Things I learn from the Acquirer’s Multiple

4 weeks ago JCprojectfreedom 1

The Acquirer’s Multiple is written by Tobias E. Carlisle.

A. Be a Contrarian

In order to perform, your view needs to be different from the crowd. If you are buying into the hottest stock, most likely it will be inflated price where all the funds and retail investors are already invested. You will most likely be the last to join the party when everyone is leaving. The only to get a good price is when nobody wants to buy, sell when nobody wants to sell. A good price has more margin of safety, which means downside is already priced in. If you are wrong, you won’t lose much.

One thing I tend to agree and disagree with is “given time, many business turn out to be less scary, bad or boring than they seem at first. The reason is mean reversion“. There are businesses which extrapolated from bad to worse and never return back to the mean. There are businesses which reinvent themselves and started growing again. My question is how do we know which are the ones that will likely survive the business cycle and reverse back to the mean?

B. Buy undervalued companies.

The larger the margin of safety, the better the return. In this book, Tobias clearly shows the result of using Acquirer’s Multiple which is company’s Enterprise Value compared to its Operating Earnings.

Enterprise Value = Market Cap + Debt (which includes Minority Interest and Preferred Shares) – Cash and Cash Equivalent. Operating Earnings =Revenue – Cost of Goods Sold – SG&A – Depreciation & Amortization

C. Treat share as ownership

Shareholder has rights as owner of a company and needs to pay attention to everything the company owns. This will include the business and its assets.

D. High Earnings Growth and Profits

I like this part of the book which mention that we – retail investors seldom have the capability of legendary Warren Buffet in picking companies with everlasting moats. Moats are easier to cross than most will have thought. Research shows that highly profitable companies’ profit revert down to the mean over time due to attraction and entry of new competitors.  Best place to find future growth is in a business which is already trading at large discount to value.

E. Concentrated investing

If you want to match the market, buy the market. If you want to beat the market, do something different.

Concentrated portfolios are more volatile than broad market and don’t follow the market. However, do not be too concentrated. When your thinking and assumptions are wrong, it is likely the market is right.

F. Think Long Term

Companies often become mispriced because the next year looks tough, this creates a window for entry for investors. This is an edge for retail investors when time is on their side. Let compounding effect works its course. With humility, luck and time, we can beat the market.