Joel Greenblatt on Value Investing

Via BlueRidge

I recently re-read Joel Greenblatt’s The Little Book That Beats The Market  to prepare for a presentation to Jacob’s Fork Middle School on investing (see slides here). This book is just as valuable for educated investors as it is for sixth graders.

For more serious investors, I’d highly recommend a weekend at the library studying Greenblatt’s Special Situations class notes, available here. If that doesn’t tickle your fancy, here are A Dozen Things I’ve Learned from Joel Greenblatt about Value Investing, compliments of 25iq:

1. One of the greatest stock market writers and thinkers, Benjamin Graham, put it this way. Imagine that you are partners in the ownership of a business with a crazy guy named Mr. Market. Mr. Market is subject to wild mood swings. Each day he offers to buy your share of the business or sell you his share of the business at a particular price. Mr. Market always leaves the decision completely to you, and every day you have three choices. You can sell your shares to Mr. Market at his stated price, you can buy Mr. Market’s shares at that same price, or you can do nothing. Sometimes Mr. Market is in such a good mood that he names a price that is much higher than the true worth of the business. On those days, it would probably make sense for you to sell Mr. Market your share of the business. On other days, he is in such a poor mood that he names a very low price for the business. On those days, you might want to take advantage of Mr. Market’s crazy offer to sell you shares at such a low price and to buy Mr. Market’s share of the business. If the price named by Mr. Market is neither very high nor extraordinarily low relative to the value of the business, you might very logically choose to do nothing.
2. Buying good businesses at bargain prices is the secret to making lots of money. Look down, not up, when making your initial investment decision. If you don’t lose money, most of the remaining alternatives are good ones.
3. Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot. Most people don’t (and shouldn’t) invest by buying stocks and holding them for only one month. Besides the huge amount of time, transaction costs, and tax expenses involved, this is essentially a trading strategy, not really a practical long-term investment strategy.
4. Periods of underperformance make value investing difficult – and, for some professionals, impractical to implement.
5. Companies that achieve a high return on capital are likely to have a special advantage of some kind. That special advantage keeps competitors from destroying the ability to earn above-average profits.
6. You have to know what you know – Your Circle of Competence. The idea behind the Circle of Competence is so simple it is embarrassing to say it out loud: when you do not know what you are doing, it is riskier than when you do know what you are doing.
7. Remember, it’s the quality of your ideas not the quantity that will result in the big money.

The full article (and several others on the site) are worth a read and available here. His Lessons from Howard Marks are excellent as well.