(Ep.36) The Acquirers Podcast (Bonus): Ian Cassel Interviews Tobias Carlisle

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In this episode of The Acquirer’s Podcast Ian Cassel steps into the hosts seat to interview Tobias Carlisle. Ian is the Founder of MicroCapClub and Intelligent Fanatics Capital Management. During the interview Tobias provided some great insights into:

  • What Was The Catalyst For The Acquirer’s Multiple?
  • Why Does Value Under-Perform During Market Booms?
  • Buying Some Cheap Stocks Will Be A Mistake But The Ones That Work, Work Really Well!
  • What Is The Ideal Number Of Stocks To Hold In Your Portfolio?
  • The Difficulty Of Using The Kelly Formula In Investing
  • How To Find The Best Stocks To Short
  • Understanding The Difference Between Active And Passive ETF’s
  • What Is The Process For Launching An ETF?
  • Sometimes The Best Strategy Is To Buy Stocks And Forget About Them
  • One Behavioral Trick That’s Really Helpful For Investors
  • This Could Be One Of The Best Opportunities In The Last 20 Years To Be A Value Investor
  • Do The Thing That You Think You Are Good At – Non, je ne regrette rien

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:

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Full Transcript

Ian Cassel: All right. Hi. This is Ian Cassel, and this is The Acquirers Podcast. I’m stepping in for Tobias Carlisle to interview a very special guest. He’s a portfolio manager, a brand builder. He’s authored several books on investing, which I’m sure many of you have read. But perhaps even more important, he’s a great father, great husband. He hasn’t left his family behind on the road to success.

Ian Cassel: It’s an honor and privilege to interview the great Tobias Carlisle right after this.

Speaker 2: Tobias Carlisle is the founder and principal of Acquirers Funds. For regulatory reasons, he will not discuss any of the Acquirers Funds on this podcast. All opinions expressed by podcast participants are solely their own and do not reflect the opinions of Acquirers Funds or affiliates. For more information, visit acquirersfunds.com.

Ian Cassel: Tobias, thanks for coming on.

Tobias Carlisle: What a great introduction. Thanks so much, Ian. That’s probably the most professional introduction this show has ever had.

Ian Cassel: Hey, it’s an honor to interview you. Just so the audience knows, I decided to turn the tables on you because I’ve been an admirer of yours from afar. I think a big reason for that is I think that you make success look easy. I don’t know if it’s just the way you look, the way you talk, your books, which are great. They launched this podcast. But I know it hasn’t been easy for you. I know it’s been a grind, just like it is for anybody building anything.

Ian Cassel: So I’d like to get into a little bit of that hustle and what it took to get where you are today, and also as well as a lot of other things that I hope maybe you didn’t hit on in other interviews.

Tobias Carlisle: That sounds great. I’m ready.

Ian Cassel: Great. Excellent. Let’s get started. Where are you from? Where did you grow up? I don’t think you probably grew up in Alabama or Mississippi by your accent.

Tobias Carlisle: Yeah. I grew up in a little country town in the Australian Outback, Roma. When I was there, it was like 6,000 people. It’s a four- or five-hour drive to the nearest big city, which has 100,000 people in it. So it’s not a huge city by any stretch of the imagination. It was very dry, kind of country, very rural. My friends were farmers or the kids are farmers, or the kids have kangaroo and pig shooters. Then they would turn those into dog food.

Tobias Carlisle: So it was a fun little town. It’s got a doctor, dentist, accountant, lawyer, teachers, a few kind of… I wanted to do a professional job, but I didn’t know what you could do. I didn’t want to do doctoring because I don’t like blood. Accounting looked really boring. Lawyer looked really boring, too, [inaudible 00:02:53]. I had to decide at some stage what I was going to do, and my dad said, “You should do lawyer because lawyers make lots of money.” That’s not true. Lawyers don’t make lots of money, I discovered after doing it for 10 years.

Tobias Carlisle: But that was basically… So I left that little country town, went to university, studied law, got a job in a law firm that was a big law firm that did mergers and acquisitions, and got transferred to the state after about five or six years. I met my wife. She was living next door to a girl who I had worked with in Australia. She came back to Australia for a little while when I worked as a general counsel for this company that I helped list, which is a really great story. These two guys from another little country town had put in $100,000 each into this thing, listed it at $10 million evaluation, $10 million market cap. So it was a genuine microcap.

Ian Cassel: [Pico 00:03:45] cap or something like that.

Tobias Carlisle: Yeah. A tiny thing, which you can do in Australia. You can list them that early on. The rules are I think you had to have net assets of more than $1 million, but they raised three in the listing. So that gets you over that mark. And then they had built this business, which was like a Dark Fiber business with internet plumbing, the back end of the data centers and appearing exchange and [inaudible 00:04:14] service, all those sort of things.

Tobias Carlisle: They built that, and they eventually got taken over for $600 million, I think. The two guys that ran it made about 120 each, and I had a little bit of money in it too. So it just was trying to work at what I wanted to do, and I thought what I wanted to do was to be an investor. There’d been an activist in it who I knew, and I said, “You did some good stuff, but there are all of these buttons that you can press to make life a lot harder for incumbent management, make them… If you think they’re doing something wrong. So I can help you do that, and you teach me the other stuff.”

Tobias Carlisle: He agreed to do that. I sat there for about 18 months learning. He was the real thing. He’d go to general meetings, stand up in the general meeting, ask a question. This is a big part of… Meeting rules are not really legal. There’s a lot of… I don’t really know what you’d call it. But, basically, if you’re at a meeting… This is just good to know. You want to try and get yourself to be the chairman of the meeting. If you chair the meeting, you’ve got enormous power. Often, you can get there just by… You can call for a vote of hands on the floor rather than proxies, which are handed in. And you might be able to get control of the meeting from the floor.

Ian Cassel: Wow.

Tobias Carlisle: So he tried to do that a few… It didn’t ever work, but it created enough noise and got enough attention that it brought some attention to these companies. And they did tend to work out. He’s done very well as a result. So I realized that I probably didn’t have the personality for activism. I just care what people think too much. You need that ambulance-chasing attorney kind of attitude to be able to inflict psychic pain on other people and not absorb any of it yourself, not because you’re tough, just because you don’t even notice. And I do.

Tobias Carlisle: So then I set up the fund my then girlfriend, now my wife… We moved back in December 2011 to Los Angeles because we were getting married, and we’ve since had kids. So it helps to be close to the grandparents. Her mom and dad are in Los Angeles. We live about five minutes away, which is fantastic because I’ve got three kids. And they’re 6, 4, and 21 months. So we need all the help we can get.

Ian Cassel: Well, that’s a pretty incredible story. I always wondered what was the catalyst to make you go from attorney to investing, and I guess it was some of the success you had working as a corporate attorney for that company, that start-up that had a successful exit.

Tobias Carlisle: Part of it also was I started work as an attorney in April 2000, which was right at the very peak. Even in Australia, there was this big dot-com thing going on. There are equally terrible businesses and equally glamorous… Everybody wanted to be an entrepreneur, a dot-com entrepreneur or a venture capitalist. I was doing law, and I thought that I was kind of going into this job to do IPOs and help venture capital and that sort of stuff because that was the way they had presented it.

Tobias Carlisle: But I just didn’t realize that that’s unusual times in the market. Typically, what happens is much more bread and butter, is mergers and acquisitions type work. So you do M&A because that happens all through the cycle, and it happens a lot at the bottom end of the cycle and at the top end. It happens all the time. But you just overpay more at the top end. So, basically, it collapsed. We started doing M&A, and these guys who were writers from the ’80s came back and they were trying to get control of all these little dot-coms.

Tobias Carlisle: I just had no idea why. Why would you want a business that’s losing money? These are terrible businesses. I don’t get it. That’s one of the problems with… I had read Buffett’s letters, and I was like, “Oh, you need a high return on invested capital, business with a moat,” and yet none of these things had anything like that. Of course, all they had was lots of cash on the balance sheet. I was just so focused on one income statement that I just completely missed the fact they had cash on the balance sheet.

Tobias Carlisle: I was like, “I vaguely remember reading…” because I had the 34 edition of Security and Analysis. What am I saying? 34 edition. And I remember that there were these chapters right at the back where they talked about the relationship between liquidating value and shareholder rights. So I went back and read that stuff, and I was like, “Oh, that’s really interesting. And, because I’m a lawyer, I know how to do some of this stuff. So next time this happens, I will go and try and find a whole not of net nets where there’s an activist involved.

Tobias Carlisle: Took a long time. Took until 2008 for them to really come back, and all of a sudden, there were like 300 US net nets, and there were activists involved in all of them. I was like, “Well, this is as good as it’s going to get. So I need to go now. All these things are back.” That’s when I started writing [Greenback 00:09:26].

Ian Cassel: Okay. Okay. Where did Greenback come from?

Tobias Carlisle: You remember Ashton Kutcher had that show Punk’d?

Ian Cassel: Yeah. Yeah.

Tobias Carlisle: I thought it’s… because these companies that I wanted are net cash, net net. So I thought it’s great it’s backed by Greenback. It’s backed by cash. And then it was the funny… Probably because the dot-com wasn’t available, so I got the… I just spelled it in the Punk’d version.

Ian Cassel: Right. Right. So you got bit by the value of investing bug. You were focused on income statements and then kind of switched to the balance sheets, started looking at net nets. When did you first discover, maybe, the Acquirers multiple or start thinking about that? What time period, and then when did you actually discover it?

Tobias Carlisle: When I was a real nerd at university, I used to go into the business library and they had all these old… Journal of Portfolio Management. If I had time between classes, I used to get those and just read through them and just see what was in there. It’s funny. I was there in the late 1990s, and I was looking at these things from 1986 thinking, “Wow, that’s really old. I can’t imagine that any of this stuff is relevant anymore.”

Tobias Carlisle: I found an article talking about how private equity firms or the leverage buyout firms found companies to take private based on their enterprise value to EBITDA ratio. That guy who wrote the article said, “You can think about this as the acquirer’s multiple,” because the lower this is, the more they’re able to buy, the more likely they’re able to take [inaudible 00:11:13]. They can do all these things with.

Tobias Carlisle: I can’t find that article. Whoever that guy is, he came up with the term. I didn’t come up with the term. But I just have no idea where that’s gone because it’s not searchable. It was like a hard copy thing, and I have no idea because I used to go in there a few times a week and read a few of these Journal of Portfolio… or whatever. I’ve read hundreds and hundreds, maybe a few thousand of them. So I have no idea. I have no idea where this idea came from.

Tobias Carlisle: But I saw the activist guys come back. I saw all the private equity guys come back into the market. Private equity got very sexy in the early 2000s, and that was what… All of the deals we were doing were private equity deals going private and little acquisitions and bolt-ons for these private equity type deals. I saw some research called Darwin’s Darlings or the endangered species list, which [Papa Jeffrey 00:12:13], which is an investment bank, put out.

Tobias Carlisle: In it, they had listed out all of the… They were saying there’s a bifurcation in the market at the moment they were talking about. That was in the… They were saying all the dot-coms have run away from all these other businesses, and they’re really good businesses. They’re growing 30% a year. You can get them on EV/EBIT multiples of three to five times. They’re buying back stock, and still nobody loves these things. They’re down on a regular basis, which is funny because I thought that’s such a weird… We’ll never see something like that again in the market. I wish I’d been around to invest during that period.

Tobias Carlisle: But they had used EV/EBIT. So I was aware of some research that a law firm did some… I forget his first name, but they’ve done some research that came out in about 2009 that talked about EV/EBIT and how that was a superior price ratio to book value for the reason that book value just didn’t work in 94% of the market. And then the 6% where it does work, the [inaudible 00:13:16] just too wide to make… It’s not even clear that it’s working there, whereas EV/EBIT does work really well.

Tobias Carlisle: You can take any decile of any universe and it’ll pretty much outperform over the back test data. So I just started using it, and then I remembered that the magic formula had used it as one part of the earnings yield. Joel Greenblatt’s earnings yield is part of it. So I saw some research by James Montier where he said he thought that the value part of it outperformed the whole value plus quality. And I just started building it up from there.

Tobias Carlisle: So it’s a combination of my background and the research that I was reading to come up with that idea.

Ian Cassel: I think you ran some analysis with Wes Gray. Is that correct? I think I remember in an interview you mentioned…

Tobias Carlisle: The book Quantitative Value has all of the… We went and found every bit of industry academic research that we could possibly track down to… Just on fundamental value investment and tested it just to see what works, what doesn’t work, because one of the funny… When you look at those Altman Z or [Banish 00:14:31] or any of those things that they use for financial distress or for earnings manipulation and so on, they’ve all got these weird coefficients in them.

Tobias Carlisle: So you’ve got to weight this particular thing with this .288, which makes no sense. There’s no reason why you would weight. So he’s just done a linear regression, Altman or whoever it was, Banish… I forget specifically which one I’m talking about here, but they’ve done a linear regression of companies that have gone bankrupt and they’ve said, “These are the… In their financial statements, the ratios that you can extract from their financial statements. These are the ratios that are associated with approaching bankruptcy or approaching financial distress or earnings manipulation or whatever the case may be.”

Tobias Carlisle: But then they put these weird coefficients on, which probably makes sense in the context of a linear regression but doesn’t make any sense going forward. There’s no reason why you should weight one of these to some weird three-decimal-place coefficient. Some of them still work, though, but even though I think it’s… I’m going to get this wrong a little bit. But I think Altman Z… There have been various iterations of it. It was originally just for manufacturing, and then they came up with one for non-manufacturing companies. And then it’s varied as it’s gone along.

Tobias Carlisle: But even though it doesn’t make perfect sense from a pure academic perspective, it is still pretty good at identifying these companies that are going through this financial distress. And I think that’s just because it’s looking at, are payables outstanding, growing? That’s probably not a good sign. What’s the quick ratio? What’s the asset ratio? What’s the… Because that’s blowing out. If that’s getting worse, that’s not a good sign. So it’s stuff like what’s the asset turner? And all those things, they do kind of add something, I think.

Ian Cassel: You mentioned some of the back tests in your book, and it’s a wonderful book. I’ve read it three times, twice before preparing, and then I read it again preparing for this interview. But you’ve done some back tests against Joel Greenblatt’s formula, which you just mentioned. It really just trounced the magic formula. Why do you think it outperformed so greatly over the magic formula?

Tobias Carlisle: Well, the idea is that the magic formula is there’s equal weight of EV/EBIT, which I call the acquirer’s multiple. Greenblatt uses the inverse of that, and that’s his earnings yield, which is basically like a [Look 3P 00:16:59] that just includes the cash on the balance sheet or debt and uses EBIT rather than bottom-line earnings. But then he combines it with this return on invested capital, which is what Buffett says he should be looking for.

Tobias Carlisle: To give Greenblatt credit, he dissected what Buffett has said and then created this very simple quantitative application of that idea and tested it, and it works. It does outperform. We tested it again in quantitative value and doing all the things that make it difficult for a strategy to outperform market capitalization, weighting the holding so it makes it comparable to a well-known index like the S&P 500.

Tobias Carlisle: We also have lacked the data, so we assume that you weren’t allowed to trade until June on the K data, so on the annual data, which… And then the database is already point in time. That should mean that it’s not like this is a common thing that there’s some look-ahead bias. In back tests, they presume knowledge. You don’t know that the system is trading on knowledge that it doesn’t have or information it couldn’t have possibly had at the time.

Tobias Carlisle: So even trying all those things, the magic formula does outperform a comparable index because value outperforms. And then the question becomes, what is driving the outperformance? Is it the fact that it’s that value plus quality or value plus return on invested capital? Or is it something else? So when you devolve the two down and you test each side independently, what you find is that the value part of it delivers more than 100% of the return to the magic formula. And the quality side, the return on invested capital, detracts from the returns.

Tobias Carlisle: The reason I think is that business is very competitive. As soon as a business sees that it’s easier somewhere else, it’s easy to make money, and somebody’s earning supernormal profits, they’re getting much more than their cost of capital, then competitors come in and they try to compete for that money. That’s basically microeconomics. They push down the profitability of those companies. And the reverse happens, too. In industries where they’re going through a tough time, the weak ends get forced out first. And then there are other businesses that we just don’t need to be in this vertical or this line because it’s easy to make money somewhere else. So let’s just forget about this one. We’ll take the assets out.

Tobias Carlisle: It gets to this point where all the capital has been taken out of the industry. There’s not been any competitors around. They get a little bit of a tailwind rather than a headwind, and they start making supernormal profits for a short period of time. That’s just the business cycle. That’s mining companies, advertising companies. Anything that’s cyclical looks like that. It’s a very small handful. It’s about 4%. Michael [Moberson 00:19:47] has done the research that resists this main reversion and any sort of tenure period.

Tobias Carlisle: He looks at the [endecia 00:19:54]. There are various things he’s still not been able to resolve. And I’ve talked to Michael. It will have come out by the time this podcast comes out, but I interviewed Moberson on the podcast, and we talked about it quite a bit because it’s something I’m fascinated in, this idea that return on invest… Because it’s something that a lot of value guys who’ve read Buffett focus on.

Tobias Carlisle: I think there are better ways of finding quality in a business, and I think that one of the things that people miss is that it’s a highly main reverting factor. And if you’re trying to buy things on the basis of this very high return on invested capital, your base rate is quite low. But you just need to be aware that that is the case so when you’re buying these things, you factor into your model some main reversion in return on invested capital, or you have a really good argument for why main reversion won’t apply in the instance that you’re looking for.

Ian Cassel: No, that makes sense. So I guess when you looked at the back tests of the acquirers multiple, was the outperformance generally tied towards one area of the market cycle? Or was the outperformance more general over the whole period?

Tobias Carlisle: It’s pretty consistent. It’s pretty consistent, but there are notable cycles where it doesn’t outperform. And the notable cycles are where the stock market is closer to the peak. The last few years of the boom, value tends to underperform. And I don’t really know why other than it’s just not that it’s… Value stocks are definitionally not the glamorous end of the market. They’re the things that aren’t getting any attention or flows.

Tobias Carlisle: And, probably, value investors are a little bit more disciplined than the average investor. So the bid goes away after a while for some of these stocks, so the value stocks drift sideways and then sell off before the market sells off. I think that that’s why you saw that late 1990s value doing very poorly while the market rocketed ahead. But it’s also happened in the ’60s and it’s happened in ’50s. It’s happened in various other notable stock market booms.

Tobias Carlisle: So then, conversely, value recovers first. Value tends to get its balance three to six months before the market does, and so value can be going ahead while the market’s falling. And that’s the time when it works best.

Ian Cassel: Okay. How do you find these companies? Is it just through a quantitative screen, or is there more to it than that?

Tobias Carlisle: Yeah. I start with a screen. One thing that I’ve learned after a decade of screening is that the first time you run a screen, you have a really great idea for something, build the screen. Run the screen. Build it. Back test it. Back test could be quite good. Then run it for now, and it’ll spit out this gobbledygook, like the list of names that you go through. And you just can’t understand how. How did these names get through this screen? It makes no sense because they’re all obviously not buyable ideas.

Tobias Carlisle: So it’s been a long time for me going from just to run the screen and get an output of names to don’t try and optimize the back test. Try to create something that is sensible, that is the way that you would invest, and then you get an output of names from that that are all pretty good opportunity. So, from the screen to the portfolio, I think that I cut out about 10% of names, 10 or 15% of names. The difference is often that I do this forensic accounting diligence and I look at, are their cash flows matching? Are their cash flows real? Is the economic picture that the financial statements paint true for this business?

Tobias Carlisle: There are lots of businesses that fool that say… Insurance companies fool and financials fool my screen. So I’m always extra careful with the analysis of those through the second process. And then I do a very, very simple DCF on every one of them just to see, is the reason that these things are so undervalued because the decline in the negative growth is so bad that they can never come back again? I’ve never found anything, just because they’re all so cheap on a multiple basis, on a yield basis, that even negative growth often means that they’re still undervalued.

Tobias Carlisle: I think a lot of what you’re trying to do as an investor is to find these things that… What’s the reason that these things are neglected? It’s because it looks like they’re in terminal decline. I think that, really, it’s not a terminal decline. It’s just a regular part of the business cycle, and now is a really good time to get them while they’re cheap relative to depressed business. So I try and get them at that stage. Some of them are going to be mistakes. Like half of them through any given rebalance period are mistakes because it’s not at the bottom of the cycle or they’re genuinely in terminal decline.

Tobias Carlisle: But that’s okay because the ones that work work so much better than the ones that don’t work because there’s already very low expectations for these businesses. So when they don’t work, they’re sort of like, “That’s kind of what we thought you were already.” And when they do work, it’s a big surprise to the market. So there’s a big change in the price. Over the full data set on average, that’s sort of… And that’s pretty typical asymmetric returns that people expect to find in value, and I find that’s true.

Ian Cassel: In your book, you also talk about how position, sizing, and rebalancing, when done correctly, a big part of your performance actually comes from that. I’m curious. How have you decided on the amount of positions and strategy, position sizing and when to rebalance?

Tobias Carlisle: I read a book called Concentrated Investing because I was interested… There are two arguments for how you concentrate or how diversified you should be. There’s the academic approach to it, and what they’re trying to do is eliminate non-diversifiable risk… Eliminate diversifiable risk. Sorry. So what they’re saying is if you create a portfolio, how can you make your portfolio track the market as closely as possible with the fewest number of stocks?

Tobias Carlisle: They find that by the time you get to 30, there’s really no marginal benefit to adding a stock beyond that. Value lists have got a different approach to it, but it should be somewhat informed by that other idea because if you think about it, it’s true. If you take a random sample of stocks, what is the chance that you either outperform or underperform? It’s a statistical sampling question. You should be able to create something that looks roughly like the market. So what number of draws from the hat have you created something that is a market portfolio?

Tobias Carlisle: And then you think, “Well, how do I then go about creating something that doesn’t track the market portfolio?” What you need to do, you need a value tilt or you need some sort of tilt to the portfolio that you’re creating. But then that creates another problem where now you’re buying these companies on a value tilt. What’s the appropriate number to capture the underlying phenomenon that you’re trying to express?

Tobias Carlisle: So the value guys have sort of fallen out. There’s the Buffett approach, which they say is to apply some version of [Kelly 00:27:04]. Kelly is really tough to apply, I think, because you can get the edge of odds by what the market is implying, and your own personal information is your own evaluation. That’s the difference between where the market thinks it is…. Where you think it is, that’s your private information. So you can derive edge over odds and make a Kelly-weighted bet.

Tobias Carlisle: The problem is that Kelly is created for guys playing blackjack in sequence. So they get one hand, make a decision, toss the hand, keep on going like that, whereas in the market you’re playing all of your hands at once all the time. And in playing all of your hands all at once, that definitely changes the sizing of the position. So a 40% position might make sense in isolation, but if you’ve got three 40% positions, you’re not going to leave your portfolio because Kelly never risks ruin. That’s the most important rule.

Tobias Carlisle: So you have to scale them down, and then when you start doing that, you think, “Well, I’ve got to include any positive expectation bet, which could be… Maybe I need some exposure to treasuries. Maybe I need some exposure to gold. Maybe I need emerging markets.” And then that scales everything down again. If you’re genuinely applying those rules, if you’re genuinely doing that, you get to this point where your portfolio looks more like a traditional value investor, sort of 20 to 30 positions. Maybe you’re weighting the bigger ones 5 or 6%. Maybe you’re weighting the smaller ones 3%.

Tobias Carlisle: And then I’m short as well. So my shorts are… I can talk a lot about the shorts, but the shorts are-

Ian Cassel: No, I actually wanted to because I saw you’re in 30 longs, 30 shorts. And I’m just curious. Were you able to run back tests on that? I’m curious how much of the outperformance came from the short book.

Tobias Carlisle: The shorts do two things. So the way that I think about the portfolio… because it’s 130/30. There’s a 100% net long portfolio [inaudible 00:28:59]. It’s just like a traditional value investing portfolio. Then there’s another market-neutral portfolio that’s 30 long and 30 short. That market-neutral portfolio, the way that it makes money is it’s just the arbitrage between the two sides so that the shorts come down faster than… Or the shorts come down, the longs go up, or some variation of that.

Tobias Carlisle: Then you should get some outperformance. Most of the time, that’s what happens on average. So it depends a little bit on what part of the market cycle. So this part of the market cycle has been really fun for shorting because the momentum is breaking a little bit, and that’s kind of the… Value guys don’t like shorting, I’ve found, because value is not a great way of… You see something like Beyond Meat. That’s a crazy evaluation, probably, for something that doesn’t really have any competitive advantage. There’s already lots of competitors rolling out. There are competitors out there right now, Impossible Burger and so on.

Ian Cassel: It’s not healthy.

Tobias Carlisle: It’s not good for you. Maybe it’s better for the planet. I don’t know. I’m not ignoring it as a business. I’m just saying, as an investment proposition, it doesn’t look that attractive to me. But then does that mean you want to go in shorter? What is the evaluation for it? I don’t know. But it could be 10 times overvalued. But David Einhorn makes a great point that 10 times overvalued is silly, but 20 times overvalued or 30 times overvalued is no more silly. It’s just still silly. You’re blown out of your position if you’re in that for that part.

Tobias Carlisle: So you need to find a way to time the shorts a little better, and they need to be smaller to be risk managed properly. One of the things I look for is terrible balance sheet, losing free cash flow. So they’ve got the ticking time bomb there. They have to do something. And the way that they’re financing themselves is by raising debt and equity. If I say that, everybody immediately can think of 20 names that fit that bill, that are up 30% a year, because when the market’s still in love with the story, it doesn’t really matter. As long as they can survive and they can keep on raising… Do a little placement. Do a little capital raising. Raise a little bit of debt. They’re going to be okay until that spigot gets turned off.

Tobias Carlisle: But the moment that that does, then they become a much more interesting proposition. And I think the way that you find that is the momentum is broken. So there’s just no more momentum in the stock. It’s just not up by the 12 months. If that happens, that’s when I sort of initiate a really small, little short position just to see what happens. We did that with Netflix. Netflix has been a widow-maker trade, but Netflix has had this enormous momentum for the last six, eight years. And it doesn’t have it anymore. That’s true of Tesla. It’s true of Canada Goose, which is a new one I’ve got on.

Tobias Carlisle: Canada Goose, it’s not a software as a service business. It’s a $500 jacket in a weakening economy with not a great balance sheet. So that’s one of the ones that I’ve put on. So that’s what we’re looking for. They’re all pretty similar stories. They’re once-glamorous growth stories that had an unlimited runway that have probably run out of runway.

Ian Cassel: It seems like you’ve discovered this simple formula that beats the market since 1973 or whatever in your back test. And it sounds too good to be true. It sounds like the holy grail of investing, quite honestly. Maybe, what are some of the issues that you’ve found with the acquirer’s multiple? Or maybe not issues, but…

Tobias Carlisle: Well, it’s still a value strategy. It’s still tied to what value does. And there are periods of time, long periods in time… And the last 10 years have been one of them where it underperforms. And people think that value investing itself is ridiculous; it clearly doesn’t work. If you look back over the last 30 years now, it’s probably had 5 or 10 years of outperformance and 20 years of underperformance because that includes the late 1990s. Worked in the early 2000s. Hasn’t really worked since 2010.

Tobias Carlisle: So I think that it’s just… The acquirer’s multiple is just a… If we test all of the price ratios, it has tended to be the best one. It’s still a value ratio. It’s not going to do anything magical. It’s pretty good at finding undervalued companies. In aggregate over time, it’s going to work. But there are long periods where it doesn’t work. It requires some discipline, and it’s hard to buy some of these stocks because I can look at them. I know what’s wrong with them. I know they’ve got a problem, and I don’t know if it’s going to get better.

Tobias Carlisle: I’m just betting on the fact that the price that they’re offered at right now is such a weird price for them that they’re either priced as if they’re going to zero or there’s… Something a little bit better can happen, and then you get such a big return, although that hasn’t been the case for the last few years. I just sort of buy them, and they keep on going down. And that’s not the shorts.

Ian Cassel: That was a good segue to your… Can you talk a little bit about the benefits of an ETF against maybe an SMA or a fund?

Tobias Carlisle: The ETF… So there are two types of ETFs. There are active and passive, and they have slightly different tax treatments. The only difference in practical terms is that the passive ETF has to follow an index so you can create an index. So there’s always some argument, are passive investments better than or worse than active? It’s a funny kind of question because the definition of passive is not what you think it is. Passive just means that it’s tracking an index, and an index can be… You can self-index. You can create an index of positions in a portfolio. So you could be running a portfolio, have that turn into an index, have somebody follow that index.

Tobias Carlisle: Now that person following that index is investing passively even though there’s an enormous active share in that portfolio. So active share is just the difference between an S&P 500 market capitalization-weighted index, and some group of stocks selected from that same 500 universe. If you hold five stocks equal weight with a value tilt out of the S&P 500 universe, you’re going to have enormous active share. But if those five stocks are tracking another index, then they’re technically passive.

Tobias Carlisle: So active share is what you want because that’s what leads to outperformance. It also leads to underperformance. So there has to be a good reason why you’re diverging from the index. Value is a good reason to diverge from the index. So it should deliver performance over time. The advantage of an ETF really is twofold. So if it’s this passive ETF and it has capital gains, tax advantages, you don’t get flow through. If a manager sells an underlying position, the holder of a mutual fund or a managed account will incur the tax on the basis of that sale if it’s in a taxable account.

Tobias Carlisle: In an ETF, that’s not the case if they’re managed properly with this create-redeem function. They’re able to eliminate the capital gains. And it’s very liquid. If you open up your brokerage account, you can type in the ticker. You can invest directly like a stock. You don’t have to fill out forms, which you do with a mutual fund or a managed account. And if you want to fire your manager, you just open up your brokerage account and sell it all.

Ian Cassel: Yeah. What’s the process like for launching an ETF? And what’s the break-even point in assets that you need just to break even as an ETF?

Tobias Carlisle: It varies because there’s lots of different ways of implementing it. If you own your own trust, that could cost a million dollars, and your operating cost might be $350,000 a year. You could be a sub-advisor to somebody else who’s an advisor, and you might not have any costs at all. The advisor is taking all the costs. There have been issues with advisors firing sub-advisors. So the guy that hacked ETF pretty famously got… They just changed the index. So the guy who came up with the index wasn’t getting paid anymore.

Tobias Carlisle: There have been other examples where people have created a successful ETF and then lost it because somebody further up the food chain was able to figure out a way to cut them off. So it’s important, I think, to make sure that your manager or the manager of the ETF is the advisor because then their destiny is in their own hands. And then the question of break even is kind of like, what are the fees and what are the underlying costs? The underlying cost can be 300 to 400 thousand dollars a year for an ETF, and then the fee on top of that.

Tobias Carlisle: Fees are typically 50 basis points to maybe one and a half basis points. Sorry, one and a half points. So the break-even is somewhere between… It could be 80 on the high end, and it could be 25 on the low end. Something like that.

Ian Cassel: Okay. Okay. Thanks for sharing that. I was always curious. It’s a new world for me when we talk about ETFs. I know it’s more your world, but some of the listeners probably like a little bit of detail, too. Maybe switching to a couple investing questions, when I was preparing for the interview, a couple kind of popped into my head.

Ian Cassel: You also invest in individual companies, obviously, through your strategy, but also, probably before then, individual equities. What stock was your biggest winner, and maybe what stock was your biggest loser? And maybe some of the lessons that you learned from both of those scenarios?

Tobias Carlisle: Well, the biggest loser that I had publicly was Seahawk Drilling. In Seahawk, they made these jack-up rigs and they had this fleet of oil rigs in the Gulf of Texas in that ridge. Oil got destroyed, and they traded down well below… There were 10 cents on the dollar for these rigs. I’m a deep value guy. At that stage, I was more of a liquidation-style investor. This would have been 2008, something like that.

Tobias Carlisle: I thought, “This is probably as good as it gets for this style of investing. Even though these things aren’t cash-flowing, there’s this very significant asset value here.” So I put on a position. It kept on going against me. The guys who were running the business were saying, “This is one of the best markets ever for buying rigs. We’re looking forward to buying more rigs,” because you can go out and get these rigs for 10 cents on the dollar, too, or whatever it was. 50 cents on the dollar.

Tobias Carlisle: But, meanwhile, these guys are selling rigs to fund operations. So I should have figured out at that stage that they probably weren’t being completely forthright about how the business was going, but I held on to it. I think it ultimately went into bankruptcy. I didn’t ride it all the way into bankruptcy, but it was still an 80 or 90% loss. So it was like I might as well have held it all the way into bankruptcy.

Tobias Carlisle: And then the best one… I’ve had a few 10 baggers. I’ve had a few. I think my biggest one was… I’m just blanking on the ticker a little bit at the moment. But I can tell you the story. It was an activist position, and it had $2.10 in cash. And it was trading at 70 cents. They had an activist who was trying to get them to give back the cash. But, in the meantime, they had this drug candidate with the FDA, which nobody thought was going to go through. That was why it was trading at one-third of cash backing.

Tobias Carlisle: I was in Australia at the time. I woke up one morning, and I checked the brokerage account. I checked my screen, and it was $7. I was like, “How does that… They got the decimal place wrong here.” And then I realized, overnight, these guys have found… The drug has actually got through the phase two trial or whatever. So it was up 10x, and then I was basically… Woke up, went to the office. By the time I got to the office, it was at $11.

Ian Cassel: Oh, wow.

Tobias Carlisle: So I was just desperately trying to sell as much as I could. I think my average sale price through there was somewhere between 7 and 11 dollars. So it was more than a 10-bagger over a five- or six-month period. Unfortunately for me, it’s really good evidence that I had no idea what I was doing.

Ian Cassel: I wasn’t going to bring that up, but I was [inaudible 00:41:25].

Tobias Carlisle: I made money, but I was completely wrong. The analysis was just wrong. Neither of those stories… The one that didn’t work out was purely my fault. The one that did work out, just all luck.

Ian Cassel: You’re being honest. One of the interesting things is the biggest returns in the market often comes from value situations that turn into growth situations. But it’s hard for value investors to hold on to growth. We talked about that before we even got on this podcast. When you buy something because it’s cheap, it’s hard to hold on to it when it isn’t cheap. And yet the latter part is where the big money is made. I think it’s easier for growth investors to identify and participate in value, probably more so than it is for value investors to feel comfortable with growth. And I’m just curious how you feel about that.

Tobias Carlisle: Yeah. I agree. I think that that’s absolutely spot on. I think that the best thing that I could have done was just buy positions and never sell them. I think you get some that will not work out and some that you could have sold at a bump, like it was up 50% inside your time frame, got to value. You should have sold it. And then it traded back down to where you held it or something like that. I’m sure that that happens all the time.

Tobias Carlisle: But you do get these businesses that go from being in a lot of trouble to being very good businesses seven or eight years later, and they’re up so much more over that period that I don’t think that it really matters that you hang on to the ones that don’t work. I think that you get better returns probably by just holding for longer and longer. I think it’s incredibly hard to do behaviorally because you beat yourself up so much for the ones that don’t work out or the ones that you had the opportunity. Your analysis was right initially. You got the little bump to value that you were expecting. You didn’t sell it out at that stage or you thought that something better was coming. It traded back down, so you feel like you’ve made a mistake.

Tobias Carlisle: But I think that the best returns are always from coffee-can-type portfolios where you put on whatever positions, and then you just forget about them. That’s probably the best thing you can possibly do. Here’s your time capsule for 2019. But the stocks in there, and then don’t check it for 10 years. Then do the same thing again the next year.

Ian Cassel: Yeah. We see that… In MicroCapClub, we have a member ranking. Basically, the member ranking is just… As a member, you profile stock ideas and your starting price of the day. You profile it. And your member ranking is just the cumulative return of everything that you’ve profiled since you profiled it to the end of last month. It’s a very easy way. So if you profiled three companies, and let’s say company A is up 100%, company B is up 50%, and company C is down 50%, your member ranking is 100. It’s just a very simple formula for that. You can go in there and see what the member rankings are. I think [Connor Haley 00:44:19]-

Tobias Carlisle: He was on last week.

Ian Cassel: Yes. He’ll be on your program. Yeah, I think it’s at 4,000. So it’s basically 4,000 percentage points of gains he’s profiled.

Tobias Carlisle: That’s a 40-bagger.

Ian Cassel: Yeah. And number two is [inaudible 00:44:32]. He’s at 3,000. My partner in MicroCapClub, I think he’s… But, anyway, I think I’m up to number four for some reason. But, anyway, what’s interesting is when I looked at that even for my own personal well-being, it’s just like I start thinking, “If I would have just held on to everything that I ever profiled even on MicroCapClub and never got involved with it, it would have been an exceptional return.” Oftentimes, when you get involved with things, like you were saying, sometimes it’s easier to have a coffee-can approach to some of these things.

Tobias Carlisle: And there’s no taxable event there, either. I tell this story all the time. I had this friend and we were in university. He was the guy who introduced me to Security Analysis. I think he said, “Warren Buffett’s the richest man in the world. He runs an insurance company.” This is sort of what he was telling me at the time. I was like, “Well, I don’t want to run an insurance company.” That’s like saying the richest man in the world is… It’s Bill Gates. He runs a computer company.

Tobias Carlisle: I was just like, “Well, good for him. That’s fantastic.” He said, “No, he’s written these letters you can go and read. It tells you how to be an investor.” So we went and looked at them, got Security Analysis. He actually went and invested on the basis of basically just trying to find stuff that was cheap. But he was using these Australian version of… I think it’s called [Huntley’s 00:45:48]. It was like a phone book, and each page had a different… because this is pre- all of this stuff being on the internet. That’s how long ago this is. It was 1987 or something like that. It was getting pretty close to being on the internet.

Tobias Carlisle: But you could buy this little phone book, and each page had a listed stock on it. Basically, what it had was the share price, and you could see that up and down. And then I think it had the earnings plotted for 10 years. His whole thing was he’d just go through and he’d find where the share price had fallen off a cliff, but the underlying earnings were still chugging along. And he bought a few of these. The first few that he bought… I think one went from 70 cents to 20 cents, and the other one halved. And then one that he wanted to buy went up. It might have doubled, and he hadn’t bought it. So he’s just like, “Oh, I don’t know what I’m doing. This is all stupid.” And he just forgot about it.

Ian Cassel: Wow.

Tobias Carlisle: The positions were still in the account, but he went and did other things. He came back to it… It was probably the mid-2000s. He looked at it, and the two positions that he had put on that had initially gone down… But one was down two-thirds. That had run to $20. So from 20 cents to $20.

Ian Cassel: Wow.

Tobias Carlisle: The other one was up to $10, so it was seven or eight times. And the one that had doubled had then also proceeded to run up another 20 times. So, to his credit, he was like, “Well, it turns out this stuff really does work.” And in the positions that had run up that much, he was getting more out of them in dividends than he had paid to buy them.

Ian Cassel: Wow.

Tobias Carlisle: So he was like, “This is…” because Australian companies tend to pay more in dividends. They tend to… because [inaudible 00:47:30] credit which just basically grosses up the tax you pay, the company’s paid. You get that back, basically. So you then pay tax at your marginal rate adjusted for this number. So you can look at the yield on Australian companies. They tend to be 5 or 6%. They’re incentivized to pay up their capital, and shareholders like it in Australia.

Tobias Carlisle: If you were that kind of investor, if you had put these positions on and been very disciplined about not selling them, or just every year you put whatever it is, whatever you save up over the course of the year, and buy… You save up $10,000. You buy your three best ideas, whatever it is. And then you come back to it five or seven years later, and it’s paying out that kind of money. All of a sudden, you’ve turned into… That’s a real compounding machine because then you can take those ideas… That would have been the idea. Of course, then, as soon as he went in there and he started… He was using it and trading it all the time. The returns went away.

Ian Cassel: Yeah. Right? I believe it.

Tobias Carlisle: It’s cruel. It’s so cruel. There’s such a huge cognitive behavioral part to investing that it’s hard to communicate to someone who hasn’t been through those ups and downs.

Ian Cassel: I’ve always been curious, and you probably know more about this than me. But I was curious if there’s any stock pickers out there that equal weight positions on the onset.

Tobias Carlisle: Well, I do. I don’t know if the… Yeah. I don’t know. I think that there are probably some guys who run… Probably, that’s more a function of the kind of structure that you’re running. If you’re running a mutual fund, you may tend to… You might put them on at 3 or 4%-

Ian Cassel: I mean more concentrated, like 20 positions or less but equal weighted, like everything’s going to be a 5% position or something like that.

Tobias Carlisle: Well, I do do that. And the reason that I do it like that is that I just don’t know which of the 30 positions is the best position. Even though I can see that one is… On a ratio basis, one is at a lower ratio than another one. But it’s conceivable that the one that’s on the lower ratio isn’t as good a business as the one that’s on a higher ratio, and it’s in fact the one on a higher ratio is more undervalued.

Tobias Carlisle: But then you also don’t know what’s going to happen in the future. If they get a little bit of luck in one of these things and it works, you can get pretty good returns. But then I have this rebalancing mechanism on a quarterly basis where I like to take money away from the ones that have worked and put it into the ones that haven’t worked. And you get this Shannon’s Demon effect where you’re buying stuff as it’s going down and you’re trimming stuff that’s going up, which I think generates better returns over time.

Ian Cassel: Have you back-tested that to see if that’s the case? I mean [inaudible 00:50:06] winning and putting in the things that are not.

Tobias Carlisle: Yeah, just because for that effect that I was… Often, you find with these companies… I buy them, buy the $5 or $7 worth of… This is more when I was a net-net guy. But I would buy it at $5 and it was a $7 stock. It would run for $7, and I’d sell it. And then, a year later, I’d see it again and now it’s a $3 stock with $5 in cash. The opportunity’s there again. You can have another go at it. You can get that little bump again.

Tobias Carlisle: So you do kind of… It does smooth out. I think that some of the best investors… And I’ve certainly… When we did concentrated investing, we talked to guys like Christian CM, and I know that Alexander [Ropus 00:50:52], who runs Atlantic Capital, he says the same thing. About 20% of their returns have come from trading around positions. Lou Simpson does the same thing. So if he’s in something like Nike, he thinks Nike is a great business, or he did at the time that the book was written. He’d be in that, and then it would run up. He would never be out of it. He said he was always holding some portion of it because he just wanted to know what it was doing.

Tobias Carlisle: And then, if it kept on running, then he’s just got this little position in it. If it comes back, it doesn’t matter. But if it comes back enough, then he’d be prepared to buy a whole lot more because he knows it really well. He’s known it the whole time. And if you have John Huber, who’s a… I think John’s a… He’s getting a lot more attention now, but he’s been around for a long time. He wrote this great article talking about different sources of advantage, different sources of edge, informational edge and behavioral edge.

Tobias Carlisle: He said, basically, the behavioral one is the biggest. If you look at something like… I think he gives the example of J.P. Morgan. J.P. Morgan didn’t lose money through the 2007, ’08, ’09 crisis. It kept on… I think it might have not grown its book value two years in a row, something like that. But it didn’t go backwards at any stage through there. But you can look at the share prices. It’s wildly all over the place, and he says all you have to do is have some idea of the intrinsic value of these things. When they’re at a big discount, you buy them. Maybe you trim them back when they’re at a big…

Tobias Carlisle: So I think that that’s one of the behavioral tricks that’s really helpful for investors. If you have your own calculations different from the share price, then you become less concerned about the way that the share price is moving and more interested in how you take advantage of that. It certainly works for me that I feel better when… If I’ve got a pretty good idea what something’s worth and it’s going backwards against me, I’m not so worried about that because I know I can buy a little bit more of it at the next rebalance state.

Ian Cassel: Right. Yeah, I know. Paying attention to the business instead of the stock price is a hard thing. But, like you said, it’s like if you do the work, you do your modeling, you develop an intrinsic value that you believe in, that you’re focused on, and not the stock price. That’s really the only way to do it, and I think that’s how the money is made in the downturn, too, is focusing on that business and be in those businesses, hopefully, that can weather any downturn [crosstalk 00:53:07].

Tobias Carlisle: Or make strides through a downturn-

Ian Cassel: Exactly.

Tobias Carlisle: … because, often, these businesses that are a little bit better capitalized. When they go through a period like that, that does create opportunities if there are good managers in there who are guys who’ve been around through a few cycles or they’re guys who’ve got a lot of money in the business and they know how it works. When the business gets beaten up like that, they’re buying customers. They’re buying business. They’re buying assets cheap. They’re really positioning themselves, and I often think that’s a big part of why value rips out of the bottom of one of these things: because some of these businesses have gone ahead, and what was cheap at the trough is now even cheaper at the other side.

Tobias Carlisle: So I think that’s a good management, good business. It’s a good balance sheet that’s able to withstand and very important.

Ian Cassel: Do you mind if I ask you a couple personal questions?

Tobias Carlisle: Sure. We can edit this out later.

Ian Cassel: Excellent. Yeah, and you will. I think most successful people are pretty self-aware people. They know their strengths. They know their weaknesses. This might be an uncomfortable question, but I’m curious. What do you think are your strengths? What do you think are your weaknesses?

Tobias Carlisle: That’s very kind of you to say that. I really do appreciate that. I don’t regard myself necessarily as successful, so I think that we’re sort of still in the fight to… I don’t think that there’s anything… That success is something you assess at the end of a career or at the end of when you get there, because a lot of guys blow up along the way. And I don’t know that I’m not going to be one of those guys. I don’t want somebody showing this to me in 10 years’ time and saying, “Hey, here’s you saying how successful you were.”

Ian Cassel: Toby, just answer the question.

Tobias Carlisle: When I was practicing law, I think I had almost no self-awareness at all. That’s probably an age thing and also being pretty impressed with myself as a lawyer. I’ve definitely got more as I’ve gone through… Like moving to another country, you see different cultures. Even though I think the US and Australia are very similar, there’s differences. So that gave me some good insight.

Tobias Carlisle: My wife, I think, has a very high EQ. So she often says that, “That was a dumb thing to do. You shouldn’t have done that,” and explains to me what I should have done. I’m like, “Oh, that was a much smarter approach. I should have done that.” I think that women tend to have slightly better EQs than men do. I think sometimes men have got a little bit too much ego, maybe a little bit too much just stubbornness or something like that, like don’t want to say that you’re wrong, don’t want to admit that you’re wrong.

Tobias Carlisle: So I’ve got better at that. I’ve got to the point now where I’m just completely surprised whatever the market does. I thought that I had an idea what it was going to do maybe 5 or 10 years ago, and now I just… I wake up every morning and I’m like, “Oh, that’s what it does.” I don’t know if there’s any sort of great answer there. But I think-

Ian Cassel: No, I think sometimes it’s harder for a person to answer the strengths question just because it’s more uncomfortable to answer that for yourself.

Tobias Carlisle: Well, my strengths are I have a very, very high tolerance for risk. So that’s one thing that I’ve found among just talking to people about what I do, that I think it makes people very nervous when they find out that I don’t have a boss, don’t have a… I’m self-funded. The big project that is out there at the moment that I’m not allowed to talk about on my own podcast. I’m self-funded. There aren’t many guys out there who are self-funding one of these things. And I don’t how any partners in it at all. It’s just me doing it, and it could be a colossal mistake.

Tobias Carlisle: I know it makes people nervous because I talked to various other people. I’ve got a negative cash burn, and it makes me a little bit nervous. But it makes people… They’re horrified when they find out what’s happening. So that’s one thing. The other thing, I think I communicate reasonably well. I speak reasonably well. So I try to maximize the kind of writing and talking. That’s podcast and books. That’s why I do those things.

Tobias Carlisle: And then I don’t mind being contrarian. I figure something out myself, and then I will do that thing if I think it’s right. Trying to update, doing a Bayesian probalistic updating all the time, what new information am I getting that’s changing my own view of this thing that seems to be divergent from the market or what other people are doing? This could be another colossal mistake, or we’re in this interesting position where if the market does start… So for value, like value as an example, there’s no good reason to launch a value fund given what value has done over the last 2 years, over the last 5 years, over the last 10 years.

Tobias Carlisle: But I think that if you believe in main reversion, this could be one of the best opportunities in the last 20 years to be a value investor, to be putting on value positions, to be investing the way that I do, which is with a deep value style. I don’t know whether that’s going to be proven right or not. I kind of hope that it will, but I’m happy to stand here a little bit apart from the crowd and let it happen.

Ian Cassel: Well, I think you and I have one thing in common, and that’s probably the negative cash flow for [inaudible 00:58:36] from being a full-time investor, then you’re self-funding your project [crosstalk 00:58:43].

Tobias Carlisle: I should take it public. The cash [inaudible 00:58:47]. Probably get a 50-times multiple on it.

Ian Cassel: Are there any times that you just got to go to bed at night thinking, “Oh man. What am I doing?” Or is that-

Tobias Carlisle: Every day. Every day.

Ian Cassel: What gives you the mental fortitude to be like, “We’re going to continue to do this”? Because you’re die hard going after it, and that’s one of the things I admire about you.

Tobias Carlisle: I think it’s just I’ve just painted myself into a corner. Just for ego and consistency reasons, I can’t turn around. No, I don’t know. I think part of it is I can look back… So, for value in particular, I can look back over the very long data set, and there have been five or six examples of this sort of underperformance. It’s hurt microcaps. It’s hurt everything that’s not the index, basically, or that’s not in S&P 500. And that’s unusual.

Tobias Carlisle: There’s nothing magical about the index. These should be rewarded for holding value stocks. If you’re… As a business guy, as an entrepreneur, if I said there’s a way for you to get 10 times the cash flow that you’re currently getting and it’s just by not buying the index, it’s by buying this little cluster of stocks over here that have better cash flow buying back stock, better balance sheets, might not work this year, might not work next year… But in the fullness of time, that’s a better spot to be in just as a business guy.

Tobias Carlisle: That should appeal to you intellectually, and I think it does. Eventually, the market wakes up beyond… It’s a $10 billion market cap. I only lost $30 million last year, but that’s because that’s about how big its business is. It’s not coming close to profitability on $10 billion in revenues, I only lost 30 million. It’s got a $30 million business. It’s not even big enough to justify the losses for a $10 market cap.

Tobias Carlisle: That could be a billion-dollar market cap, and you’d still say, “Well, that’s still way too big for something losing $30 million a year.” But people see the stock price has gone up a lot, probably going to keep on going up. Being a value investor or just being a fundamental investor is unusual. A lot of people don’t do that. And the guys who are growthier… Think of an example like ARK. I’ve got an enormous amount of respect for Cathie Wood, who set up that family of ETFs. She’s gutsed it out to get to $7 billion in assets in that thing, and they’re doing these really contrarian out-there picks with Tesla and bitcoin and all of these other companies.

Tobias Carlisle: But there are examples of… At the peak of every single boom in the market, there have been these go-go mutual funds. In the ’60s, the go-go mutual funds, and then the late 1990s, the Janus funds, all these different funds that were crushed into tech or crushed into whatever was hot. And people weren’t in them because it didn’t make sense to them, but in the paradigm of the day, it does make sense. They’ve all been washed away following the unusual period in the market.

Tobias Carlisle: So I think you need to have a longer-term perspective and imagine what happens to whatever your strategy is in a more normal environment. And I think that in a more normal environment, value will do quite well and it’ll be much tougher for the very high-growth, new-paradigm-type investors.

Ian Cassel: Next personal question. Somehow, we took that one to investing, but…

Tobias Carlisle: Brilliant.

Ian Cassel: Yes, exactly. Plan’s working. What’s the hardest thing you ever had to go through, and how did you get through it?

Tobias Carlisle: I’ve launched this new thing. So I’ve got to tell you. At the end of-

Ian Cassel: [crosstalk 01:02:28] set up for that.

Tobias Carlisle: I’ve been very lucky. I haven’t had any major health scares. I haven’t had any… And including when I say… Like in my close family and my kids and all, that’s all been very lucky, all of that. It was hard moving countries and then starting again with no network. When I meet somebody and say I went to this university in Australia, nobody’s ever heard of this university. In Australia, it’s a good university. It’s one of the top universities in Australia. But no one’s heard of it here, so I have no network here. I have no [inaudible 01:03:04] of who I am.

Tobias Carlisle: I’m not able to say, “I went to this brand. I’m associated with this brand, this college. I’m associated with this college.” I’m just sort of like, “You’ve never heard of me before,” and there’s no way to judge my competence or otherwise. So the way that I got around that was I just started writing and talking, and I’ve slowly, slowly built up a network of people who I know and interacted with them so that they know that I’m not a lunatic, that I have reasonably, sensibly some evidence of some thought process going on behind the eyeballs.

Tobias Carlisle: I think that that’s kind of how I got over it. But, in another sense, it’s sort of been a blessing because it’s made me… I’m very independent. I don’t really need to rely on anybody else. The business as it stands now just has to keep on doing what it’s doing, and we will eventually get there. We will eventually be successful. On one hand, I’m quite pessimistic about the prospects for the market and other things like that. On the other hand, I’m just this wild-eyed optimist that, “Yeah, it’s probably going to work out. Most people’s have failed. Mine’s not going to fail. This is going to work out.”

Ian Cassel: Well, it’s interesting that you mentioned coming over here really with no friends, colleagues. Nobody knew who you were. I think that’s probably one of your biggest strengths. I think I met you for the first time… Was it five years ago at a conference up in Toronto?

Tobias Carlisle: I remember it very clearly. I remember very clearly meeting you. Yeah.

Ian Cassel: I remember hearing your name before that, and I remember sitting in on your presentation. I wanted to make it a point to get up and introduce myself to you afterwards, and I’m thinking to myself, “Man, this guy is probably going to be… He’s a tall, good-looking guy. He speaks well. He’s probably going to be some a-hole.” Right away, within 15 seconds, I realized you’re just a real genuinely nice person that [crosstalk 01:04:58].

Tobias Carlisle: Oh, that’s kind.

Ian Cassel: And we ended up going to dinner together and spending another two hours together. I think that’s probably one of your, I think, biggest strengths as well because within about 10 seconds, people feel comfortable around you.

Tobias Carlisle: Well, that’s good.

Ian Cassel: I know you like working in solitude and you’re a contrarian mindset, but I think that’s a gift that you’ll have that you’ll probably go on to do bigger things with [crosstalk 01:05:20].

Tobias Carlisle: Well, that’s kind of you. I remember it very vividly because your… I don’t know if your avatar… I can’t remember your immediate avatar now, but you used to have this black-and-white avatar.

Ian Cassel: That stencil…

Tobias Carlisle: The stencil avatar. And I thought, “This guy’s got this really intimidating look on his face, and he’s got the black-and-white avatar, which means he’s not messing around. He’s going to be this really dominating personality,” and then no. Of course, you’re a very friendly, fun guy. So we had a great time.

Ian Cassel: Last question. Maybe to help set this up, a couple years ago, I started thinking about regret a little bit in my own life. Looking forward 10 years, what would I regret not doing and trying? For me, it was my investment strategy. But I’m curious for you now. The thing that you just launched is going to be successful that we can’t talk about. But I’m just curious, what’s next? What’s something in 10 years, if you look back, that you would be really disappointed in yourself if you wouldn’t have tried or launched? Maybe it doesn’t necessarily have to be something business-wise.

Tobias Carlisle: When I was about to turn 30, I was still a lawyer, not doing what I wanted to do. I had that, “Oh my God. I’m nearly 30. I haven’t started doing what I wanted to do. Time is running out. If you want to do something, you got to go now and start doing it.” I think that that was right. My only regret really is that I didn’t start earlier. I should have just… This is the thing that… And I would want to say this to my own kids: don’t chase money early on. Don’t do what you think your parents want you to do. Do the thing that you think that you are good at. If you get to the end of your life and you haven’t done it, there’s nothing worse. I can’t imagine anything worse.

Tobias Carlisle: So I’ve had this view since then. I’ll try anything. I’ll try it. If it makes sense, if I can kind of think through it and I think there’s a chance it’ll work, I’m prepared to try it and look stupid doing it. And I’ll take that to the investments, too. Often, these investments have… Everybody thinks… The value guys have had a look at them, too. They don’t think they’re good ideas. I’m like, “You know what? It’s not over for some of these businesses, and it’s not assured for some of these other ones, either. You are paid for taking the little position and trying something out.”

Tobias Carlisle: So I’m doing the things now that I would be really upset if I hadn’t done them in 10 years’ time, like the French Foreign Legion, je ne regrette rien. I regret nothing.

Ian Cassel: Excellent. Well, we’ll leave it at that. It’s been an honor turning the tables and interviewing you on your own podcast. I’m sure most of the people in your audience know how to get in contact with you, but if they want to learn more about the acquirer’s multiple, go read his book if you haven’t. It’s a great book. Buy a few copies. I’ve read it a few times. You can check out acquirersmultiple.com.

Ian Cassel: You can follow Toby, @Greenbackd, on Twitter. If you’re not on Twitter, you should be on there. A lot of other great FinTwit people are on there. It’s a great way to follow Toby, me, or anybody else. If you can’t find Toby, just put his name in the search box. You’ll be able to find him.

Tobias Carlisle: If you’d like to see my portfolio… I’ll just say this. If you’d like to see my portfolio, you can go to acquirersfunds.com. I’ll try and put a link up there so you can click through really easily to find… If you’re interested in the stocks that I hold long and short, you can take a look there.

Tobias Carlisle: But I just want to say, Ian, thanks so much. It’s been so much fun. I was so happy when you suggested that you come and do the interview. I was a little bit worried because that old black-and-white avatar… I thought I was going to get the third degree; I was going to get cross-examined.

Ian Cassel: No, I’m pretty friendly. I’m a pretty friendly guy.

Tobias Carlisle: I was going to feel the sting of those management teams when you go in to put them under the microscope.

Ian Cassel: Oh, yes. Yes. That could be another podcast.

Tobias Carlisle: Well, we should do that.

Ian Cassel: We should. All right. Thanks, Toby. Have a great one.

Tobias Carlisle: Thanks.

Ian Cassel: Toby will be back next week.

Tobias Carlisle: Yeah. Anytime. Thanks, Ian.

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