During his recent interview on The Acquirers Podcast with Tobias, Adam Mead, author of The Complete Financial History of Berkshire Hathaway discussed Buffett’s Strategy Of Having No Strategy. Here’s an excerpt from the interview:
Tobias: As an investor, having conducted this extensive research on the great industrialist of our age, what do you take out of it that you want to use in your own process?
Adam: I really came to appreciate– Again, it’s almost paradoxical that the simplicity but also the complexity of it. The model that I used in the book to look at all these acquisitions over time is this pretax return on capital. You have very basically, how much capital does the business need to operate? What’s the capital intensity? What are the margins? I came to realize that Buffett hangs everything off of that. You listen to his words, and it’s okay, what will cause margins to change? What will cause capital intensity to change up or down? What will competition do to affect those things? And so, it’s a very simple model, but it’s very hard to figure out.
I really came to appreciate just how hard it is, I guess, even though it is simple. This patient approach, and Buffett even writes about several times, this strategy of having no strategy where you just have to keep turning over rocks, keep going, but be opportunistic when things come along and really just do the best thing that’s in front of you at the time, and all of the mistakes, but we’re so lucky that Buffett highlights his mistakes– and all these mistakes are just reassurance that you know, geez, he’s going to make mistakes, learn from them, but also, don’t beat yourself up too much when you make the mistakes.
You can find out more about Tobias’ podcast here – The Acquirers Podcast. You can also listen to the podcast on your favorite podcast platforms here:
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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