Value Investing with Tobias Carlisle
FEATURING: TOBIAS CARLISLE
Since the October 2007 market high, $BRK.B has been cheaper than today on a price-to-book value basis (1.1x) a mere 2% of days–68 in total–falling in 2009 at the low, and 2011 at the low: pic.twitter.com/LSJhrCkZDr
— Tobias Carlisle (@Greenbackd) March 11, 2020
Q: For those who aren’t familiar with you, please explain your investment philosophy. How does your philosophy influence how you evaluate investment opportunities?
A: I run a long/short US value strategy that buys deeply undervalued, and out-of-favor stocks that offer asymmetric returns, with limited downside and a greater upside. We also short fundamentally weak, distressed stocks with statistical indications of earnings manipulation and fraud. To paraphrase Warren Buffett, deep value targets fair companies at wonderful prices where Buffett-style value investors target wonderful companies at fair prices.
We target more Benjamin Graham-style opportunities with a wide discount to a conservative valuation, downside protection in a strong, liquid balance sheet, and a robust business capable of generating free cash flows. And we hedge the long by shorting junky, distressed stocks.
Q: The featured chart shares how Berkshire Hathaway Inc (BRK.B) Price-to-Book Value has reached rare levels. What does Price-to-Book tell us? What are some other metrics investors should pay attention to?
A: I usually favor a metric called The Acquirer’s Multiple®, the measure used by activists and buyout firms to identify potential targets, which I discussed in my books The Acquirer’s Multiple and Deep Value. But for insurers and investment companies like BRK.B valued on the basis of assets, rather than income or cash flows, price-to-book value is a better measure. The objection to price-to-book value is it’s based on historical data at year end, and Berkshire’s asset values will have also fallen. That is indisputably true. However, in this case, I’d argue that it’s better to be roughly right and buy BRK.B here, than aim for precision and risk missing the opportunity. As Seth Klarman says, “High uncertainty is frequently accompanied by low prices. By the time the uncertainty is resolved, prices are likely to have risen.”
Q: As a value investor, how do you approach market downturns? What rules of thumb should investors be considering during selloffs?
A: Value investors embrace sell-offs because they offer rare opportunities to buy stocks at what we believe to be cheap prices. All the best returns for value investors occur from the bottom of big busts. For example, buying Berkshire at the lowest price-to-book value since the 2007 peak, which happened to coincide with the bottom of the last bust–March 5th, 2009–generated annualized returns of almost 80 percent to today, even though BRK.B again trades at a depressed price-to-book value. Investors buying BRK.B here will likely do exceptionally well over the next 3, 5, and 10 years, even if it gets cheaper in the interim.
I know, I know, $BRK.B‘s p/b is based on historical book (unlike the last time it got this cheap when book was updated on a tick-by-tick basis). Better to be roughly right, etc: pic.twitter.com/3aoUt7n2v7
— Tobias Carlisle (@Greenbackd) March 12, 2020
Q: How do you use YCharts in your investment research and analysis? Which tools are your favorite or most used, and why?
A: YCharts offers huge amounts of very helpful data that I can easily plug into a visual. In the current drawdown, I’ve been pulling up other data in chart form, like the high-yield spread, to see the impact of coronavirus and disruptions on the credit markets. The high-yield chart, for example, can help distinguish between “V” shaped drawdowns that are primarily equity market events like 2018, and more serious events like 2016, 2011, 2007-2009 and 2000-2002, which were driven by fundamental weakness in the economy.
For the record, this looks like a more serious event to me because the spread has reached 7.42%, which is high, and unusual, exceeding the late 2018 peak, and closing in on 2011 and 2016 declines, which peaked at 8.72% and 8.51% respectively. If we blow through those peaks, a megabust like 2000-2002 or 2007-2009 becomes a real possibility.
Q: What are some of the ways value investors can benefit from YCharts? What’s your “secret sauce?”
A: I love to take a look at a stock and run it back a decade or so against a few different price metrics. Seeing how the stock performed when it got equivalently cheap or expensive can help in assessing an opportunity, long or short. It also helps to communicate the opportunity to investors. Showing the visual is so much more powerful than quoting statistics and ratios.
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