Tobias Carlisle is the founder and managing director of Acquirers Funds, LLC. He serves as portfolio manager of the firm’s deep value strategy. Tobias is the creator of The Acquirer’s Multiple®, and the author of the books: The Acquirer’s Multiple, Concentrated Investing, Deep Value, and Quantitative Value. Tobias has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Here’s his story!
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Tell people who you are and what you’re currently building.
I’m Tobias Carlisle, the founder of an SEC-registered investment advisor called Acquirers Funds, LLC. It operates an SEC-registered exchange-traded fund (ETF) called The Acquirers Fund (ZIG:NYSE), which is a long-short US equity, deep-value fund. The strategy in the fund is based on a series of books that I have written. The first one that I wrote was Quantitative Value and it came out in 2012. I partnered with a guy who was doing his Ph.D. at Chicago Booth, which is the best quantitative research school in the United States. We went and found every bit of industry and academic data that we could on fundamental investment strategies. We strove to answer questions like: How do you find something that’s undervalued? How do you find something that’s good quality? How do you find something that’s got no earnings manipulation, no fraud, no distress, financial distress? Then, we built a model from that data.
In the course of building that model, I noticed there was this weird phenomenon where something is deeply undervalued and starts behaving in an unusual way. So I wrote a second book called Deep Value, which is about some of the odd properties that companies exhibit when they get very undervalued. That came out in 2014. Along the way, I realized that which stocks you selected was about half of the challenge, and the other half of the challenge is managing the portfolio. The second half of the battle is described in the 2016 book Concentrated Investing.
The final book that I wrote was called The Acquirer’s Multiple, which you can read in two hours and is written in fifth-grade English, so anybody can understand it. It’s also got lots of charts and makes the argument simply, quickly, and clearly.
The fund is called The Acquirer’s Fund and it implements that strategy. The fund draws on those works. I created a long short-portfolio–long meaning that we own stocks, short meaning that we borrow them, and sell them in anticipation of buying them again in the future. The idea is that you get this effect known as Shannon’s Demon–if you have one part of the portfolio that’s anti-correlated to the other part of the portfolio, you’ve always got one part of the portfolio working, and if you’re rebalancing on a regular basis, you’re always taking away from the side that’s working and investing in the side that’s not working, and that helps you improve your returns and reduces your risk. Eventually, I’d like to create a small and micro-cap version of the fund because the current version of the fund is mid-cap to large-cap. After that, I’d like to create an international version of the fund.
Tell us how you decided to make the transition from lawyer to investor.
I’ve always wanted to do investing and found it really interesting. There’s a lot of overlap with what I do now and my previous experience as a mergers and acquisitions attorney, first in Australia and then in San Francisco. There was a lot of overlap between those two in the early 2000s because, in the first dot com bubble, there were a lot of companies that had raised money and when the bust happened, they had a lot of cash on the balance sheet, but they were also burning a lot of cash, so they were sold down really hard. But there were these activists around–we didn’t know that they were called activists at that time–they were like corporate raiders from the 1980s who had come back. They would buy positions and then lobby the management to pay out the cash or to stop the business and were very successful in doing that.
During that process, I read some of Warren Buffett’s letters. Buffett talks about buying a wonderful company at a fair price, but these weren’t wonderful companies, they were really bad businesses and I couldn’t work out what they were doing. So I went back to Security Analysis and read the chapter about liquidation value, the role of management, and the relationship between management and shareholders. From there, I worked out what they were doing and found it really interesting. I thought that it was a way that I could use my legal skills to potentially do this if it happened again. Then in 2007, in the big bust, as companies came around again I started investing in them and made a lot of money. I worked out pretty quickly that it’s a strategy that you can really only use at the bottom of a bust. It’s not something that you can do throughout the whole cycle. So I tried to find something that was the same philosophy but scaled better to work through the whole cycle, and The Acquirers Multiple is that strategy.
Basically, The Acquirers Multiple is the metric that activists and private equity firms use to work out how much they can pay for a business, put some debt on it, pay some cash out to kind of get control, and then run it themselves. I created a website called acquirersmultiple.com that screens for those stocks. I’ve run that from 2015 until today. The idea was that I would use it as the launching pad for the fund, which is what’s happened.
What were the biggest obstacles to founding your own fund?
It’s incredibly expensive, and the cash burn when you’re running a fund is huge. The outgoings are very material, so you need to get to a certain level to break even. So you either need backing from venture capitalists, or the ability to back it with your own capital, which is what I did. You also need to raise money into the fund, which means that you need distribution or some sort of marketing platform. I have a podcast, Twitter, the website, and the books that helped me with the distribution. Doing podcasts and interviews with other people is a big part of the marketing strategy because it doesn’t cost anything other than my own time, but can be very effective because you can build a close relationship with the people who listen.
What have you learned about building successful companies or about the success of companies while working as an investor?
I think that cash flow is the lifeblood of companies. They need cash on the balance sheet, and they need free cash flow generation or the ability to generate free cash flow in the future. So buying companies that have those properties is a great way to get good returns. If you can, buy them at a stage slightly earlier than that, where they don’t yet have those properties, but they are about to emerge in a very foreseeable future. Then you can often get better returns again, provided that you are confident that those free cash flows will emerge.
So a lot of the positions that I like, personally, are ones that have been previously profitable, previously cash flow generative but are going through a bad period and the market gets terrified that the bad period will just continue on forever. So the time that we’re in now is a very good time for guys like me because there’s a lot of things that look bad and get sold off really hard, but it’s foreseeable that they will recover, provided that they’ve got enough capital on the balance sheet and can see a path to profitability. That’s typically when we take a position. When they look beaten up and ugly, and when they look better, then they’ll be bid up a lot on that new cash flow multiple.
If you had to give a one minute keynote, to a group of college graduates, what would you tell them?
When you’re starting out and you don’t have any obligations to family and you can live very cheaply i.e. don’t have a mortgage, expensive car payments, or things like that. That’s really a great opportunity to do something that is high risk and high reward. You don’t necessarily have to work for yourself, but you should go and work for somebody else who you respect and admire. Learn as much as you possibly can and build something of your own. People who start working, start getting paid slightly more, their lives get slightly better, and then it’s really hard to break out and do anything at that time. You’ve just got to be prepared to eat shit for a long time. That’s really the roughest thing. You’ve got to be prepared to hustle, do other jobs, anything to kind of support it.
It takes a long, long time to figure out where your niche is. You’ve got to look for it and look for the opportunities. Young people have a huge advantage in things that are new because older people have no more experience in them than young people. So if I was a college graduate, I’d be looking at things that are just starting out now and trying to figure it out, because you’re figuring it out at the same time as all the old folks too, and you don’t have all the bullshit in your brain that the old folks do.
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