Weekly on Stocks’ interview with Tobias Carlisle, founder and managing director of Acquirers Funds

By Li Jian & Ge Lin (edi.)

“This is an exciting time for Chinese investors,” Tobias Carlisle, founder and managing director of Acquirers Funds said in an interview with Weekly on Stocks. “Chinese investors who can identify durable businesses should adopt a policy of buying and holding.”

On how to find low-risk, high-quality businesses at good prices, the veteran investor said that patience is the key. What’s good for investors seeking opportunities in China is that the country has a long runway of high growth over the coming decades, according to Carlisle.

Today the global market is pricing companies very optimistically, but as Carlisle said, it will change with time. “Humans are always emotional. When they are too optimistic, prices will be too high. When they are too pessimistic, prices will be too low.”

Tobias Carlisle is founder and managing director of Acquirers Funds, LLC. He serves as portfolio manager of the firm's deep value strategy. He is also the author of the books The Acquirer’s Multiple (2017), Concentrated Investing (2016), Deep Value (2014), and Quantitative Value (2012).

Part One: China will dominate the list of the world’s largest companies in 30 years; The only challenge in investing is to remain patient.

Q: Some people say the best investment conforms to a country’s growing fortunes, just as Warren Buffett fully enjoyed a prolonged U.S. bull market. For the next 10-20 years, how do you see opportunities in China?

A: China has a long runway of high growth ahead of it over the coming decades. Chinese companies will become globally dominant. At his most recent shareholder meeting, Warren Buffett showed the largest 20 companies in the world in 1989 and compared them to the largest 20 companies in 2021. In 1989, Japan dominated with only a handful of U.S. companies represented. In 2021, the U.S. dominated with a handful of Chinese companies. In 2051, China will dominate the list of the largest companies in the world. Investors who can identify these companies will do very well.

Q: We often come across the choice between a “good company” and a “good stock”. A good company is usually not under-valued, while a “good stock” may not represent a good company. How do you choose between them?

A: This is precisely the challenge for investors. A good company, if too expensive, will disappoint as surely as a good price for a bad company will disappoint. Investors need to find a good-enough company available at a good-enough price. Investors must balance the quality of the company with the price available in the market. The objective is to find good companies at good prices. This is difficult, but the longer an investor's time horizon--how long they plan to hold the stock--the easier it becomes to identify temporarily depressed companies with good prices. Patience is the key.

Q: But it’s not easy to find a good company that’s undervalued, especially when the market is booming. How challenging is it to identify such an opportunity?

A: My objective as an investor remains the same: To find high-quality companies available at good prices. Good companies are rarely available at good prices. Why should they be? Good opportunities are often recognized by the market and priced highly. Right now the market is pricing companies very optimistically. As a result, there are fewer available than usual. This will change with time. The only challenge is to remain patient.

Part Two: Value stocks will continue to outperform; "Never sell" is an investment philosophy that gives great businesses time to grow

Q: The "father of value investing" – Benjamin Graham once said, “What brings a discounted price back to its intrinsic value is a mystery to me, as it is to everyone else.” What do you think are the “mysterious” reasons behind the recent rally in value stocks? Is it about the global economic recovery?

A: That certainly seems to be true. After a brief period of speculative optimism, which saw story stocks outperform, the economic recovery globally has rotated back to better quality, undervalued stocks. Viewed over the very long run, undervalued stocks that generate cash and earn good returns on investment must outperform.

There are many indications that value stocks are already outperforming in 2021 and will continue to do so. The high yields and good reinvestment opportunities for many high quality, undervalued stocks suggests to me that, whatever happens in 2021, the medium- to long-term prospects for value are unusually good.

Q: The world is changing every minute now. How can we adapt to the changes while adhering to a value-based strategy?

A: While the world is always changing, human nature remains constant. Investors must align themselves with the world as it is, and as it will be. This means they must be flexible to new ideas. Ideas and technologies change, but humans are always emotional. When they are too optimistic, prices will be too high. When they are too pessimistic, prices will be too low. The investor must take a rational approach, looking to the underlying truth of the company, and not be influenced by these human emotions.

Investing is identifying companies with good long-term prospects available at a price that allows the investor to earn enough return for the risk taken on. If prices are too high, the company may do well, but its shareholders won't.

Q: Warren Buffett adopted a “never sell” strategy for some of America’s best-known brands, such as Coca-Cola. And turning to China, we are now also seeing some enduring brands emerging after decades of development. Can Chinese investors apply a similar strategy to “never sell”?

A: Yes, Chinese investors who can identify durable businesses should adopt a policy of buying and holding. It's not necessarily a strategy--"Never sell" is an investment philosophy that gives great businesses time to grow. It necessarily demands more work before buying, but repays that work with compound growth--growth on growth.

Investors shouldn't sell because a company becomes expensive if over the long-term the company will become much larger. The time to sell is when the quality of the company deteriorates.

Q: The last question: What advice would you give to Chinese investors and our readers?

A: This is an exciting time for Chinese investors. China has a long runway of growth ahead of it. The result will be many globally dominant businesses. My advice to Chinese investors is the same as my advice to every investor--find low-risk, high-quality businesses with long runways ahead of them available at good prices, then buy and hold them for the very long term.