The reason the acquirer's multiple beats the magic formula is that mean reversion will lift the price of a cheap business, whereas mean reversion will work against the magic formula by dragging down ROIC. Very cheap is better than cheap and good when it comes to this quantitative approach. Of course, if you have the skills to identify businesses that can maintain a high ROIC (moat) then you're better off going that route, but that's a tough game! Acquirer's Multiple = Enterprise Value (what it would cost to buy the whole business) / Operating Income Here is the free screener for the largest 1000 stocks: acquirersmultiple.com/screener/large-cap/
Hey Brad!! Thank you for what you do. Have you ever pulled Data from Phil Towns toolbox? I have had some questions about how accurate that data is and wondered what your experirence is with this.
Thanks for the vid. I've also been wondering about Toby's analysis and what it means vis a vis stock 'goodness' vs cheapness... (personally think that might go down to 'can u actually hold on' meaning as it is even w 'good' metric included its hard to hold magic Formula companies... But you get past gag factor hopefully b/c u understand they're 'good' (returns on capital etc). When u don't have even that perhaps not so possible in bad times to hold on?) either way... Really liked ur point on morningstar and replicating the AM screen. Can u talk me through how to do that? Are you using a morningstar screener? The api to pull data into excel? I couldn't find a screener from them even w charge
I read the book over the weekend, and the principle of high cash, low debt companies is interesting and seems plausible. My only concern is the assertion that companies “revert to the mean,” I have a master’s degree in mathematics and I see assertions like this all the time. I’m sure it does play out that way in practice much of the time, I’m just concerned people will blindly have faith in that kind of assertion without fully understanding it. I’m going to implement it into my own investing strategy, nonetheless.
I found his website really interesting. The page discussing his mutual fund says it "begins" with the acquirers multiple, but then "applies risk-management principles drawn from both qualitative and quantitative value investment". Does the book cover what those principles might be? It also mentions investing heavier in stocks with stronger fundamentals. So it seems like he is in fact looking at a lot more than what he is selling in the book.
Sounds like similar verbiage that Greenblatt uses for his funds. Carlisle is a true shameless cloner ;) The book is very short and just covers the acquirer's multiple concept.
Brad, just read Acquires Multiple again. Read it years ago. I compared the AM large cap again running my screener, FIN BIN,, used EV/EBIT(FFD adn TTM) and it compared pretty well. Added it my overall screener. Thanks for the video.
I will continue with Magic Formula, whether it sticks with Acquirer's multiple or not; I find it more principled - cheap but good is always better than just cheap; I don't believe in using statistics; it can fool you
I thought the point of a back tester is to tweak it until you get the results you want. If a particular formula works well in the past, is that not an indication that it will work well in the future? Or at least as well as any other historically successful formula.
When enough folks figure out what has worked well in the past and adopt that strategy, it works less well in the future. The core principle here is that when the crowd zigs, we must zag (and be right) in order to do better than average. Tweaking back tested results until you get the result you want is a great way to find anomalies in the past that won't do you much good moving forward.
Thanks Brad! I was thinking to start with magic formula but AM looks promising than MF, planning to start with AM. One side note, I saw one of your video where you are combining MF and AM to select 100baggers/compounders and let them grow, shouldn't we spend more time reading ARs and weigh business, understand management, weight for them to execute and then average up ? Please let me know your views on this. Thanks!
Hey Brad, thanks for the book review. I have ordered the book but have not gotten to read it yet. I noticed on the website the screener excludes utilities and financials, but it does not say why. Does the book offer an explanation for why it excludes these two sectors? Or do you have any speculations if not? I can make some assumptions but would be interested in your input. Thanks.
Utilities and financials play by a different set of rules and thus require different metrics to evaluate them. Greenblatt touches on this in The Little Book That Beats the Market (required reading IMO).
Why would anyone use this approach when you could just buy a small cap value etf without breaking a sweat. Moreover why would the screener have membership model. If the author is making a lot of returns from this approach why charge his readers. Screeners are supposed to be free. Its a catch 22. Either these type of business are very hard to find without the screener or he is charging for something that is easily doable. Either way its shady.
The reason the acquirer's multiple beats the magic formula is that mean reversion will lift the price of a cheap business, whereas mean reversion will work against the magic formula by dragging down ROIC. Very cheap is better than cheap and good when it comes to this quantitative approach. Of course, if you have the skills to identify businesses that can maintain a high ROIC (moat) then you're better off going that route, but that's a tough game!
Acquirer's Multiple = Enterprise Value (what it would cost to buy the whole business) / Operating Income
Here is the free screener for the largest 1000 stocks: acquirersmultiple.com/screener/large-cap/
Hey Brad!! Thank you for what you do. Have you ever pulled Data from Phil Towns toolbox? I have had some questions about how accurate that data is and wondered what your experirence is with this.
Thanks for the vid. I've also been wondering about Toby's analysis and what it means vis a vis stock 'goodness' vs cheapness... (personally think that might go down to 'can u actually hold on' meaning as it is even w 'good' metric included its hard to hold magic Formula companies... But you get past gag factor hopefully b/c u understand they're 'good' (returns on capital etc). When u don't have even that perhaps not so possible in bad times to hold on?) either way... Really liked ur point on morningstar and replicating the AM screen. Can u talk me through how to do that? Are you using a morningstar screener? The api to pull data into excel? I couldn't find a screener from them even w charge
@@BH-nm4xl I use TIKR terminal for screens now, but I haven’t spent much time figuring how to replicate AM
I read the book over the weekend, and the principle of high cash, low debt companies is interesting and seems plausible. My only concern is the assertion that companies “revert to the mean,” I have a master’s degree in mathematics and I see assertions like this all the time. I’m sure it does play out that way in practice much of the time, I’m just concerned people will blindly have faith in that kind of assertion without fully understanding it. I’m going to implement it into my own investing strategy, nonetheless.
I found his website really interesting. The page discussing his mutual fund says it "begins" with the acquirers multiple, but then "applies risk-management principles drawn from both qualitative and quantitative value investment". Does the book cover what those principles might be? It also mentions investing heavier in stocks with stronger fundamentals. So it seems like he is in fact looking at a lot more than what he is selling in the book.
Sounds like similar verbiage that Greenblatt uses for his funds. Carlisle is a true shameless cloner ;) The book is very short and just covers the acquirer's multiple concept.
Adding buyback yield to the acquirer’s multiple calculation makes it close to a sure bet for capital appreciation.
Brad, just read Acquires Multiple again. Read it years ago. I compared the AM large cap again running my screener, FIN BIN,, used EV/EBIT(FFD adn TTM) and it compared pretty well. Added it my overall screener. Thanks for the video.
Nice! And you're welcome Scott :)
Should we take EBIT or cash flow statment operating income.
@@amithachandima3318 Income Statement operating income (TTM)
What metrics are used ??
I will continue with Magic Formula, whether it sticks with Acquirer's multiple or not; I find it more principled - cheap but good is always better than just cheap; I don't believe in using statistics; it can fool you
When the screener finds more than one stock under the same Sector & Industry, which one should we favor?
I thought the point of a back tester is to tweak it until you get the results you want. If a particular formula works well in the past, is that not an indication that it will work well in the future? Or at least as well as any other historically successful formula.
When enough folks figure out what has worked well in the past and adopt that strategy, it works less well in the future. The core principle here is that when the crowd zigs, we must zag (and be right) in order to do better than average. Tweaking back tested results until you get the result you want is a great way to find anomalies in the past that won't do you much good moving forward.
curious, what do you do for a living sir? great video thanks!
I'm trained as a mechanical engineer, but shifting my focus to investing
@@BradKaellner appreciate a fellow engineer investor. Good content. Keep it up. Subscribed
Thanks Brad! I was thinking to start with magic formula but AM looks promising than MF, planning to start with AM. One side note, I saw one of your video where you are combining MF and AM to select 100baggers/compounders and let them grow, shouldn't we spend more time reading ARs and weigh business, understand management, weight for them to execute and then average up ? Please let me know your views on this. Thanks!
I think cloning is a more promising approach for finding 100 baggers, whereas MF/AM may be useful in tracking down $0.50 dollar bills.
MF is a passive approach that I’m currently testing. Understanding a business is critical for making active bets
Vy6
Can you do example to collect data from financials and do the calculation vedio.👍👍👍
great idea! I'm still playing around with ValueLine and Morningstar to figure out how to run an accurate screen for this
Tobías is a great investor
Seems like a smart guy!
Please do video breaking down. I think I am doing correctly but I video would be sweet!!
Noted!
You rarely see a bad backtest
Olá pode de indicar algum site free nos eua que posso filtrar stocks pelo método?
I'm not aware of any, but I'm sure they exist
Hi, great video. Do you also have a portfolio of Acquirer's Multiple? How does it fare over Magic Formula so far?
I do not because I’m too cheap to pay for access to the screener 😉
@@BradKaellner lol. Me too!! I like your stock picking with the Acquirer's multiple twist for Magic formula :)
Hey Brad, thanks for the book review. I have ordered the book but have not gotten to read it yet. I noticed on the website the screener excludes utilities and financials, but it does not say why. Does the book offer an explanation for why it excludes these two sectors? Or do you have any speculations if not? I can make some assumptions but would be interested in your input. Thanks.
Utilities and financials play by a different set of rules and thus require different metrics to evaluate them. Greenblatt touches on this in The Little Book That Beats the Market (required reading IMO).
Why would anyone use this approach when you could just buy a small cap value etf without breaking a sweat. Moreover why would the screener have membership model. If the author is making a lot of returns from this approach why charge his readers. Screeners are supposed to be free. Its a catch 22. Either these type of business are very hard to find without the screener or he is charging for something that is easily doable. Either way its shady.
Is it just EV/Ebitda?
it's EV/EBIT
because EBIT = Operating Income
EV/EBITA
i think it's EV/EBIT not EV/EBITA