In his latest interview on the Meb Faber Podcast, Jeremy Grantham discusses what happens when investors are short-term in their thinking and bit innumerate. Here’s an excerpt from the interview:
Jeremy: And people are all focused as they always are on the next year or two. I get that. But I’m much more interested in a period beyond that. What does the next ten years look like? It looks like a period of shortage, invention, challenge, inflation, and cheaper assets. Whoopie for those people who are acquiring them, not so good for people who are selling.
Meb: That’s right. Well, if you’re a young person, that’s the best thing you can cheer for is a nice, big, fat bear market.
Jeremy: Absolutely. Oh, and by the way, just let me make the point. People don’t realize that when you have cheap assets, that 6% yield that you’re reinvesting…a forex is a good example. You pay 6%, you buy another forex, 6% increment a year. When it doubles in price, what are you doing?
You’re now compounding at 3% a year. In 48 years, you’re down to a quarter of the wealth you would have had in the 6% world, a quarter. And yet we all love high-priced assets. It’s because we’re all so short-term and basically a bit innumerate.
We don’t get it that cheap assets with high yields is a much better state to live in than high priced assets and tiny yields, or in the case of bonds, negative.
You can listen to the entire discussion 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.”
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