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

by Tobias E. Carlisle

The excellent stocks were much better than the unexcellent stocks on every measure but one: valuation. Growth was higher for the excellent stocks at 22 percent per year. The unexcellent stocks grew at just 6 percent per year. The excellent stocks also had a better return on equity: 19 percent. The unexcellent stocks returned just 7 percent. (Remember, high return on equity is what makes businesses “wonderful.”) If you only looked at asset growth and return on equity, you might expect the excellent stocks to beat the unexcellent stocks. But Clayman’s excellent stocks were undervalued, and the excellent stocks were expensive. Clayman’s unexcellent stocks traded at 0.6 times book value. Peters’s excellent stocks traded at 2.5 times book value. In other words, the unexcellent stocks were fair companies at wonderful prices, and the excellent stocks were wonderful companies at fair prices. Which stocks were the better investment? In 2013, Barry B. Bannister tested Clayman’s unexcellent stocks from June 1972 to June 2013. Bannister found the unexcellent stocks beat the excellent stocks and the market by a wide margin. The unexcellent stocks averaged 14 percent per year, while the excellent stocks returned only 10 percent per year. Over the same time, the market averaged 11 percent.