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

Value Investing Congress Notes: Day 1

Today we're posting notes from the Value Investing Congress in New York where tons of prominent hedge fund managers are giving their latest investment ideas.

This post serves as an index and you can click each individual manager's name below for notes on their presentation.


David Einhorn (Greenlight Capital): short Green Mountain Coffee Roasters (GMCR)

Ricky Sandler (Eminence Capital): long CME Group (CME)

Joel Greenblatt Gotham Capital: The big secret for value investors

Guy Gottfried (Rational Investment Group): long Canadian company The Brick (TSE:BRK)

Jim Chanos (Kynikos Associates): Beware the global value-trap

Vladimir Jelisavcic (Longacre Fund): DryShips (DRYS) Convertible Bonds

Timothy Hartch (Brown Brothers Harriman): Dentsply (XRAY) & Energy Solutions (ES)

Alexander Roepers (Atlantic Investment Management): Anticipating more M&A



***UPDATE***: We just posted our Day 2 notes from the Value Investing Congress which features presentations from Bill Ackman, Leon Cooperman and many more hedgies.


Want more hedge fund coverage? Don't miss out: get our free updates via email or via RSS reader.

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.

Get Investment Ideas From Bill Ackman, Jim Chanos & Leon Cooperman at the Value Investing Congress

The upcoming Value Investing Congress in New York City has an all-star line-up as usual. Jim Chanos of hedge fund Kynikos Associates was just announced as the latest speaker for the event on October 17th & 18th, 2011. The manager is famous for his Enron short and you can hear his latest short ideas at the event.

Discount: Market Folly readers can save 47% off admission by clicking here and using discount code: N11MF2.

Here's the list of managers presenting:

- Bill Ackman (Pershing Square Capital)
- Leon Cooperman (Omega Advisors)
- Jim Chanos (Kynikos Associates)
- Joel Greenblatt (Gotham Capital)
- Guy Gottfried (Rational Investment Group)
- Michael Kao (Akanthos Capital)
- Whitney Tilson & Glenn Tongue (T2 Partners)


This is *the* go-to event for the latest investment ideas from top hedge fund managers.

The discount for our readers expires in one week so take advantage ASAP. Click here to receive the discount.

Ira Sohn Conference Notes Part 2: Ackman, Einhorn, Eisman, Icahn, Greenblatt

This is part 2 of our ongoing coverage of presentations given by top hedge fund managers at the Ira Sohn Conference today. Be sure to check out part 1 of our notes from Ira Sohn which includes presentations from Dinakar Singh, Jim Chanos, Phil Falcone and more.

Part 2:


Steve Eisman / FrontPoint Partners: Eisman was profiled in Michael Lewis' great book, The Big Short as one of the big winners in the subprime trade. Last year at Ira Sohn, he said to short for-profit education stocks and that trade paid off as many stocks were down anywhere from 25% to 72% over the past year.

This time around, Eisman focused on US financials, asking "are financials dead forever?" He notes that credit quality is improved but interest margins will most likely continue to contract.

Eisman likes property and casualty insurers, citing the potential for commercial policy pricing to improve. He noted that his year has been particularly hard hit with natural disasters, leading to large insurance losses. He thinks P&C insurers are a 'buy' even if there's another big disaster.

He says the least risky way to play this is via insurance brokers like Marsh & McLennan (MMC), Willis Group (WSH), and Aon (AON). You can read an in-depth analysis of AON in the free sample of our Hedge Fund Wisdom newsletter (direct .pdf download link).

For riskier plays, Eisman points to pure reinsurers based in Bermuda and pulled up a list of them, the most well-known of which is probably Ace (ACE).


Bill Ackman / Pershing Square Capital: Ackman said to buy Family Dollar (FDO). He likes the dollar-store chain because it is like Walmart, but there's room to grow. He also notes the company's solid return on capital as they can build plenty of new stores. Many of Ackman's plays are retail or real estate focused and this one is no different.

FDO actually received a bid to go private from Nelson Peltz's Trian Fund, who offered between $55 to $60 per share in February. They are one of the largest shareholders, owning almost 8% of FDO's shares. Ackman believes that FDO is an attractive target for a leveraged buyout.

Ackman notes that Family Dollar has fallen behind competitor Dollar General (DG) ever since KKR bought DG and now FDO has to improve. The Pershing Square manager thinks shares will trade as much as 70% higher (FDO currently trades around $55 and Ackman thinks it's worth up to $92 including dividends). He also mentioned that his hedge fund was even buying shares today.

We also covered that Ackman started an activist position in Alexander & Baldwin (ALEX).


Joel Greenblatt / Gotham Capital: The value investor talked about the advantage of having a long-term investment horizon. He emphasizes investments that fall under the 'time arbitrage' classification. Market Folly readers will recall that Blue Ridge Capital's founder and hedge fund manager John Griffin also uses this approach. He classifies investments as either time arbitrage or catalyst driven.

Greenblatt's picks included a myriad of names, including: WellPoint (WLP), GameStop (GME), Intel (INTC), Walgreens (WAG), Nordstrom (JWN), Bed Bath & Beyond (BBBY), and Humana (HUM).

He also has a new book out entitled, The Big Secret for the Small Investor: A New Route to Long-Term Investment Success. You can also check out his recommended reading list here.


David Einhorn / Greenlight Capital: Einhorn's presentation laid out the bull case for life insurer Delta Lloyd (AMS: DL), traded in the Netherlands. This is one of his hedge fund's largest positions.

His second pick was Microsoft (MSFT). The tech giant has attracted lots of value investors as of late and you can view fellow hedge fund T2 Partners' presentation on MSFT here. Einhorn says the company still has a shot at the smartphone market with its partnership with Nokia (NOK). He also notes that it is trading at a discount as the market isn't giving them credit for their solid position in cloud computing.

Einhorn also said that CEO Steve Ballmer doesn't care what Wall Street thinks and that could possibly be a good thing. However, he conceded that Ballmer is "stuck in the past" and said that Ballmer's "continued presence is the biggest overhang on Microsoft's stock." It's very clear Einhorn wants Ballmer fired.

We've also detailed Greenlight Capital's recent letter to investors for insight into their new positions in Yahoo! (YHOO) and Best Buy (BBY).


Carl Icahn / Icahn Partners: The legendary rabblerouser began his presentation by saying he's made a fortune by studying natural stupidity. Icahn said that "activism" in the old-school sense of the word is dead; there aren't anymore true corporate raiders anymore. He says that there's tons of money to be made by shaking things up at a company.

He went on to talk about why he returned outside investor capital in his funds. He simply didn't want to be responsible for the losses of others like he was during the 2008 crisis. Icahn fears further problems will arise in the markets in a year or two. His pitch at the conference? His holding company: Icahn Enterprises (IEP).


Mark Hart III / Corriente Advisors: If you're unfamiliar with Hart, then all you need to know is that he created subprime mortgage and sovereign debt funds well before the crises happened, profiting handsomely from the events that followed.

In his speech, Hart said to short China and this isn't the first time he's made this case. He argues that it is a credit fueled bubble and there are many misconceptions out there. It seems his conviction is high here as he says that China's bust will be much larger than the Asian crisis in the 90's.

Hart argues that inflation will end China's credit growth. This isn't the first time we've seen this argument. Hedge fund Kleinheinz Capital has in the past said that inflation is the biggest threat to emerging markets. Coincidentally, both Kleinheinz and Corriente operate out of Fort Worth, TX. Lastly, Hart mentioned he was buying puts on the renminbi.


Jeffrey Gundlach / DoubleLine: He used an Andy Warhol car crash painting as an illustration for the housing market. He said that Bank of America $BAC is a proxy for the ABX and says it's going lower. Gundlach likes natural gas.

Interestingly enough, Gundlach said that gold is too heavy to carry around to use as a form of currency to pay for things. Instead, he said to use gems to protect against a crash and uncertainty because they are more portable, noting that you can carry a ruby in your shoe. Gundlach prefers holding cash or gems instead of gold or silver.

As an aside, it's worth noting that diamond prices have been heading higher in recent months. They are not a publicly traded commodity and high demand from India and China seems to be driving prices there.


Marc Faber / Gloom Boom & Doom Report: Faber is very clearly not a fan of Ben Bernanke. He says that the Federal Reserve Chairman is a student of history regarding the Depression, but that Bernanke unfortunately doesn't know what caused it. Faber notes that as the Fed prints more money, cash and bonds obviously aren't good investments. He also joked that if everyone at Ira Sohn complained, Bernanke would come in and drop a trillion dollars right there.

Faber said not to own US government debt, even if the deflationists end up being right. He is also an advocate of owning gold but not storing it in one place. Faber says you need to store gold all over the world in Australia, Switzerland, etc. He also disputed Gundlach's notion to own gems over gold and said people will always value gold, even if you're in a jungle or desert because everyone knows what it is.


Steve Feinberg / Cerberus: He pitched residential mortgage backed securities (RMBS) as a compelling opportunity and labeled them 'cheap,' given the high amount of underwater loans and depressed home prices.


Peter May / Trian Fund Management: Peter May of Nelson Peltz's Trian Fund pitched upscale jeweler Tiffany & Co (TIF), citing "enormous price appreciation" ahead. Catalysts for TIF include new store openings, vertical integration, new watches, and increased analyst coverage and he said shares could see $100 (they currently trade around $70.)


If you missed it, be sure to also check out part 1 of our notes from Ira Sohn featuring investment ideas from Jim Chanos, Phil Falcone, Dinakar Singh and more.

Joel Greenblatt's New Book: The Big Secret for the Small Investor

Just wanted to give everyone a head's up that value investor and hedge fund manager Joel Greenblatt's new book just came out yesterday. It's called The Big Secret for the Small Investor: A New Route to Long-Term Investment Success.

The book details a new approach to investing based on value investing, common sense, and quantitative discipline. Basically, it intertwines his value investing style with an indexing approach. Greenblatt is the founder of Gotham Capital and has seen 40% annualized returns from 1985-2005. He is also an adjunct professor at Columbia Business School.

Greenblatt has authored numerous other books and they each cater to specific investors, including:

You Can Be a Stock Market Genius - Though the title is somewhat cheesy, this book has been recommended by hedge fund legends like Seth Klarman and David Einhorn. It is the definitive text on spin-offs, restructurings, and special situation investing.

The Little Book That Still Beats the Market - Teaches readers how to find good businesses when they're trading at bargain prices.

Greenblatt's newest book, The Big Secret for the Small Investor, is seemingly aimed at the broadest audience since it looks to be a quick read (150 pages) and details value-weighted indexing as an applicable investment style.

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.

---

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

Long Term Stock Market Cycle: Where Are We Now?

This morning, Market Folly's quote of week focused on wisdom from value investor Joel Greenblatt. A few sentences in particular stuck out where Greenblatt says:

"Over the long term, despite significant drops from time to time, stocks (especially an intelligently selected stock portfolio) will be one of your best investment options. The trick is to GET to the long term. Think in terms of 5 years, 10 years and longer."

Given his commentary, the chart below is a perfect illustration of "the long term." This chart, courtesy of DecisionPoint (via Cynical Advisor) depicts how the stock market has traded in 16-18 year bull/bear cycles ever since 1932.

(click to enlarge)

Currently, the market appears to be in the bear cycle where it essentially chops sideways via wild oscillations every few years. By the chart's calculations, this means the market will be stuck in its current cycle for another 5-7 years before entering another bull cycle. This of course assumes the current trend of alternating cycles remains in tact. Focusing on the drawn-in trendline, a break below the level of 500 on the S&P would obviously be quite a negative signal jeopardizing the multi-decade trend.

In the end, this chart simply illustrates Greenblatt's notion of "long term." In a day and age when everyone is so focused on short-term performance, hopefully this forces you to take a step back and examine things from a multi-decade perspective. While the current trend is choppy to say the least, the long term trend is most definitely up. The problem for most investors though is the lack of ability to remain on course. Whether it be poor market timing or succumbing to emotion, investors have time and time again found a way to deviate offtrack.

Joel Greenblatt on Risk & Investment Timeframe ~ Quote of the Week

Joel Greenblatt is quite a prevalent value investor. He founded hedge fund Gotham Capital, is an adjunct professor at Columbia University's Business School, has founded the Value Investors Club and more. Most recently, he has focused on Magic Formula Investing, a strategy that seeks to buy good companies with high earnings yield and a high return on invested capital.

Market Folly's quote of the week from Greenblatt centers on the topic of how to invest when you can't handle a 40% drop in the market:

"So, what should you do? The answer is annoyingly simple. I believe the stock market is a great place to make money over the long term. Despite the last decade's poor returns for the broad market averages (and including the knowledge that you are not forced to buy the average stock, but can follow a strategy like Formula Investing to buy a portfolio of above average companies at below average prices), I firmly believe almost everyone should have a significant portion of their assets in stocks. But here it comes - few people should put ALL their money in stocks. Whether you choose to place 90% of your assets or 40% of your assets in stocks should be based largely on how much pain you can take on the downside. As painful as it might be, if you put only 40% of your money in stocks and the market falls 40%, the simple math says you'll only be down 16% (though it depends on where the rest of your assets were at the time!)

However, and most importantly, once you've chosen an amount you can handle, every time the market drops, hopefully you will no longer be tempted to sell all your stocks, put on your feety pajamas and roll up into a little ball. Over the long term, despite significant drops from time to time, stocks (especially an intelligently selected stock portfolio) will be one of your best investment options. The trick is to GET to the long term. Think in terms of 5 years, 10 years and longer. Do your planning and asset allocation ahead of time. Choose a portion of your assets to invest in the stock market-and stick with it! Yes, the bad times will come, but over the truly long term, the good times will win out-and I hope the lessons from 2008 will help get you there to enjoy them."

~ Joel Greenblatt

For more market insight from this value investor, check out Greenblatt's book: You Can Be A Stock Market Genius (a book we might add that is recommended by none other than Seth Klarman).