A deep dive into value investing with Joel Greenblatt

Joel Greenblatt is one of the most revered investors in the world. He is well-known for his books, including, 'You Can Be a Stock Market Genius'. His hedge fund Gotham Capital produced an astonishing 50 per cent return per annum in the ten years from its inception. Apart from this, he was also a professor of value investing at the University of Columbia.

Recently he sat with the Hedge Fund Association (in the US) to discuss his journey and experience. You can watch the full interview here. Here are the key highlights of the interview.

The Aha! moment

Greenblatt became curious about value investing while learning about the efficient market hypothesis.
According to the hypothesis, all publicly available information is already priced in. In other words, value discovery is a futile exercise. Greenblatt felt that this could not be true, and in his search for answers, he discovered the teachings of Ben Graham.

Graham's lessons about Mr Market (an imaginary investor) and how he is extremely emotional in the short-term made a lot of sense to Greenblatt. He then started following Graham's teachings on value investing, which later on led him to Graham's student, Warren Buffett.

Tenets of value investing

Greenblatt believes that the core aspect of value investing is to look at a company as a whole and not as a market instrument. He said, "Stock is not a piece of paper that bounces around, and I put fancy ratios on to figure out what's going on. It's basically an ownership share of a business, and I'm trying to value."

While momentum investing may seem attractive, he said, "Chances are that the momentum strategy is crowded. It may not work as well as it has worked before. You won't know the answer to the question of whether you should wait or not".

On his secret to success

Trying not to lose money was the primary objective of Greenblatt's fund. He stated, "We didn't take big positions in things where we thought we would make 10 times your money or 20 times your money. Instead, we took big positions in things where we didn't think we would lose money".

Further, he reiterated the importance of portfolio allocation. Quoting Charlie Munger, he said, "If you have the greatest position you've seen and you put two per cent of your money in it, and it quadruples or something, you didn't make a good investment but a stupid investment".

On management quality

Management of a company can make or break a business. Greenblatt gives a simple guide. He says, "If they have been good allocators of capital, then we can assume they will keep doing that. If they have been bad allocators, then chances are that it will continue".

He also believes that the management's compensation structure also influences their actions. If the management gets paid more in shares relative to salary and other bonuses, then their activities will be aligned with the interest of shareholders.

Your takeaway

Regardless of your investing philosophy, Greenblatt's teaching will help you navigate the market better. We are a firm believer in Greenblatt's philosophy of viewing equity investments as buying a business and not investing in a market instrument. As Greenblatt preaches, understanding the value of patience, the importance of valuation, and knowing that the market will be irrational in the short term are crucial to investing success.

Also read: Pat Dorsey's secrets to investing success