Joel Greenblatt, the value investor and academic known for popularizing his Magic Formula approach to investing, gave a rare interview with CNBC, recommending that retail investors (or at least the kind of investor who might be watching CNBC for investment ideas) stick to the top 20 names on the S&P 500 (INDEXSP:.INX) because they are reasonably well-priced.
Joel Greenblatt: Large-cap prices ‘aren’t terrible’
“The big, big picture is this. Large caps have a better valuation right now than small caps,” says Greenblatt. “They’re not great but they’re not terrible.”
He specifically names Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), and Hewlett-Packard Company (NYSE:HPQ) as some of the companies that he thinks are worth owning, but that doesn’t mean he has shared his best ideas. Asked how he looks for a good opportunity, Greenblatt says that, “It comes down to valuing businesses and buying them at a discount. Most people can’t do that so they should probably stay out of the way.”
Harsh words, but then most retail investors underperform the market when they try to pick stocks for themselves, so it might be good advice. For himself, Greenblatt points out that the Russell 1000 is currently in the 42nd percentile for historical valuation (meaning it’s been cheaper 58% of the time) which usually gives a year-forward return in the 7% – 12% range.
Russell 2000 is expensive, systematically avoided
The Russell 2000 (INDEXRUSSELL:RUT), on the other hand, is in the 5th percentile, meaning that it has been cheaper 95% of the time and it typically produces a negative year-forward return (around -3%) when it is so highly valued. Even when professional managers believe there are some good long-term deals in the bunch, Greenblatt says that pressure from clients with a shorter time-horizon forces them to look elsewhere for a better one or two-year return.
“Some of these stocks the next year or two doesn’t look quite as good as the most recent past so that’s not the happy hunting ground for making money,” says Greenblatt. “They’re systematically avoided and we take advantage of that in general.”
So if you’re looking for stock picking tips, Greenblatt isn’t going to share any of his. He’d rather just trust his ability to accurately value companies and start digging through the markets that other people believe are tapped out. Let everyone else keep investing in Tesla Motors Inc (NASDAQ:TSLA) – he’ll be making his returns on companies that aren’t in the headlines.