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

by Tobias E. Carlisle

This is the broken-leg problem. Suppose we have a rule for predicting whether John and Jane go to the movies together. If we know John has a broken leg, can we ignore the simple rule and make our own decision? The argument is the simple rule will get the question wrong because it doesn’t know John’s leg is broken. Surely, we can include this data to decide that John and Jane will stay home. Won’t that make our prediction more accurate? The studies find that it does not. The reason is we find more broken legs than there are. We make our own decisions too often, including too much irrelevant data. This is true for companies with bad businesses, slowing growth, falling profits, or losses. As a portfolio, fair businesses at wonderful prices beat the market. But these companies look like they have broken legs. They have lots of reasons to override the simple rule and make their own decisions. We are better off if we just follow the simple rule.