Jeremy Grantham: The Problem With Being Contrarian
The Acquirer's Multiple2021-05-14T03:48:55-04:00
In his recent interview on the Meb Faber Podcast, Jeremy Grantham discussed the problem with being contrarian. Here’s an excerpt from the interview:
Q4 2020 hedge fund letters, conferences and more
Grantham: Of course, I did want to add that I can say with a clear conscience that we were at our maximum bearishness in March of 2000. And at a maximum all-time bullishness in March of ’09. And a very interesting question is does that make it a viable business strategy?
I’m not so certain. Because being a contrarian, as Keynes pointed out in his famous chapter 12 of the general theory, “It’s a hair raising business because if you’re right on your own,” he would argue that the committee pats you on the head while you’re in the room, and then describes you, as you leave the room as a dangerous eccentric.
And if you’re wrong on your own, they shoot you, that’s it, out of hand, bang! Whereas if you’re wrong together, nobody gets shot. You go off the cliff together, endless banks doing the wrong thing at the wrong time. And maybe they find a complete idiot who’s been actually cheating a bit. And they showed him that basically, there’s huge comfort from company in terms of career risk. And that’s why you never hear a good bear case from Goldman Sachs, or Morgan Stanley, or whatever.
You may hear it from one individual once in a blue moon, but you don’t hear it from the enterprise in total because it’s lousy business. They’re not in the business of engaging in lousy business. So, since you can never get the timing perfectly, otherwise, whoever could don’t have the will as well. Since you can’t get the timing right. You know, in general, you’re going to be too earlier, etc. So why not just tout the bull market and say, “It’s cheap. It’s cheap. It’s wonderful. Jump on. Jump on.”
You can listen to the entire interview here:
Jeremy Grantham: Meb Faber Podcast Feb 2021
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The Acquirer's Multiple
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.”
