How to implement your Acquirer’s Multiple Strategy – 5 Good Questions Answered

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I often get asked, “What’s the best way to implement an Acquirer’s Multiple (AM) deep value investment strategy?”.

Tobias has written a number of articles over the years on how best to implement this strategy. Here are five questions we are regularly asked, answered by Tobias himself.

If you’ve got any questions on how to implement your own AM investment strategy, drop me a comment at the bottom of this article so that others can see your question and my response.

Question 1.
1. Should I buy a basket of minimum 20 stocks from the acquirer’s multiple screen? Would only 10 stocks be too risky?

Answer.
Concentrating tends to lead to greater returns over the long run, but is much more volatile in the short run. 20 gives a good balance of return and volatility. 10 can be volatile, but has delivered slightly better returns.

Question 2.
2. How often should I make changes in the portfolio? Shall I sell all stocks after 1 year and then buy the one that is new on the list?

Answer.
For taxable portfolios, stocks that are up should be held for a year and a day for long-term capital gains. Stocks that are down and out of the screen can be re-balanced out and replaced with the next best position. An annual re-balance is sufficient, and a quarterly re-balance can slightly improve returns, but more frequent re-balancing requires increased monitoring, increases trading costs, and can increase taxes.

Question 3.
3. Can I buy 1 stock every month until I have reached 20 stocks and then sell each of them after 1 year of holding (that means different selling time for each of the stocks)?

Answer.
Yes. That’s a good approach to scaling in.

Question 4.
4. Does the acquirers multiple beat other methods like greenblatt’s magic formula and other deep value methods like net net stocks?

Answer.
It has historically beaten the Magic Formula for the reasons laid out in Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors and Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations. Net nets are a special case, and not really comparable. It won’t likely beat net nets when you can find a basket of them.

Question 5.
5. Should i choose the 20 top stocks on the screener or can I just select 20 of the 30 available? Will the top 20 give better results than the the stocks from 10-30 on the list?

Answer.
The top 20 are the way to go.