We’ve just been watching Bruce Greenwald’s 2014 presentation at the International Post Keynesian Conference in which he illustrates how smart investors can take advantage of overconfident investors, which is most of us, saying:
Human beings are constituted and cannot stop themselves from believing they know what they know with a vastly higher degree of certainty than is warranted.
In the debate on ‘weapons of mass destruction’ in Iraq nobody said, “There are weapons of mass destruction in Iraq with probability sixty percent or probability forty percent”… but that was the reality.
In advance nobody knew. They all decided either that there were for certain or there weren’t. When they apply that to stocks they decide the good stocks are good stocks for certain, and the bad stocks are bad stocks for certain… and nothing is certain!
In a situation of radical uncertainty people impose certainty on that situation, and you can see how that’s going to amplify the over-valuation to the glamour stocks and amplify the under-valuation of the ‘ugly’ stocks.
The other thing you ought to know is that people don’t learn! People learn a little but they don’t learn much!
You can watch the full presentation here:
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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.”
Absolute Return Partners February 2014 letter
” The noble title of "dissident" must be earned rather than claimed; it connotes sacrifice and risk rather than mere disagreement.”
Christopher Hitchens, Polemicist
Herd mentality... Read More