function of the market makers, I think they’re unnecessary because we don’t have them in Australia and the Australian markets function perfectly fine. The other big difference is sector composition. So, Australia is heavily financials, it’s half financials, which is mostly the big banks. And then it’s 15% basic materials, something like that, and then everything else is squashed into that remainder and so there’s very little tech. Whereas, if you look at the MSCI World, which is the World Index, tech tends to be about eleven sectors, and then the US has a heavier weighting towards tech. I forget now, it might have been a little bit overblown by the bubble that we went through over the last two years, but I would guess that it’s settled somewhere around 13 or 14 or 15%, something like that. And that’s a big difference between the US, and really the rest of the world, that it does have these big consumer discretionary businesses. You know, like a Google or an Apple that don’t really exist in other countries. So, it would be very easy to construct a portfolio here if you’re trying to keep your sector weightings reasonably equal whereas it’s quite hard to do that in Australia, because the Australian markets just like the Canadian market, it’s more heavily focused on financials and basic materials.

Tony  14:01

Yeah, very much so. What about the size of the US market? I mean, I kind of feel, having invested for a long time in Australia, I very rarely come across a company I don’t know much about because it’s been a reasonably static market with two thousand stocks for a long time. Are you drinking from a fire hydrant in the US? Are you just focused on one sector, or do you focus broadly?

Tobias  14:25

Yeah, I focus across everything because you have that advantage that if one sector… because sectors and industries tend to get cheap, all of the companies in the sector or the industry tend to get cheap at the same time or expensive at the same time because there’s a mania going on, or there’s some sort of localised depression, or something like that. So, it’s good to be able to go across boundaries and do that because my two funds are slightly different universes, but I’m trying to express the same strategy in those two different universes. Although, it’s reasonably easy to research them and they are all comparable to something else. But that’s, yeah, you’re right, I remember being in Australia, the guy that I used to work for in Australia, he could just sit there with the announcement scrolling down the screen, and he would know — he was looking for capital returns and things like that — he would know the company and he could react to it very quickly. Whereas you couldn’t open up the announcements, there’d just be too many, you just couldn’t stay on top of them. So, you need to do a different type of screening on criteria for valuation or for quality, or something like that, balance sheet strength, all those sorts of things.

Tony  15:35

Which is what you do with The Acquirers Multiple. It’s a similar sort of process to what we do, which is to download the data and then look for ratios and look for quality and value. How did you come across that? Was that something that evolved out of what you were doing?

Tobias  15:48

So, when I was at UQ I used to go to the Social Sciences Library, and I’d go — and this was pre all of this stuff being in online databases. We were doing CD ROMs, but these journals weren’t on CD ROMs. I just used to go and grab the, you know, they had the financial analyst journal and various other journals, and I would just go through the index, literally just running my finger down the index, and see if they had anything that mentioned value. And I found one, there was a guy who is a Harvard legal and economics guy, Michael C. Jensen is his name, and he did a whole lot of research in the 80s on takeovers. What he found was that… You know, academics identify these things and say them in ways that everybody already knows is to be the case, but they kind of formalise it a little bit. He just said, when you find these companies that have enormous amounts of free cash, those are the ones that are targeted by the leveraged buyout companies because they can redirect that cash flow. And then he came up with all these reasons why that was a good thing, because it would sort of tie management’s hands; they couldn’t expand, they were compelled to return capital and redirect those cash flows into ways that really benefited the shareholders who remained. Because, you know, to get out of the way of a lot of the leverage buyout guys, a lot of these companies did a dividend leverage recap where they would just pay out a big dividend and then they’d do the on-market leverage buyout. And so, I read a lot of his stuff and I read a lot of these things. One of these articles that I read, or one of these journals that I read, they said think about, it was EBITDA to enterprise value, as being the “acquirers multiple”. And so, it just stuck in my mind. That was the late 1990s, and that was when dot coms were very popular, and I thought this stuff is all old stuff from the 80s, this will never… we’ll never see this again. And then after 2002 it became a private equity buyout, activist market again. And I thought, well, that’s interesting, so these things do seem to go in cycles. You have a tech mania and then you have a financial market, and then you probably go back into a tech mania. And funnily enough, that seems to have been what has happened. Although we’ve come to the end of the tech mania, maybe the next thing is a financial mania. But I just had that idea. And then, when I moved to the States, I did some research with a guy who was at the Booth School of Business, which is the old Chicago School of Business. We went and found every bit of industry and academic research we could find on fundamental analysis and tested all this stuff in a model that he had built, and the idea was we were going to track down… There were these old ratios that were invented in the 30s to look at manufacturing companies to work out where they could stay solvent, whether they were credit worthy, and the question was, do these apply to things that aren’t manufacturing companies? Do these things continue to apply to this day? Because they all have these really complicated formulas, and they’d have these little coefficients for each of the days payable outstanding, and that’d be 0.27. Now, why is that 0.27, I have no idea. But when they’d done the linear regression by hand, like least-squares method by hand, in the 30s they’d found that this was the best fit through the data. And so the question was, does this stuff continue to work, or has this stuff stopped working? Or did it never work, and it was just purely an accident of looking through this data? So, we tested it and we found what had worked, what didn’t work, what could be made to work again if we just made a little adjustment to it. So, a lot of people will know Piotrosky’s F score; he looks at companies that ship on a price to book value basis, and then he goes through and basically looks for, are they solvent? Do they have too much debt? Do they have, you know, all of the other ratios changing in a bad way? Are they changing in a good way? And he gives them scores and if they score enough points out of nine then they’re good, and if they don’t score enough points out of nine, they’re bad. And we found that you could just adjust that a little bit to make it… One of the things that he looked at was share issuance, or shares bought back, and since he did that research share-based compensation has become a much bigger part of the market. So, we changed it to net shares issued rather than, or net shares bought back rather than the net shares issued. So, we did all those changes, then we put that all together into a single model, and we wrote about that in a book called Quantitative Value that came out in 2012. And so, that really was the basis for the way that I think about the market. One of the things that we found when we compared all of the value ratios… So, we looked at price to book, we looked at all the flow metrics (earnings, cash flow, operating cash flow, free cash flow), we looked at accounting metrics like EBIT or EBITDA, and so on. And we tested them all and we found that the EBIT and EBITDA, basically you couldn’t separate them relative to scale to enterprise value. If people don’t know what enterprise value is: market capitalisation is the share price multiplied by the number of shares that are outstanding, and then enterprise value adds in the debt that the company holds and other things that are like debt, so preference shares. It looks to see if they’ve got any minority interests that mean that they don’t have all of the economic value accruing to them, and anything that’s quite quasi-debt, adds it all together. So, to give the house example that we had before, the purchase price of your house might be a million dollars and you might borrow $800,000 and put down $200,000, as your deposit, so the market capitalisation of that house is $200,000. But it misses the fact that you’ve got this mortgage sitting there for $800,000. And so, enterprise value is $1 million market, capitalisation’s $200,000. So, that’s what we’re trying. And you might get lucky and find there’s a safe buried in the backyard, and when you open up the safe there’s $500,000 in the safe, so you have to adjust for that. And that’s basically what the enterprise value does. When you scale enterprise value to EBITDA, that’s like operating earnings; any operating earnings figure like that, so operating cash flow, EBITDA, operating income, they all give you roughly the same answer. And it’s just basically comparing what you’re paying, which is the enterprise value, that’s the real cost, versus what you’re getting, which is the accounting measure of cash flow, basically, EBITDA. We found that that one performed best in the study that we did through to 2011.

Tony  22:11

Yeah, wow. So, you used that to invest for yourself first? Or were you running people’s money from day one, or what happened there?

Tobias  22:19

No. I had been using it before then because I just liked the metric. I like the intuition of the metric, because I had read about it in that book, and I liked that 80s style of analysis where you were looking into things that could get bought out. And so, I was finding in the US in particular, you’d find that there are lots of these little companies that I think — there are fewer now, which I think is caused by Sarbanes Oxley — but at that time, there were lots of these companies around. And there were these guys at this bank, Piper Jaffray did this research, and they found that there were countless numbers of these companies that were too small to be in any good index. So, they might not even be in the Russell 2000, which is the smallest two thousand of the biggest three thousand. And I think that there are about four or five thousand listed stocks in the states on these indexes. And so, these companies were basically orphaned, they weren’t in any of the indexes, and they were all very cheap. Otherwise, they meet all the criteria that we would look for; they’re growing pretty quickly, they got a lot of cash generation, pretty clean balance sheet, basically run by the founding family. And these guys said, there’s this preference in the market for bigger, better, growthier companies, and these things will never get taken out. Initially, they called them endangered species, then they started publishing this report which they called the Endangered Darwin’s Darlings because they were all companies that weren’t going to survive. I think that was what created all the dry tinder for the activism that exploded in the early 2000s, because it was a very simple matter to come in and find these things, trading two or three times enterprise. So, EBITDA to enterprise value, which basically means that they pay themselves off. You buy them and they get enough money back in a few years to justify the purchase price. And then these are run by families, so they’re not going to do anything too silly. They don’t sell at silly prices — although, one thing that they do is that they would team up with private equity and get taken out at a price that I was always a little bit miffed about, because it was way cheaper than I would’ve ever solve these things. You know, you’d buy them at two or three times, they’d get taken out at five times. It’s not such a, it’s not a huge loss. It’s a good return, but it’s not as good as it could have been. So, they’ve gone away a little bit because the market has just trended towards big companies, and companies have tended to come public later and bigger. Whereas previously they would have listed and grown, now they wait until they’re going to hit the big indexes because they don’t want to be orphaned. That was the strategy, and then after I got reasonably comfortable with doing that, that was when I started matching outside money.

Tony  25:01

And so, you have two funds now, and I think one of them is an ETF? Or are they both ETFs?

Tobias  25:06

They’re both ETFs, yeah.

Tony  25:08

They’re both ETFs. Why did you choose ETFs? And in Australia, an ETF normally means low fees, is that the case with your funds?

Tobias  25:16

Yes. So, they’re lower fee than you would get in a mutual fund or in a limited partnership, which would be a hedge fund over here. The huge advantage of an ETF is, unlike a mutual fund or limited partnership, or even a managed account, is the decisions that I make as the portfolio manager to buy or sell don’t create taxable events for the people who hold the ETF. So, it’s not like if you have a unit trust in Australia, which is the way that a lot of the funds are set up, when they buy something and they sell it and they have a capital gain, that capital gain then flows through to you as the ultimate holder of the unit trust. That’s not what happens with an ETF because they have this create-redeem function where basically, it’s a little bit like getting script to script rollover in the takeover. If you get taken over and they offer script, you take script. Then you’re able to roll over your capital gains tax until you eventually sell the share yourself. So, that is basically how it works in the back end of the ETF, which is incredibly powerful. One of the things that you find after you’ve been investing for a little bit of time is that the tax drag on successful investments is massive, and the difference between short term capital gains and long-term capital gains is so huge if you then compare them on a like for like basis. If you get 15% and you never sell and you just allow something to compound, that’s worth about 40% in short term capital gains because that’s basically a marginal rate. The effort to produce the after-tax return, after fee, is so much lower in an ETF than it is in any of these other structures. That’s the main attraction, because most people who have been investing for a while become pretty sensitive to taxes I’ve found, and I certainly got that way. So, it’s an incredibly tax efficient strategy.

Tony  27:14

Is the operation of an ETF the same as if it was a listed fund? I know, for example, if it’s an ETF that tracks an index there’s something called a market maker sitting underneath. So, if someone joins the ETF and they need to buy some more shares, there’s somebody working spinning the wheels underneath to do that. Is that the same with your fund?

Tobias  27:35

That’s right. The names for them are a little bit misleading, because, you know, there’s this idea that there’s passive and that there’s active. So, a passive fund tracks an index, and the index can have a huge active share. So, active share is just the deviation from whatever broad-based index you have. So, the S&P 500 is a market capitalisation weighted float adjusted index of five hundred names in the States, and anything that deviates that because it’s got a value tilt, or its smaller, has a big active share. But it could be an index product with an active share. So, the way that I have structured Deep as an index for historical reasons, because I took it over from somebody else — it had been operating for a while, and it was an index fund — ZIG is an active Fund, which means that I trade the shares, but it did start out as an index fund. They made a change to the capital gains tax over here where previously it had to be an index fund to get the capital gains tax treatment; when they changed that it was just a way for me to chop out a bit of costs out of the business. And I’m a value guy, so I chop any costs out that I can. So, I got rid of the index, and now I’m managing actively. But there’s no difference to the way that it was managed before, there’s no practical difference for the holder of a unit in ZIG. The market maker function is independent of whether it’s an index or whether it’s an active, every ETF has that market maker function. And that is so if you invest in the ETF, the ETF might never trade, but if you invest always as liquid as the underlying security — so, if the fund holds very large S&P 500 companies, it’s as liquid as those underlying companies. If the underlying is a bond that doesn’t trade very often, then it will be very illiquid, even if the unit’s changing hands pretty regularly. So, that is something that you should watch out for, but the holdings in my funds are very liquid. There’s lots of liquidity there and the market maker stands, so if there’s nobody selling, the market maker will make the sale. And that’s how money actually ends up flowing to the fund: they have inventory, and they wait until they get a little bit short, the units of the fund, and then they do a create. And the way that a create works is somebody, these high frequency traders typically, they create the portfolio, they recreate it in the market, then they exchange it for units in the fund. So, the fund grows by accumulating additional holdings. The clever thing is that you can do this in a custom way; so, if I want to sell something out, I can use that create-redeem function to sell it out and I can exchange it for units, or I can exchange it for other companies in in the market that I want to buy at the same time. So, it’s a great vehicle for investment, because it’s very, very liquid. If you decide tomorrow that I haven’t done a very good job and you want to sell out, you can liquidate your holdings immediately on the market and never have to speak to me again. And if you want to buy it, anybody can do it out of a brokerage account.

Tony  30:40

So, you said one of the funds is a value index fund. We don’t really have that in Australia, but when we’ve looked into it– I think they do publish indexes for value — but when we looked into it, they were basically just taking the top ten lowest PE ratio stocks within an index (top 200, or whatever it was here). Is that the kind of simple methodology for value index fund in the States as well?

Tobias  31:07

So, I construct the index, all that means is that I put together a portfolio on a quarterly basis and I send that to my index maker, which is a German firm by the name of Selactive. They then publish the index and then the traders, the trade desk for the fund, have to match that index. So, it rebalances on a quarterly basis. But the way that the index is constructed, that has been the problem with value indexes, and continues to be the problem with value indexes in the States. So, the bigger, older indexes like the Russell 2000 value or S&P 500 value, there are lots of these, every index now has various sub-indexes that are broken into valuable growth or ESG, or whatever the case might be. The value indexes haven’t been great because they use price to book as their value metric. And they do other silly things too, they’re not particularly valuable. They might look at the number of employees, it makes no sense at all. I’ve looked at a few of their methodology documents, and they just, I don’t know what they were trying to achieve when they put it together. And then the performance is, as you’d expect, pretty terrible from those, because price to book hasn’t been a particularly good… I don’t know that price to book was ever a particularly good metric, but it’s now deviating so far from the way that financial statements are constructed that it’s just not a particularly useful metric. The only saving grace that it had is that value has done so badly over the last few years, price to book did least badly of all of the value metrics because it was not tracking value very well.

Tony  32:43

Yeah, it’s interesting. I’ve considered myself a value investor for a long time, and I get puzzled when I hear market commentators talk about value doing well, or value doing poorly compared to growth. And I’m thinking, well, I’ve just been investing, and it’s been going fine, so I don’t get that value versus growth. But there is a kind of pigeonholing going on there, as you say, when they try and construct an index for it. And that’s what they’re really talking about, isn’t it?

Tobias  33:06

There’s this idea of value as a philosophy, and value is sort of, you know, “the value factor” is what the academics call price to book. And so that has sort of seeped out into the investment community where the core value is the extent to which attracts the value factor, and you can do these analyses and see. And so, my holdings… Because the start of my process is the acquirers multiple, I tend to not score very well on a price to book basis because the book value is irrelevant to the process. I’m not looking at book value at all. It’s a flow metric. And you can find that there are lots of businesses and lots of examples of that. So, McDonald’s is a good example. McDonald’s is so good at returning capital to shareholders that now it has a negative book value. So, when you try to do a book value analysis on it, you get a nonsense answer. But it’s not a difficult process to do a valuation on McDonald’s, because it’s a pretty simple business and it’s been pretty steady, but it just fails the price to book, that traditional sort of analysis. So, flow metrics have always been my preference. The only thing to say though is that flow metrics are volatile, earnings are more volatile than book value. That’s the only saving grace for the book value argument.

Tony  34:28

That’s what we find, too, is I can turn over my portfolio twice a year because the flow metrics change every time they report, from six months to six months. So, something that was cheap can have a new set of numbers and it’s not cheap going forward.

Tobias  34:43

We’re talking about value as a philosophy here. So, value is a philosophy, you’re not looking at a single report at a static number and then calculating a ratio from that. Probably what you’re doing is looking at a series of reports trying to find a rough estimate for a growth rate of earnings or return on invested capital over time, and then looking subsequently to see if it can continue to generate these kinds of returns into the future. What’s that worth? What’s my opportunity cost when I look at other things? So, over here I would look at the ten year, I think that’s a reasonable proxy to match the duration of these businesses. This is the problem, though, the ten year’s been so crushed that everything looks cheap relative to the ten year. But if you run the ten year back towards historical — it’s sub 3%, I think, at the moment — but historically, it’s been around 6%, on average it has been around 6%, which is about a PE of 15 or 16. So, any business that is trading at a higher PE than 15 or 16 has to be growing fast and have a higher return than the ten year. That’s the way I think about it, anyway. But that’s value as a philosophy.

Tony  35:51

Yeah, it’s a little bit different to what I do but I understand what you’re saying. That’s what I think is interesting in the market, is because of the index market commentators often talk about value and growth as those indexes, but really everything’s value. Why would you overpay for something? So, it can be as wide as you want. And you know, at certain stages, the growth stocks are value investments as well when they come back enough. So yeah, you’re right.

Tobias  36:16

The way that I think about it is to slightly reverse the process. I say, if something has a rate of growth that is high and the current fundamentals of the business are low relative to what you’re paying for it, you’re implying that you expect the rate of growth to be very high, for instance. Which may not be a bad bet, that might be the right thing to do, that might be perfectly sensible in any given case. It’s just that’s the explicit bet, or the implicit bet, that you’re making, and when you’re doing that, that’s a growth investment because you require this business to grow materially to justify the price that you’re paying. Whereas there are other businesses… So, I own HPQ, which is Hewlett Packard, that’s the printer business. There are two HPs for people who don’t know this: HPE and HPQ, and HPE is the enterprise that’s all the sexy consulting, that’s the better business, and HPQ make printers. They’re the ones who are responsible for your printer that doesn’t print, and everybody’s got like a $200 printer that they use every now and again that doesn’t work very well. So, why would you buy that business? Well, they don’t have a lot of competition, they generate a lot of cash flow, their management’s been very good at buying back undervalued stock, and the stocks done pretty well as a result. That would be a more traditional value investment where there’s no growth — really, if anything it’s shrinking — but that’s not necessarily a bad thing. If it’s undervalued and you buy that stock, you can still do quite well. And I regard that as being a deep value investment where I know that the business isn’t that great, but on a risk adjusted basis, risk to reward is pretty good. And the other things where, yeah, it’s a stellar business, but it’s so expensive that it’s risky as an investor to take a position because you are requiring growth from it to justify the price, and that can be a difficult thing. Ideally, you’d get things that are stellar businesses that aren’t very expensive, and that’s, that’s the Holy Grail…

Tony  38:14

That’s the Holy Grail, exactly.

Tobias  38:16

We’re trying to triangulate towards that. But you’ve gotta take your opportunities when you get them, they’re not always there. And so, you’re always looking for the ideal and picking the bits of hair off of the thing that you have to see if you can justify why you’re buying it, that it’s worth it.

Tony  38:29

Yeah, negative oil was a pretty good indicator that it was time to get some energy.

Tony  38:29

Yeah, no, I agree, and the stellar ones only come about every couple of years, I find. For us a few years ago, it was oil stocks, right? The oil price was at $30 a barrel and the oil industry was going to crash because all the tanks were full, and tankers were off the coast of China and couldn’t unload and all the rest, and so no one was buying oil stocks. But it was the best time to buy oil stocks. So, they’re the stellar returns.

Tony  39:02

Exactly. Let me just ask you some questions about the US environment. I mean, if someone’s interested in investing over there, and or buying into your fund, for example, what do they watch out for from a compliance framework point of view. Like, for example, in Australia if you were going to buy into a fund, you would check to see if it was licenced — so, had an AFSL. Is there a similar sort of regime in the US that we need to look at?

Tobias  39:28

Yeah, so I have to have a licence. I’ve had to pass this, they call them the series 65, series 7, a variety of these sort of things in order to operate an IRA. The IRA must be licenced in order to have a public company — sorry, in order to have a public fund. A public fund is not quite as complicated as having a public company. I don’t have an internal company secretary and those things, but the back end of that I share one. I sit on a trust, and the trust has fourteen or fifteen funds on it. The back-office operation for that is run from Milwaukee because it’s a lower cost state, and they do all of the bits and pieces that go into the back end. And that’s high touch, there’s a lot of work that needs to be done there. So, you wouldn’t be able to have an ETF without being licenced and there’s an enormous amount of publishing of updates and so on that go to the SEC. I would recommend that you look at the SEC filings to make sure that the company’s properly, the fund is properly constituted, then you can check to see the manager has the appropriate licence. And usually that is a CRD number, or if you Googled Acquires Funds LLC, all the filings would come up at the SEC and also with FINRA, which is the body that governs the managers like mine. So, we have reporting obligations at all of these different levels, and it’s also state based to make it even more complicated. So, there’s a California version as well. So, there’s three governing bodies that that I have to deal with.

Tony  41:14

And what about for the podcast? Like, I went out and got my CAR for an AFSL, because ASIC here was cracking down on people giving financial advice in new media. What about for your podcast?

Tobias  41:28

I don’t mention the tickers of the funds and I don’t discuss any ETFs and things that we’ve seen in the market, and a lot of that tends to be about personalities. So, Julian Robertson who was the Tiger founder passed away today. So, we mentioned Julian Robertson has passed away. That’s the sort of stuff that we’re interested in, rather than promoting the tickers, which I would never do. I can’t do that on my own podcast without going through compliance. So, anytime that we want to mention a ticker, or discuss anything like that, it would need to get through compliance first before it’s released. It’s considered a big no-no. If you do it, you’re making a release without having it approved first. So, it’s approved by a compliance group who have a relationship with FINRA and they submit things to FINRA before they’re released publicly. So, you need to be very careful. You could do it yourself, but you’d be faced with a number of changes. Anytime that I actually make a release it all gets red lined, and it costs me a few thousand dollars every time I do it, for the advice. So, I’m reticent to do it.

Tony  42:30

Sorry, the compliance group, was that a company that you submit them to?

Tobias  42:34

I call it my compliance group; it’s actually called Foreside Quasar which is the name of the enterprise that looks after it.

Tony  42:43


Cameron  42:44

And this is just because you have a fund, you need to be careful? If you didn’t have the fund, would you talk about stuff like that on your podcast?

Tobias  42:50

Yeah. Because I am licenced and because I have… the way the regime is structured over here, it’s structured around the tickers. So, anytime you mention a ticker or the name of the fund, then that has to be signed off by compliance. But aside from that, you’re okay provided not giving financial advice. So, that’s why you often see everybody has the disclaimer that this is not financial advice.

Cameron  43:16

Yeah. And if you have the disclaimer, that’s it, you’re free and clear if you just use the disclaimer?

Tobias  43:23

If you made the disclaimer and then you went on and pitched your tickers, you’d be in trouble. They would look at the substance of what you’re saying. So, there are many investors who manage accounts rather than a fund the way I do it. If you manage an account, then you can talk about whatever you want and you can pitch yourself as much as you want. It’s just the moment that it’s a product, you’re gone.

Tony  43:52

Are you talking about your ticker? Or are you talking about, like, just as we did before, you spoke about McDonald’s? Can you talk about McDonald’s openly?

Tobias  43:59

I can. Yeah, so I can’t promote my own ticker.

Tony  44:02


Cameron  44:03

Before we wrap up, Tobias, I know a lot of the folks that listen to our podcasts are learning to be value investors and are trying to get in the mind space of a value investor, and they’re trying to think long-term. It’s been an interesting couple of years to be a value investor. In 2020 when we had you on, at least in Australia, it was very much all the growth stocks that were still sexy, and BNPL players and all that kind of stuff, and crypto, and we spent a lot of our time saying, “yeah, ignore all of that, ignore all of that, ignore all of that. Let’s just focus on fundamentals, and we’re looking for businesses that produce a lot of cash and are undervalued,” etc., etc. And we were doing okay, our portfolios were doing okay back then. They weren’t doing okay if you compared them to the high end of the tech stocks — they weren’t growing at 100% a year — but we were getting our 20% a year, it was okay. The last year it’s been pretty rough with a lot of the stocks that we were invested in here; mining, with the China slowdown and all that kind of stuff, and Ukraine and blardy, blardy blar, it’s taken a beating. As a long-term value investor, can you give our audience some hints or insights into how you stay centred? How do you stay disciplined? How do you stick to your circle of competence despite all of the noise that’s going on around you, about this sector, or that sector?

Tobias  45:40

I talk about this a little bit on my website, There’s not much content on it, it’s just the first page. This is something I talk about a little bit, and I think this is what Buffett has said, too; to succeed in the market, you really don’t have to hit homeruns, you just have to make sure you don’t die on the way. You’ve got to survive to the end, and the longer you survive, the more you learn, and the more you learn about ways that you can lose money. So, I have studied all the ways that people have blown up in the past; they’re all obvious stuff, like don’t take on too much debt, don’t buy companies that have got too much debt, watch out for particular types of business models, there are some business models that get ruined every time they go through a recession. And so, you just sort of have to avoid those, or be very sceptical when you see them. There are also things like style drift, something that is more a problem for fund managers, but I think is a problem for investors, too. This is a thing where what you’re doing is not working, what those guys over there are doing is working, it’s very tempting to start going towards what those guys are doing. But I think the real lesson is that there are these, you know, they call it “the law of ever-changing cycles”, or min reversion, which is the idea that what is out of favour does tend to come back into favour. And so, you’ve got to train yourself to go to what is out of favour and hold what is out of favour knowing that or trusting that at some point it’ll come back into favour. So, I spend a lot of time avoiding style drift. I’ve done a lot of work, I’ve done a lot of research, I have a very defined universe of things that I will consider at any given point in time. Most of them are going to be too expensive. The ones that are offering a reasonable risk-reward is where I tend to go, but I don’t have any idea… I always have in the back of my mind that the market is probably right and I’m probably wrong. There aren’t any free lunches in this market, you’re paying somewhere else to hold these things. And so, what I found is that my strike rate is about 50%, it’s about 50/50. But the idea is that the ones that hit return a little bit more than the ones that miss, because I’m concentrating on the downside first. So, when I’m wrong, there’s another way that I’m not going to lose money; whether it’s a balance sheet strength or something else there. And then if I’m right, the market should rerate. Because it’s expecting the worst, the worst doesn’t manifest, and you tend to get a rerating. So, an example of that right now is Facebook: everybody’s got an opinion on Facebook, the product, and I don’t really know what the future holds for Facebook. If we just look at the financials of Facebook, it’s earning way too much money for where it’s trading and they are doing a very substantial buyback. They’re also spending money on the Metaverse and doing other things like that. I appreciate that Facebook has a lot of problems, and it really does touch the gag reflex for me, too: I don’t like the blue site, and various other things. But purely quantitatively looking at the financial statements, I do think that it looks too cheap to continue. If it can continue to earn the way it seems to, and I watch the metrics of this business, every time they publish their daily active users, monetizable daily active users, that’s the sort of stuff that I look at. Is it falling or is it growing? And then I think Zuck is a scary dude in many ways. He’s a ferocious competitor, and I like that. He’s buying back stock; he’s got all of this money in it. He’s pretty smart. So, that’s the sort of bet and bunt, that could easily be wrong. So, if it works out, it might be a 7% position. If it doesn’t work out, it might be a 3% position. So, I kind of think I’d buy it after it’s had its big collapse. I’ve only bought recently, but it’s one of those things that if somebody makes… I talk to people all the time who know why Facebook is not going to work and I agree with them, it’s just that on the financials I have to consider something like that otherwise I’ll never do anything.

Cameron  49:42

I’m surprised by that. I would have thought that Facebook wouldn’t be anywhere near a value investors radar, so that’s interesting.

Tobias  49:49

It’s in the cheapest 10% on an enterprise multiple basis of stocks in my universe. So, it’s well and truly in my investable universe, and it’s got a massive return on capital

Cameron  50:00


Tony  50:02

Yeah, interesting. I wanted to unpack a couple of things you said there. So, give us the red flags that you look for. So, you were saying before you find that there are companies which won’t survive a recession. In Australia, for me, that would be aggregators, anybody who mentions addressable market in their first slide, all that kind of stuff. But what are the red flags for you when you see a presentation?

Tobias  50:25

Well, I think if you limit your investable universe to companies that are actually generating money, immediately you don’t have to think about a lot of things. That narrows down your universe pretty quickly. But then, I also look at things like companies that are here that lend money for consumers; you know, like, Rent-A-Center or Synchrony Financial, all these kinds of businesses. Those sorts of businesses, they look great when everybody feels good and they’re going out and getting new TVs and renting their TVs, but they look terrible when they go through recessions because nobody wants to pay for the TV, or they give them back. And if those companies don’t hold all that, they don’t like to hold all that debt on their balance sheet — they all used to do that — what they do now is they bundle it up and they sell it off to somebody else. And that secondary market of buying that debt is becoming increasingly smart. And so, now a lot of these guys are stuck with this stuff sitting on their balance sheet. That would make me extremely nervous. I wonder if there’s a price that they can get cheap enough where I would consider it — there probably is, I don’t want to say that there’s not. But that would not be a regular value investment, that would not be something where I would say, “oh, it’s half price, it’s worth having a look at.” That would be something where I would say it would have to be in extremes, it’d have to be priced as if it was a donut, and now I’ve got a little bit of option value in it and that would be something that I might consider, but not in the ordinary course. So, that’s the kind of business model that I’m trying to avoid, the business model that can fail or go rapidly backwards; and banks are financially often like that.

Cameron  51:58

There’s one of those that’s at the top of our buy list at the moment over here: TGA, isn’t it? Thorn group. They own radio rentals.

Tony  52:05

It’s a radio rentals business, yeah.

Cameron  52:07

Their score on our checklist each week… It gets a really high score on our checklist. It’s really cheap, I think, and maybe that’s why.

Tony  52:16

Could be , yeah. There’s certainly been a lot of fear over here about a coming recession, and so those companies get marked down. I guess it’s the same in the States for you. And that presents opportunities, as well, because the recession may not happen.

Tobias  52:28

Right. As I was saying earlier, there’s always that balancing act between “is this cheap because it’s risky, or is it cheap because it’s just out of favour?” And so, I think that’s kind of the distinction that I try to make, that’s one of the red flags. So, I look at business model, I look at balance sheet, and then I want them to actually be a business. I don’t like science experiments, and there are lots around. Although, having said that, you know, a science experiment with a lot of cash on the balance sheet, I think about biotech. So, there’s a huge universe of biotechs here, and they’re all trading net cash. You know, they’re burning the cash, so you don’t have any expectation of getting the cash back. But, if you wouldn’t take a portfolio of these things and treat them as little options, and you’re getting them for a discount to cash, good things happen historically. I tend to avoid them, but every now and again when there are a lot of conditions that are right, I might buy a basket.

Tony  53:26

I remember going to the US just after the dotcom crash, maybe a year later, and being told biotechs are the future. And, you know, being in San Francisco and driving past this big shiny new campus for some biotech company, and I just thought, it hasn’t changed. The money has just moved from tech to biotech.

Tony  53:50

I’ve noticed the same thing.

Tony  53:51

No one learnt.

Tobias  53:53

It’s not that the mania goes away, it just moves somewhere else.

Tony  53:56

Yeah, it’s like a floating crap game.

Tobias  54:01

It’s been a funny thing over the last few years, because it’s gone from crypto to profitless tech, and then it was in NFTs.

Cameron  54:12

To get back to what you were saying before, though, Tobias, in terms of staying focused and disciplined and avoiding style drift — I like that term — it sounds like you’ve just got conviction that your thinking, your model for investing, is long term secure, and you just stick to it. Stick to what you know because you believe long term it’s going to pay off. Even if there are good years and bad years, long term you’ll end up better off if you just stick to what you know, what you believe.

Tobias  54:47

I do think that that’s the case, but it’s also the case that I can look at the companies that are holds and I can look at what they’re earning, and I can look at what I’ve paid for them, and I have a confidence in those companies that I hold. So, at the moment, the companies and portfolios that I have over earn on their assets relative to the S&P 500 or the Russell 2000. So, S&P 500 is in an unusual place where I think that it is higher quality than it has been in the past, just because it’s Google and Microsoft and Amazon, those companies at the top, rather than Exxon or something like that, which is much more cyclical. In the Russell 2000 smaller companies, there’s really a lot of junk in there that you really paid for being a careful value investor in the junky stuff. It’s going to be hard to beat the index for a while, I think. Having said that, my portfolio still over earns both of those portfolios and it’s trading at half the price of both of those. And when I see that, I think it’s just a matter of time. Mean reversion will push those companies closer to the index, at least. And I still think they’re better than cash, there’s enough margin of safety built into them that I think… ZIG, the average PE across that is like 8.3. And for Deep, the average PE across that is 7.8, something like that. They both earn better than… So, the S&P 500 earns 13% on its assets, and these all earn about 25/26% on assets. So, my view is that at some point either they will outgrow that valuation and it doesn’t require any change in the multiple, or the multiple universes, and either of those two scenarios should lead to outperformance. But it takes time.

Tony  56:31

The last time we spoke, I think you said that you rotated your portfolios on a quarterly basis, perhaps? Are you still doing that, or are you buying and holding them for longer?

Tobias  56:41

I don’t sell, all I’m doing is rebalancing. So, what I’m doing is, if a company trades up a lot over a quarter but it’s still otherwise undervalued, I would just sell it back to equal weight. And if a company trades down, I would just buy it back to equal weight. Because I found that about 20% of the return comes from that rebalancing over time, and then eventually things get too expensive and they get sold out, or I’ve made a mistake and they get sold out. So, the turnover register is about 80%, but that’s a little bit misleading. I’m not selling that many companies, I’m just trimming back or adding to keep it roughly equal weight.

Tony  57:22

And in terms of concentration, how many stocks are in the portfolios?

Tobias  57:27

Thirty In ZIG because that’s mid cap, large cap. One hundred in Deep, which has small and micro, just because they can be very small, they’re not as financially secure and it’s hard to get money into them. Some of them are somewhat Illiquid.

Tony  57:40

Do you find the hundred stock portfolio is tracking the index closer than the more concentrated one?

Tobias  57:47

No, it’s funny. It’s because it’s a — well, they both deviate quite significantly from the index — but it’s because the index, there’s a lot of junk in there. Just avoiding junk delivers a lot of performance, that’s outperform its index quite substantially. And I think Buffett says something like, you know, if he was going to improve the index the first thing to do is just go out and throw out all the junk. You know, rather than trying to pick the winners just try to pick out the losers, avoid the losers. And I think that that’s an efficient way of investing for the most part.

Tony  58:19


Tobias  58:19

I don’t know whether one thing is going to work or not. I know that some things are not going to work, and so, just avoiding those things I think helps.

Cameron  58:27

That’s pretty much the basic definition of how QAV works, right, Tony? It’s designed to sort out the junk, and whatever’s left is what we invested in, really.

Tony  58:38

Yeah. You can buy the barrel of apples, or you can go through and pick out the bad ones and the ones that are left are much better to eat, yeah.

Tobias  58:46

I like that approach.

Tony  58:47

It’s like when you go — I’m a golfer — and someone is selling second-hand golf balls at the side of the tee, and you can buy, you know, ten for $20 or something, if you just have to grab ten as a handful you’re gonna get some crappy ones in there. But if you can go through and pick out the ten best ones, it’s a really good deal.

Tobias  59:05

Yeah, I like that. I think that’s the easiest thing to do.

Cameron  59:08

Yeah. All right. Well, we should let you go, Tobias. Listen, if people are new to The Acquirers Multiple, where’s the best place to send them? To The Acquirers Multiple website, From there they can find the books and the podcasts and the funds and all your world of stuff.

Tobias  59:25

That’s the easiest way to do it., or Acquires Funds — there aren’t very many links. So, Acquirers Multiple is the best place to go, and then I’ve got the books and the podcast. There’s a free screener and some other stuff on that site. The bloke who runs it is an Aussie by the name of Johnny Hopkins, he does a great job of pulling up all these excellent articles. So, he runs the blog and that, and he does a fantastic job with that.

Cameron  59:50

Good stuff. Well, thanks for coming back on and chatting to us, man. That was good fun, as always.

Tobias  59:56

My pleasure. Thanks, Cameron, thanks, Tony. It was really good.

Tony  59:59

Lovely to hear from you again. And a Queenslander, ex-UQ alumni like myself.

Tobias  1:00:05

Yes, Roma in western Queensland and then UQ.

Tony  1:00:09

Wow, okay. No, I grew up in Brisbane, but I think I was there before you. i was there in the early 80s.

Tobias  1:00:16

Yeah, I got to Brisbane in ’96, I think. ’95, something like that.

Cameron  1:00:20

Thanks mate. Take care.

Tobias  1:00:23

Thanks, fellas. That was a lot of fun. Appreciate it.

Tony  1:00:26

Alright, see ya.

Tobias  1:00:27

Take it easy. Bye.

Cameron  1:00:29

All right. Oh, well, he’s gone. We’re still here. How was Fiji, Tony?

Cameron  1:08:27

QAV Podcast is a production of Spacecraft Publishing Propriety Limited, authorised representative of AFSL 5204426 AFS representative number 001292718. Please don’t make any investment decisions based solely on listening to this podcast. This is presented as general advice only not personal financial advice. We don’t know your personal financial circumstances. Please see a financial planner before making any investment decisions.