In his recent Daily Journal shareholder meeting, Charles Munger discussed a number of topics including Robinhood, SPACs, Bitcoin, market speculation, interest rates, and why value investing will never go out of favor. Here’s an excerpt from the meeting:
Munger: Well that is easy. Value investing, the way I regard it, will never go out of style because value investing the way I conceive it is always wanting to get more value than you pay for when you buy a stock, and that approach will never go out of style.
Some people think that value investing is you chase companies which have a lot of cash and they’re a lousy business or something but I don’t define that as value investing.
I think all good investing is value investing. It’s just that some people look for values in strong companies and some look for values in weak companies, but every value investor tries to get more value than he pays for.
What is interesting is that in wealth management a lot of people think that if they have a hundred stocks they’re investing more professionally than they are if they have four or five. I regard this as insanity, absolute insanity. I find it much easier to find four or five investments where I have a pretty reasonable chance of being right that they’re way above average.
I think it’s much easier to find five than it is to find a hundred. I think the people who argue for all this diversification, by the way I call it diworseification, and which I copied from somebody, and I’m way more comfortable owning two or three stocks which I think I know something about and where I think I have an advantage.
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.”
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
This article originally appeared on ETF.COM here.
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