Here’s a great excerpt from an interview that Warren Buffett did with BizNews in 2017 in which he illustrates how investing is much like reporting. Buffett was asked the following question:
When you’re doing these analyses, then and now, do you have computers that help you, or how did you actually read it all, did you just get printed materials, or how did you, in those days get the materials to read about the Washington Post, or how do you do it today?
And here’s his response:
Well, pretty much the same way, except there are fewer opportunities now, but I met Bob Woodward [Journalist – Washington Post] and he’d just come out with the president scandal and all of a sudden at all of thirty years of age, he was getting quite wealthy and we had breakfast or lunch over at the Madison Hotel and he said, “What do I do with this money?” and I said, “Investing is just about assigning yourself the right story. Imagine Ben Bradlee [Editor – Washington Post], this morning said to you, “What is the Washington Post company worth?” what would you do if you had to write the story in a month? You’d go out and interview TV brokers and newspaper brokers and the owners and you’d try and value each asset”.
I said, “That’s what I’d do, I assign myself the right story and it’s nothing more than that”. Now there are some stories I can’t write, if you ask me to write a story on what is some glamorous, but non-profit making business worth, I don’t know how to write that story, but if you ask me to write a story on what is Potomac electric power, or something like, I can write the story and that’s what I’m doing every day, I’m assigning myself a story and then I go out and do it.
The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates.
It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization.
The Acquirer’s Multiple® is calculated as follows:
Enterprise Value / Operating Earnings*
It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com.
The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT.
Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up.
Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC.
He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law.
Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener.
All metrics use trailing twelve month or most recent quarter data.
* The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”
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