In a relatively recently published WealthTrack video, a renowned value investor, Joel Greenblatt shared his professional insights with legendary finance reporter Consuelo Mack. Before we highlight the most interesting parts of the interview, let’s take a quick look at Mr.Greenblat’s background.
Back in 1985, he started his own hedge fund called Gotham Capital, which managed to obtain an astonishing track record achieving 34% annualized returns in 10 years since its inception. Interestingly, in spite of this tremendous success, he decided to close the fund to the outside investors because of the volatility, which many investors just couldn’t handle. Therefore, Mr. Greenblatt has been known for saying that “the best investment strategy is the one that makes sense and that you can stick with”.
Before launching his own fund and shifting his focus onto value investing, Mr.Greenblat honed his investment acumen at Arpeggio Acquisition Corp and Rhapsody Acquisition Corp as a Special Adviser. He earned his BS summa cum laude in 1979 and an MBA in 1980 from the Wharton School of the University of Pennsylvania. A part of his popularity on Wall Street also comes from a few successful books about investing he has published. The most popular one being The Little Book that Beats the Market, in which Mr. Greenblatt explains a special quantitative investment strategy called “Magic Formula Investing”, which is a method of choosing the right stocks to invest in, based on value investment principles. The other two books being You Can Be a Stock Market Genius and The Big Secret for the Small Investor. Currently, he is the managing principal and co-chief investment officer of Gotham Capital’s successor, Gotham Asset Management, he serves on the board of directors of Pzena Investment Management and is an adjunct professor at the Columbia University Graduate School of Business.
In the interview, Mr. Greenblatt talked about passive investing quoting Warren Buffet who said that “most people should just index”. He further said that Warren Buffet and himself don’t index, pointing out a dichotomy there, and explaining that those who don’t know what they are doing should index or choose a good manager in whom they believe enough to be able to stick with his/her investment strategy. To emphasize the importance of the “sticking with the investment” idea, Mr. Greenblatt took one example from his book The Big Secret for the Small Investor. The word is about the best performing mutual fund for the period 2000-2010 that managed to gain 18% a year, compared to the average investor who ended up being flat in the same period. Interestingly, in spite of the obvious mutual fund’s success, the average investor in that fund actually lost 11% a year on a dollar-weighted basis because he/she was getting out and back in at the worst possible moments.
According to Mr. Greenblatt, instead of looking at the past returns, we should be looking at the investment process in order to identify a good manager, but many people are not able to do that. Hence, with most people turning to index investing, it’s less competition for stock pickers.
Another example from the same book goes to show that every good investor must have at least some hard times. Namely, he talked about the best performing institutional funds in the same period (2000-2010) and said that 47% of the top quartile managers had at least three of those 10 years being in the bottom decile. “So right, it’s very painful, but to beat the market you have to do something different than the market.” He further pointed that even if you, as a manager, can easily stick with your investment process, it is very difficult to find the clients who will be able to follow you and have faith in you after you’ve had a few down years.
To stress out the importance of having a long term horizon, Mr. Greenblatt talked about the book he read called Astroball. It is a story of the Houston Astros, the worst baseball team in half a century that declared in 2014 they were going to win the World Series in 2017. They actually managed to win it, transforming from the worst to the best baseball team, because they focused on the long term horizons. Instead of getting the best players at the moment they worked on getting the players that can become the best in three years. All their sport tactics were focused on the long term, and Mr. Greenblat believes the same thing is applicable and necessary for investment success.
When asked whether he thinks that value investing is in big trouble, Mr. Greenblatt said that it “really depends on how do you define value”. Instead of defining value through law book price and similar, he determines value through evaluating businesses. He and his team examine the cash flows and how much they are going to grow. Mr. Greenblatt further concluded that “it doesn’t make sense that if you are good at valuing businesses and then can buy them at a discount that that should ever go out of favor.”
You can watch the full interview in the video below:
This article is originally published at Insider Monkey.