11 Nuggets of Wisdom from Joel Greenblatt
And my question which flummoxed him
Joel Greenblatt came out with a number of gems in a fireside chat at a recent London conference:
1. The market eventually gets it right, but eventually can be a long time. If you do your valuation work well, you will be rewarded.
2. It’s difficult to beat the market with the current concentration when these large stocks do the best. But it’s rare that the largest stocks are the best performers (see the Bessembinder study). Usually in the past, the laws of large numbers has taken over. But the Magnificent 7 are some of the greatest businesses he has ever sen. The law of large numbers may kick in for some, but some will continue to grow and the valuations are not unreasonable given the growth prospects.
3. Owning the market cap weighted indices guarantees that you do the wrong ting at every stage. You buy too much of what’s dear and too little of the undervalued stocks.
4. Underperforming the index does not make you a bad investor – if you are well compensated for the risk you undertake, that’s the mark of a good investor.
5. Shorting is very very difficult. Picking individual names is problematic as if the valuation is 2x the right price, it can go to 4x or 8x. He prefers to have hundreds of shorts with a small position in each.
6. The US market is over-regulated which is why there are just 4,000 public companies, vs 9,000 a few decades ago. Quoted stocks are larger and are bigger relative to GDP, but the costs of being a public company is now c.$3m pa so you need to have earnings of (well) over $10m.
7. He used to have 4-6 names be 80% of his portfolio. Every 2-3 years, “you wake up and you have lost 20% in a few days”. They tried something new, having very diversified portfolios and with a 130 long/30 short portfolio have beaten the index significantly. If he was starting again, he would be very concentrated.
8. There is no correlation between your past 5 year performance and the next 5 years.
9. The common theme to his best picks is analogous to finding that overlooked antique in a yard sale, Anyone who looked off the beaten path and found those could have figured it out.
10. It’s really hard to learn without losing a significant amount of money. He and his partner Rob laugh – if they had worked for someone else, they would have been fired 3 or 4 times.
He was surprised when I asked him his views of the unrest on US university campuses. He said he is very disappointed and hopes there will be a change.
I saved the 11th, the best and most interesting point, for my premium subscribers. This is a simple concept which I hadn’t previously considered – it’s a really insightful observation.