Joel Greenblatt Keeps It Simple: Buy Good Stuff Cheap, Sell Bad Stuff Dear by William Green, Obeserver
In his junior year, he read a magazine article about Benjamin Graham and eagerly ingested his books. Graham provided him with an intellectual framework that was “so simple and clear that it got me very excited,” says Mr. Greenblatt. The overarching message: Value businesses in a disciplined way and invest in them only when they trade at a big discount. As Joel Greenblatt explains, Warren Buffett added a vital “twist” that “made him one of the richest people in the world: Buying cheap is great—and if I can buy good businesses cheap, even better.”
In 1985, Greenblatt founded Gotham Capital and began to put these ideas to work. Robert Goldstein, who remains his partner to this day, joined him in 1989. Their returns were astounding. In its first 10 years, Gotham averaged 50 percent annually after expenses but before fees — not a bad rebuttal of his professors’ claims that stocks were perfectly priced.
How does Joel Greenblatt account for Gotham’s spectacular record? First, the fund never got bloated. After five years, he and Goldstein returned half of their investors’ capital; after 10 years, they returned the rest and solely invested their own money. With a small fund, they could roam anywhere in search of opportunity, including obscure companies with liquidity constraints. Second, they focused only on their best ideas, betting 80 percent of the fund’s assets on six to eight stocks. Mr. Greenblatt had a particular gift for analytically complex investments such as spinoffs. “It’s easier to find bargains off the beaten path or in extraordinary situations that other people aren’t looking at,” he says. “I was looking at low hurdles — things that other people would have bought, too, if they’d done the work.”
In 1997, Mr. Greenblatt published You Can Be a Stock Market Genius, a seminal guide to this style of investing. It was equally memorable for the irreverent wit and verve of his writing. For example, the book recounts the tale of “a friend I’ll call Bob (even though his real name is Rich).” And the glossary includes the term “Village Idiot,” which Greenblatt defines as “Someone who spends $24 on an investment book and thinks he can beat the market. (Just kidding.)”
They hired a “computer jockey” who backtested what would have happened over 17 years if investors had bought stocks with a high earnings yield and a high return on capital. They concluded that these two metrics provided a “magic formula” for outperformance. Mr. Greenblatt revealed this finding in The Little Book that Beats the Market, which he wrote for his five children. It has since sold well over 300,000 copies
See full article here.