The Acquirer's Multiple: How the Billionaire Contrarians of Deep Value Beat the Market

by Tobias E. Carlisle

The reason great businesses become average businesses is mean reversion. Things go back to normal. It means profits move back toward the average over time. A great business is an outlier. It is more profitable than average. Over time, competitors eat away the unusually high profits until the business earns average profits. This also happens to bad businesses, which are less profitable than average. Over time, competitors leave the industry until the businesses that stay earn average profits. This is the machinery of mean reversion. Some businesses do keep up oddly high profits. Mauboussin found a tiny handful of stocks kept high profits from start to finish. But he could not find the reasons why. And he couldn’t find the things that predict which businesses will keep up high profits. All he could say for sure is that some businesses stay highly profitable, while most go back to average. Warren Buffett can pick the needles from the haystack. He can find these companies with “moats” that protect them from competitors. Without the moat, competitors storm the gates and push the high returns back toward the average. Few companies have a moat. Even most seemingly great companies don’t have one. For this reason, most highly profitable companies see profits fall over time.