Joel Greenblatt And Gotham Becoming Wall Street Darlings

Joel Greenblatt of Gotham Asset Management has been a successful investor since the late 1980s, using strategies described in the value guru’s masterpiece, You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits, but didn’t wasn’t really a public name until his “The Little Book That Beats the Market” became a best-seller back in 2005. A recent article in The New York Times profiles Greenblatt, and offers some interesting perspectives into his personality and investing philosophy, which even regular readers of VW will likely find insightful.

Joel Greenblatt is the son of a shoe company executive, and was raised in relative affluence in Great Neck, N.Y. For his M.B.A. project at the University of Pennsylvania, Greenblatt and two co-authors hand-tested Ben Graham’s value-investing system using stocks beginning with the letters A and B.

He founded Gotham Capital when he was 27. The firm focused on stocks of companies undergoing restructurings. Greenblatt claimed he gained 50% a year before fees from 1985 to 1994, then decided to return all outside investors’ capital. His funds were closed to outside investors from 1995 to 2009. He then reopened Gotham to the public in 2009, using an updated Magic Formula.

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It should be noted that while Joel Greenblatt’s investing record is stellar, Gotham funds are risky in that they are leveraged and have high fees. Moreover, the NYT article also noted that the “Gotham mutual funds have fees and expenses of up to 2.25 percent, almost double the industry average for all mutual funds.”

Joel Greenblatt’s “Magic Formula”

In his book, Joel Greenblatt described his “magic formula” to pick stocks based on two numerical “value” metrics jokingly, but he also noted that his returns beat the market on paper by over 10 percentage points every year  from 1988 to 2004.

Eventually investors began to demand ways to follow the “magic formula” strategy in real investing, so Greenblatt developed a website that generated stock picks that also outperformed the markets. However, most individuals who tried to follow the formula actually underperformed the market because of mistiming their purchases and sales. When Greenblatt introduced four conventional mutual funds based on his formulas in 2010, the funds just raised $360 million.

Joel Greenblatt becoming a Wall Street Darling today

That is all changed today, as suddenly Joel Greenblatt is being deluged with cash from Wall Street. Gotham Asset Management has established four new funds using variations of the Magic Formula, and the funds have skyrocketed from just $1 billion when launched 10 months ago to over $4.8 billion today.

These funds are in the new category of “liquid alternatives,” kind of like hedge funds in mutual fund guise. Gotham, which has a profitable side business managing traditional hedge funds for institutions and high-net-worth investors, has seen $8 billion in inflows since reopening to outside investors five years ago.

Much of Gotham’s growth comes from courting Wall Street banks and brokerage firms, including JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Merrill Lynch, thereby gaining access to these firms’ wealth management platforms for individual investors. Joel Greenblatt is personally involved in many of Gotham’s marketing activities; NYT sources note he makes presentations as often as twice a month to various groups of brokers and financial advisers.