Joel Greenblatt's Talk at Google

Joel Greenblatt is the founder of Gotham Capital and also author of the book The Little Book That Beats the Market.  He recently gave a talk at Google and here are the takeaways:


Joel Greenblatt's Talk at Google

- He thinks the vast majority of investors should index rather than pick stocks.  That said, he doesn't index and Warren Buffett doesn't either.

- Greenblatt said people are still crazy (human behavior) and the market has wild rides (50% drops in recessions, tripling in value afterwards, etc).  So there's an opportunity.  The key is obviously to buy when valuations are below average and sell when they're above average.

- He tells his MBA students at Columbia Business School: "If they do good valuation work, I guarantee the market will agree with them... I just don't know when."

- "Stocks are ownership shares in businesses."  Looks at how relatively cheap they are compared to other businesses, to history, etc.  Measure in absolute and relative value.

- Emphasizes being patient; market oscillates back and forth over the years.  Time horizons are shrinking so we're playing time arbitrage. 

- "Almost never have I bottom-ticked a stock."  That means most of the time he'll be down on a stock at some point.  There's two reasons why: he's either wrong or just needs more time for the thesis to play out.

- Greenblatt also wrote a book called The Big Secret that he joked is still a secret since no one read it.  But he's also authored a wildly popular investing book with a cheesy title: You Can Be a Stock Market Genius

- "To beat the market you have to do something different."

- Runs 100% net long but it's typically achieved via 170% long and 70% short.  They determined the leverage amount based on returns.

- The market's been cheaper 83% of the time based on current valuations.  Based on this, market could see 3-5% returns over the next year and then 8-10% over the next two.  Not a prediction though he said.

- "Stock investing is figuring out what a business is worth and paying less."

- Harped on the importance of compound interest tables.  Start investing as early as possible.

- Thinks there's still a lot of groupthink going on.  If you're good at taking 'unfair bets' in obscure places that other people aren't looking, you can do well.  But eventually you'll have too much money to play in that arena anymore to have it move the needle.

- On Apple (AAPL): "I think it's cheap relative to other choices right now."

- "Your job is to be cold and calculating, and unemotional.  Unfortunately, people are human.  That's good news for us, but the stats are against you."

- "The last man standing is patience.  We call it time arbitrage.  That's in really short supply.  It's not getting better, things are moving faster... and less patience." 

- For more from this investor, we've also posted up Greenblatt's interview with Consuelo Mack

Embedded below is the video of Joel Greenblatt's talk at Google:



We've also posted a bunch of other investor talks at Google, including:

- Howard Marks' talk at Google

- Michael Mauboussin's talk at Google

- Jim Grant's talk at Google

Joel Greenblatt Interview With Consuelo Mack's Wealthtrack

Joel Greenblatt of Gotham Funds recently sat down with Consuelo Mack's Wealthtrack to talk about his hybrid approach to investing where he combines indexing with his active long/short strategy.

Greenblatt is known for generating insanely good returns (34% annualized) in his original Gotham Capital vehicle from 1985 to 1995. 

He took advantage of spin-offs, post-bankruptcy equities, and other plays.  He wrote about his strategy in a really good book that has a cheesy title:  You Can Be a Stock Market Genius.

But nowadays he's focused on some other strategies, and he dives into that in the interview.

Embedded below is the video of Wealthtrack's interview with Joel Greenblatt:

Joel Greenblatt's Wealthtrack Interview

Gotham Capital's Joel Greenblatt recently sat down with Consuelo Mack on Wealthtrack where he talked about his change of strategy from a highly concentrated portfolio focused on special situations to a widely diversified one.

Greenblatt is also the author of numerous books on the various strategies he's run.  One of the best books on investing (don't let the silly title fool you) is his book on special situations: You Can Be a Stock Market Genius.

He has also authored The Little Book That Still Beats the Market, a book that details his formula-following approach to investing.

Embedded below is Joel Greenblatt's interview on Wealthtrack:

Joel Greenblatt Interview in Latest Graham & Doddsville Newsletter

The latest Graham & Doddsville investment newsletter is out from Columbia Business School.  It features interviews with Gotham Capital's Joel Greenblatt, Loews Corporation, and Royce & Associates.

Greenblatt gave an insightful interview regarding his investment process and below are some of the key takeaways.


Highlights From Joel Greenblatt's Interview


On what kind of stocks he buys nowadays:

"Part of the future is unknowable but there are some instances where you can take a calculated risk/reward bet. One thing I would say is that a common characteristic of many of the stocks that we buy is that everyone hates them.  We do that a lot."


On going long/short:

"When we buy things, we like companies that invest their capital well; they generate large amounts of cash flow relative to the price we're paying.  On the short side, we would like to be short, in general, high-priced, cash-eating companies.  So it is essentially the opposite of our long approach.  You do have to balance your risk, though."


On emphasizing downside risk:

"One of the things I said in You Can Be a Stock Market Genius is if you don't lose money, most of the alternatives are good.  Even if you don't know what the upside is - if you just know there's upside - you can create scenarios where you have an excellent risk/reward.  Positions with limited downside are the types of positions that I have loaded up on in the past.  Not the positions with the biggest payoff.  I could buy a lot knowing that I wouldn't lose much and that there were good possibilities that it was worth a lot more over time.  At the very least, I knew that my downside was well protected and so I could create an asymmetric risk/reward by saying if I don't lose much, there are not many alternatives other than to make money."

This is an important facet of investing and we've previously highlighted previous thoughts from Greenblatt on risk and investment timeframe that are worthwhile.


On how to become a better investor:

"If you want to get good at investing, read a lot and practice a lot."  


For the rest of the interview with Greenblatt, as well as Q&A with Loews and Royce, please see the latest issue of Columbia Business School's Graham & Doddsville embedded below:





If you haven't already, be sure to read Greenblatt's book, You Can Be a Stock Market Genius.  While the title may be a bit cheesy, the book is recommended by most top hedge fund managers.

Notes From SALT Conference: Barry Rosenstein, Leon Cooperman & Joel Greenblatt's Panel on Stocks

In Las Vegas today at the SALT Conference, the talking stock panel focused on perspectives from value investing legends such as Leon Cooperman of Omega Advisors, Barry Rosenstein of JANA Partners, and Joel Greenblatt of Gotham Capital.


Barry Rosenstein of JANA Partners talked about how he's been involved in activist investing since the 1980s and thinks today's environment for it is the best he's seen.  They've been an activist in McGraw-Hill (MHP).  And though not an activist stake, we've posted JANA's thesis on Barnes & Noble, one of their latest investments.

He also touched on his firm's lack of exposure to financials, noting that the sector is too hard to analyze.  Rosenstein will be presenting an investment idea at the NYC Value Investing Congress in October. Market Folly readers can receive a discount here with code N12MF3.


Leon Cooperman of Omega Advisors reiterated his stance that US government bonds are fundamentally overvalued.  We've highlighted his case against bonds numerous times before.

In terms of stock picks, he has allocated capital to financials via AIG (AIG), E*Trade (ETFC), Capital One (COF) and Western Union (WU). On the political side of things, he deemed this upcoming election one of the most important in his lifetime.



Joel Greenblatt said he likes tech giants Microsoft (MSFT) and Hewlett Packard (HPQ).  He also mentioned Wellpoint (WLP) and CVS Caremark (CVS).  His book You Can Be a Stock Market Genius, despite its somewhat cheesy title, is recommended by tons of top hedge fund managers.


Whitney Tilson, the moderator of the panel, said his hedge fund T2 Partners was buying more JPMorgan Chase (JPM) TARP warrants this morning.  We also recently posted T2's presentation on AIG.

For more notes from the SALT Conference, check out:

- Identifying opportunities in emerging markets with John Burbank

-  Notes from panel with Kyle Bass, Dmitry Balyasny & Steven Tananbaum

- Risk panel with Phil Falcone and Eric Sprott



The above was compiled from notes sent in along with help from live tweets from: @katyawachtel & @realrobcopeland

Joel Greenblatt: The Big Secret For Value Investors (Presentation From Value Investing Congress)

At the Value Investing Congress today, Joel Greenblatt of hedge fund Gotham Capital gave a presentation entitled "The Big Secret For Value Investors".

Be sure to check out all of our notes from the Value Investing Congress.


Joel Greenblatt (Gotham Capital): Value Investing

He started out with a review of the concepts in his book, The Little Book That Still Beats the Market. He says you want stocks that are “cheap and good” and used the Compustat database to rank them by the two measures. Cheap: EBIT/EV. Good: EBIT/ (Net WC + Net fixed assets) (return on tangible capital).

Updated results through 2009: Decile 1: +15.2%, bottom decile: -0.2%. For 20 years ending 12/31/10: SPX annualized 9.1%, 11.8% on equal weight, “Value 1000” value-weighted index is 16.1%. Same Beta as SPX, same std dev. 1.01 Beta vs. 0.99 SPX.

Now, the current situation, and the meat of the presentation: A week ago, the Russell 1000 had average FCF of 9.2% (in the 94th percentile toward cheap!) Looking backwards, cheaper than 94% of periods over the last 20 years and that correlates with a 15-20% return over next one year (market up 5% over week since slide finished) "on only 10-15% left, but still pretty nice."

Average FCF of Value 1000 a week ago was 13.7% and was cheaper than 93% of the last 20 years, which correlates with a year forward return of 30-35% for value index. Greenblatt said that "Not only is the market cheap, but the value stocks are even cheaper."

Large cap long/short portfolio is in the 82% percentile- very big spread between long and short opportunity. ROIC long 59.4%, shorts 4.8%. Arguments against stocks being cheap (playing devils advocate): one argument is that we are at peak operating margins, but he showed a graph that indicated it is unclear what the real mean operating margins should be. The second argument is return on tangible capital continues to climb. In addition, outsourcing of factories, moving to a service economy, so tangible capital may not be the right way to look at it, and again it's unclear where the mean level is. He also showed a graph of tangible capital per dollar in sales is declining to 35 cents from 50 cents, 20 years ago.

Some of companies currently in the value 1000: Gamestop (GME), Aeropostale (ARO) ~ (Revolting companies, you’d never want to buy, he joked), Hewlett Packard (HPQ) ~ terrible, but selling at 5x eps, Dell (DELL), Microsoft (MSFT), General Dynamics (GD), Wells Fargo (WFC), and Merck (MRK). For every name, he mentioned why they are terrible, only half-joking. Part of the reason this works is “it’s really hard to buy these companies.”

He says that the current fixation on short-term returns causes managers to avoid buying cheap companies, because they need the ones that are doing well right now. Buying these stocks with very low expectations gives you a chance for asymmetric returns on the upside if they do even a little bit better than expected. He expects this “time arbitrage” will continue to be exploitable. He is very optimistic for the next year.


Q&A Session:

1. Role of dividends? He's indifferent in his strategy.

2. How does he incorporate financials now, he used to exclude them? He now ranks the financials separately, and adds to index if they are cheap, but he didn’t give what metrics he used.

3. Question about Michael Burry. (Background: In “The Big Short”, writer Michael Lewis made Greenblatt out for a villain for taking money from Burry even as Burry was right.) Greenblatt was a little annoyed by the question: “Michael Lewis has never let the facts get in a way of a good story. What they got wrong in the book is Burry wanted to side pocket both mortgage and corporate CDS... we did not want him to side pocket the liquid corporate CDSs … only reason we took money from him was we were getting redemptions.”

4. Where does he see the market now? He’s not a market timer, but he would argue for raising exposure to stocks now if asked.

5. Can you use the value screen and really juice returns by using further fundamental analysis? Answer: we were small, had 6-8 concentrated names, that’s why we made 40% returns - it’s impossible on large amounts of money or a very diversified portfolio. This solution is good for a very diversified portfolio, same beta as the market and beats the SPX. We’ve tried, but haven’t been able to beat the indexed approach. “We’re pretty good at picking stocks, so it’s hard to do.”

6. Large cap stocks are pretty cheap, this is an interesting time- HPQ at 5 times earnings. Bond bubble, even bigger than the stock bubble- which is crazy. Still plenty of opportunity in special situations for smaller funds.


About Joel Greenblatt: He manages Gotham Capital and saw 40% annualized returns for 20 years. He's the author of the new book The Big Secret for the Small Investor: A New Route to Long-Term Investment Success. And for aspiring investors, numerous prominent hedge fund managers such as Seth Klarman have recommended Greenblatt's other book: You Can Be a Stock Market Genius.

You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Joel Greenblatt's Recommended Reading List

Teaching a class on Value and Special Situation Investing at Columbia's Business School, Joel Greenblatt provided a recommended reading list and we wanted to detail this below. Greenblatt is the founder of Gotham Capital, a noted value investor, and the founder of the Value Investor's Club as well. Here's his recommended reading list:

You Can Be a Stock Market Genius by Joel Greenblatt. Baupost Group's Seth Klarman also actively recommends this book as it examines catalyst based investing such as spin-offs, mergers, risk arbitrage, etc in an effort to exploit market inefficiencies.

Security Analysis on Wall Street by Jeffery Hooke. A great book we've also read that highlights how to analyze a stock in step-by-step fashion. If you're in the markets professionally or want to refine your valuation skills, this is the textbook for success.

New Finance by Robert Haugen. This book focuses on evidence, causes, and the history of overreactive pricing in the stock market.

Value Investing: From Graham to Buffett and Beyond by Bruce Greenwald. This book is authored by another well-known Columbia Business School professor.

The Essays of Warren Buffett by Lawrence Cunningham. Self-explanatory and a great read.

The Little Book That Still Beats the Market by Joel Greenblatt. Application of a formula that seeks out good businesses trading at bargain prices.

Contrarian Investment Strategies by David Dreman. Teaches and advocates going against the crowd by buying stocks that are out of favor and selling the 'darling' stocks.

What Works on Wall Street: A Guide to the Best-Performing Investment Strategies of All Time by James O'Shaughnessy. Examines three decades of stock market data to demonstrate the viability of 15 of the most common investment strategies.

The Intelligent Investor by Benjamin Graham. Considered to be the best book on value investing out there, this title is also recommended by the likes of investing greats Warren Buffett and Seth Klarman.

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That wraps up Joel Greenblatt's recommended reading list. This joins our coverage of other books advocated by prominent investors such as:

- Seth Klarman's recommended reading list (Baupost Group)

- Dan Loeb's favorite reads (hedge fund Third Point LLC)

- Hedge fund Blue Ridge Capital's picks