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

by Tobias E. Carlisle

Let’s put the return on equity and the Acquirer’s Multiple together. Greenblatt is looking for a stock that makes a lot of profit for each dollar invested in it. At the same time, he wants to pay as little as possible for each dollar it makes. He wants a wonderful company at a fair price. Magic Formula = Wonderful Company + Fair Price If we have the choice of investing in Red Soda or Blue Soda, we prefer Red Soda. Why? Because it has a higher return on equity (20 percent versus 10 percent for Blue Soda) and a lower Acquirer’s Multiple (5 versus 10 for Blue Soda). Red Soda is more wonderful and at a fairer price than Blue Soda. In 2005, Greenblatt asked a young computer programmer graduate of the Wharton school to test his Robo-Buffett. The Wharton grad told the computer to look at the biggest 3,500 stocks in a database of US financial data going back to 1988. In each year, the program gave each stock in the database a rank out of 3,500 based on its Acquirer’s Multiple. It also gave each stock another rank out of 3,500 based on its return on equity. It added each stock’s Acquirer’s Multiple rank to its return on equity rank to create a new combined rank for each stock. If we return to the Red Soda and Blue Soda examples, Red Soda gets a rank of 1 out of 2 for its Acquirer’s Multiple because it is lower. Blue Soda gets a rank of 2 out of 2 because it has a higher Acquirer’s Multiple. Blue Soda also gets a rank of 2 out of 2 for its return on equity because it is lower. Red S...