Get your free personalized podcast brief
We scan new podcasts and send you the top 5 insights daily.
To avoid chasing bubble-era valuations, they first vet stocks against M&A comps, then apply a second, absolute cheapness test (an 'owner earnings yield' over 8%). This second filter protects them from extrapolating irrational purchase multiples driven by low interest rates or market exuberance.
Related Insights
In markets like Australia where tech M&A is less mature, a HoldCo's primary job during sourcing is often educational. They must patiently reset founder valuation expectations, moving them away from inflated media headlines and towards fundamentals like profitability and comps.
A board's duty to maximize shareholder value is an expected value calculation. A $100B offer with a 75% chance of closing is valued at $75B, making an $80B offer with 100% certainty more attractive. Boards weigh financing and regulatory risks heavily against the headline price.
During the dot-com bubble, Howard Marks used second-order thinking to stay rational. Instead of asking which tech stocks were innovative (a first-order question), he asked what would happen *after* everyone else piled in. This focus on embedded expectations, rather than simple quality, is key to avoiding overpriced, crowded trades.
Instead of focusing on the current price, a more effective framework is to ask if you would be excited to invest more at a significantly higher valuation if the company executes well over the next six months. This tests your conviction in the company's long-term, generational potential.
To maintain pricing discipline, Fairfax has a strict M&A rule: it never participates in auctions or bidding wars. Once an offer is made, it's final. This strategy prevents them from overpaying and ensures they only acquire companies at prices that offer attractive future returns.
A stock's valuation frames the core question an investor must answer. At six times earnings, the question is about near-term survival; at 50 times, it's about decades of growth. Your job is not to find a price, but to find a question you can confidently answer.
A company that cannot articulate its own intrinsic value is poorly equipped to assess the value of an acquisition target. Management has more information about their own business; if they can't value it, they can't reliably value another one, making disciplined M&A impossible.
Anchoring valuation on a company's typical price-to-sales ratio helps identify buying opportunities when margins are temporarily depressed. This avoids the pitfalls of methods like the Magic Formula, which can mistakenly favor companies at their cyclical earnings peaks, leading to underperformance.
A valuation multiple like P/E is not a starting point for analysis; it's the final, compressed expression of a deep understanding of a business's economics. You must "earn the right" to use a multiple by first doing the complex work of analyzing cash flows, competitive advantages, and reinvestment opportunities.
Methodical Investments' model doesn't simply buy the cheapest stocks. It actively removes the extreme outliers from its consideration set. This rule acts as a fail-safe, recognizing that companies appearing exceptionally cheap on paper are often value traps, facing severe corporate governance issues, or are a result of data errors.
