18%+ Returns!!! The Acquirer's Multiple Review

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What is the Acquirer's Multiple
I think the biggest take away that the book clearly explains is the idea of mean reversion.

Companies under fair value eventually move towards fair value, and companies over fair value eventually move towards fair value.


Now a very normal way to look at undervalued companies is the P/E ratio.
This is one of the most common simplest ratio’s on value that exists.
The P/E ratio is the price of the stock divided by the earnings per share.
So if the company’s share price is $10 and they make $1.50 earnings per share.
$10 / $1.50 = 6.66
The P/E ratio is 6.66.
So if we bought the shares at $10 of this company, it would take with current earnings 6.66 years to make our $10 investment back.
So the lower the P/E Ratio, the more undervalued the company.

The Acquirer's Multiple takes the P/E a step further. And I think a far better representation of value.
Because we factor in cash in the bank plus how much debt the company has which I think is very important.
I’ll try to make this as simple as I can.

The Acquirer's Multiple Formula is
Enterprise Value / operating earnings.

Some companies have huge amounts of debt. And some companies have huge amounts of cash and no debt.
To compare them all, it is better to use enterprise value than market cap so we factor in the debt and the cash.

Remember, lower enterprise value is better for us, it’s better value.

Operating earnings:
Money from operations.
This is simply the money that flows into the business from its operations. Before tax and one off things.

The Acquirer's Multiple is
Enterprise Value / operating earnings.
Lower this number the better. So now we can compare companies against each other and rank them.

Now we can give every company on the entire stock market an Acquires multiple. And the lower Acquirer's multiple, the better value we are getting taking into account debt as well.

Who is Tobias Carlisle?
Tobias E. Carlisle is a fellow Australian and runs the Eyquem Investment Fund. He was a lawyer specialising in mergers and acquisitions in Australia, the US, UK, and many other countries.

I like Tobias Carlisle because he uses scientific and data backed research but it is not complicated at all. The acquirers multiple in my opinion is very sensible and logical.

BUT Does it actually work?
The Acquirer's multiple investing strategy is practically the same as the magic formula.
So the strategy is to follow this process.
Rank all the companies and give them an acquirers multiple ranking.
Buy two to three positions each month in the top 20 to 30 companies, over the course of a year.
Each year, rebalance the portfolio by selling off losers one week before the year-term ends. Sell off winners one week after the year mark. (this is a tax strategy in the US)
Repeat the process each year for a minimum of five to 10 years or more.

Acquirers Multiple Stock Screen

My Opinion
Now trying to stock pick like this has its own disadvantages. I will also make mistakes.
The easier decision is to just trust the back tested data, invest in all of them and follow the rules for the very long term.

I hope you enjoyed this video, hit that like button and i’ll see you in the next video.