Joel Greenblatt has earned his place as a legend in the world of hedge and mutual funds. He is the co-chief investment officer and managing principal of Gotham Asset Management, which followed his Gotham Capital’s ten consecutive years of compounding 50 percent per year. He is an author of best-selling books about investing and an adjunct professor at Columbia Business School teaching special situation and value investing. Greenblatt is also a legendary philanthropist, contributing to $2.5 million to P.S. 65Q, a public elementary school in Queens, New York City. He helped to establish the Success Academy Charter Schools, serves as a board member for the Institute for Student Achievement, and is a Master Player and founding member of the annual virtual stock competition Portfolios with Purpose. According to Investor Mint, his net worth is estimated to be about $500 million. Greenblatt is married to Julia and they have five children together. Though he is certainly wealthy, he is much more than merely famous. His belief in successfully investing is coupled with an equally strong belief in sharing wealth for humanitarian causes. Though much is known about his financial acumen, his private life is less well-known. But his interviews offer intriguing glimpses into his thoughtful nature and personal ethics.
1. Greenblatt said, “I kind of like gambling.”
Greenblatt slipped in that statement in a Masters in Business interview with Barry Ritholtz on Bloomberg Radio but Greenblatt wasn’t talking about investing. He was talking about dog racing. Greenblatt would sneak into the dog track when he was on vacation in Florida. He and his cousin had a good time placing bets. Greenblatt admitted that half the fun of it was the sneaking in part. Together, they placed bets of dog races and lost a couple of dollars. They bet on a dog that ran its last race in 32 seconds while all the other dogs had a time of 44 seconds. They bet on the 32 seconds dog. Turned out that their dog had run a shorter race than the others and ended up losing. Greenblatt said that the dog track gave him a “cheap lesson” which taught him that you really need to know something about betting and investing because if you don’t know what you are doing, you’re going to learn a lesson in “an expensive place”.
2. Greenblatt’s first job was in the research department at Kidder Peabody on Wall Street.
It was a summer job and his duties included adjusting financial statements for inflation. He described inflation in those years as the process of dollars buying less and less each year, but the amount of those dollars dropped by about 6 to 8 percent. He compared those historic percentages to the more recent half a percent to 1 percent of what has become the norm within the last ten years or so.
3. Greenblatt moved from research to stock picking in his junior year at Wharton.
He’d read a Forbes Magazine article featuring the stock picking formula developed by Ben Graham. It was about efficient market theory and net-net stock selling. But “none of it resonated with” him. He was more interested in taking a calculated gamble even though common knowledge at the time said that nobody could beat the market. He noticed that every stock had the same kind of range every year and “it didn’t make sense” to him that the usual process for picking stocks hadn’t changed much. When he read the little Ben Graham article, the “light bulb went off” and he started to read everything that Graham had written. Greenblatt pored over security analysis and intelligent investing, and then moved on to Warren Buffett. Greenblatt was younger than 21 at the time but looked back at that time in his life as being “a very good age” to “recognize that this is what he would be doing for the rest of his life”.
4. Greenblatt defines value as figuring out what a business is worth and then paying a lot less for it.
He described what his work is as blend investing rather than value investing because it is not based on low price-to-book, or low-price sales investing. He looks to Warren Buffet’s understanding that value and growth are “tied at the hip” with growth being part of value. For this reason, Greenblatt prefers to consider cash flows to try to project what they will be in the future, and then paying a price relative to that and what it is worth. The cash flow generating portion of the business is what his process of investing is all about.
5. Greenblatt believes in being a patient investor.
Rather than rely on number crunching data or research papers about momentum investing, Greenblatt defines stocks as ownership shares of a business that is valued and purchased at a discount. He realizes that the businesses he shares ownership in may not reward his valuations in the immediate future market, but with patience, and selected for their cash flow generating ability, eventually they will create return on investment.
6. Greenblatt started Gotham Capital with about $7 million; and some of that from Michael Milken.
After graduating from Wharton Greenblatt worked at a hedge fund for about three years. He had a strong desire to “go out on his own”, but he needed money to do it. He mentioned that he needed to raise money to a friend who was part of Milken’s group. Greenblatt’s friend called him the next day to say that Milken, “said fine”. Next came the negotiations, which Greenblatt said wasn’t so easy. He had an appointment with Milken which took more than an hour. He said Milken “negotiated as if it was the biggest deal of his life”. Greenblatt felt that his own negotiating skills were not very good, but it was important to “want the terms he wanted” and to “run the money” because it was for his life and he had “only one to give”. He decided to dig in and hold to his bottom line. At one point, Milken actually left the room and sent his brother in to negotiate with Greenblatt. He finally got what he wanted from Milken’s brother and though it didn’t make Milken “very happy” he became “a good partner” for Greenblatt and the deal started him off in business.
7. Greenblatt was able to return 100% back to investors after Gotham Capital’s first 10 years in business.
From 1985 to 1995, Gotham Capital compounded 50 percent annually before fees. Greenblatt stated that one way to get that kind of return was to avoid “running a lot of money”. After the business reached the 5-year mark, half was returned to investors for outside capital. Greenblatt followed what he viewed as this prudent way to manage money came from Warren Buffet’s vision of investing in businesses which treat shareholders well, are run well, and have good prospects.
8. Greenblatt believes in Warren Buffett’s way of investing.
Greenblatt describes Buffett’s way as “not just cheap, but cheap and good”. Greenblatt read through Buffett’s letters to learn what metrics he uses for investing. Greenblatt distilled the metrics as looking first for businesses which earn high returns on tangible capital. Invest in the business which allow reinvesting its money at higher percentages rather than lower. Next, consider investing in businesses which are generating cash relative to the cost of buying the business. Also, consider what the businesses do with their money when they have it. These principles helped Greenblatt develop the simple database which he used in his book The Little Book That Beats the Market.
9. Greenblatt made all five of his children read You Can Be A Stock Market Genius.
He considers the book still valid and current even more than 20 years later. He said he didn’t write the book for hedge fund managers, but those are surprisingly the ones who use it all the time. Some use the book as a training guide for new hires. Looking back over time, he describes his writing style as “MBA level”, but his goal was to reach average people with “friendly and funny” writing. The title of the book was originally supposed to be Any Fool Can Be A Stock Market Genius, but he had just 24 hours or so to change the name because the Motley Fools published their book with a similar title. He asked his family and his father contributed the (Even If You’re Not Too Smart) sub-title.
10. When considering if he should rename a talk to: Is Value Investing Dead?... Greenblatt said, “It isn’t dead, it could be, I don’t know, and I don’t really care.”
Of course, his sentence has been repeated and paraphrased often, as others seek to understand the mind of this investing guru. Greenblatt spoke at the Toronto 2018 Prime Quadrant Conference on the topic of Value Investing. The annual conference is designed for ultra-high-net-worth investors and family offices. Greenblatt followed his preliminary sentence by telling his audience that he values companies “bottoms up” by valuing every company in the S&P 500 back to “good data from 1990” comparing the past years since then with how things are now. He looks at the valuation levels based on what has happened in the past and then compares those numbers for the future while considering various correlations in the overall market. Greenblatt systematically combines historic information to measure the current values of the investment he makes.
11. Greenblatt used jellbeans to explain the stock market to ninth graders from Harlem.
Greenblatt said he “crashed and burned” while speaking at an event for orthopedic surgeons but didn’t want to fail with the ninth-grade students. He had an hour a week to teach the kids. He filled an old-fashioned glass jar with jellybeans and gave the students 3 X 5 cards with instructions to write down how many jellybeans they thought were in the jar. He then collected the guesses from each student and came up with an average guess of 850 jellybeans. He told the students that the second guess was the stock market. He also told them that the first guess was how they should approach the stock market. He told them to be “cold and calculating” and “very disciplined when valuing businesses rather than being like most who allow themselves to be influenced by the guesses of others.
12. Greenblatt thinks he never wrote that he enjoys playing tennis.
He said that he has always told personal stories in his books and thinks many of those included were “embarrassing things”. But he also wrote that he enjoys sailing even though he believes he’s not very good at it. He touched on the fact that his sailing time has put him “in a bunch of close calls”. He spends most of his leisure time sailing and being with his family.
13. Greenblatt’s mentors have been people who read books.
He noted that these were people who “shared their wisdom with him over time” and he thought of them as kind. He included Benjamin Graham, Andrew Tobias, and others. He mentioned David Dreman, author of Contrarian Investment Strategy, the letters of Warren Buffet, and John Train, author of Money Masters. He felt that he learned so much from reading the works of these authors that he wanted to share with others in the same way that he learned.
14. Greenblatt’s favorite books include The Invisible Heart by Russ Roberts.
He likes this short fictional book about a high school economics teacher. It teaches the basic economic principals. He also likes Moneyball for sports fan because it equates buying undervalued players with buying undervalued stocks and this similarity helps people to understand the process. He also likes a book called the Power of Moments because it deals with the natural firsts in everyone’s lives which take place between ages 15 and 30. He thinks those seminal moments are very important and much harder to create when you become older. He has been touched by first dates, first loves, marriage, birth of his children, and much more.
15. Greenblatt always assigns Warren Buffet’s letters to his classes.
The letters were compiled by Lawrence Cunningham. The letters are organized by topics, and Greenblatt describes the book as “a great, great book”.
16. Greenblatt describes his worst investment as a purchase of a tradeshow company.
He explained that he really “fell in love with the business” but it ended up costing more money than it was worth. What he loved about it was that it ran a computer tradeshow in Las Vegas. It also promised financial leverage, which could be “fun” when working well. But he “learned a lesson in operating leverage” because the money it brought in fell short of the money put out to have it.
17. Greenblatt tells his students that his opinion is that being an investment manager doesn’t have a lot of social value.
Though he loves being in the investment field, he also believes that if his students decide to enter it that they should discover the way that they will give back to the world. If they are successful, there is much money to be made and he teaches them to use their thoughtfulness, intelligence, and skills to find ways to share with others.
18. Greenblatt views diversity as essential for his research and tech teams.
His own team has included an MIT chess champion and a man who won the Google code jam. Their intellects combine to help them trade and trade tax efficiently. His team is what he calls “very, very tax efficient” and this allows them to construct successful risk-adjusted portfolios.
19. Greenblatt likes “gushing cash-flow stocks”.
Gotham Asset Management owns hundreds of stocks, concentrating on companies with large free cash flows. Focusing on cash flows is the way to better ensure expected returns. Though it is impossible to know exactly what will happen in the market over time, considered the value in a business is more important for the long view. When they deploy their capital well it is better overall going forward.
20. Greenblatt believes that patience is the secret to being successful.
He believes that the one thing that people rarely say is that the market will agree with them if their valuation work is good. He also never tells them when the market will do so. He says that it could be within weeks or years. He describes the importance of learning to have a “longer time horizon” rather than judging investments on a “very short time horizon”.
Written by Bill Vix
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